Beating the rake - Know your trading fees

Let’s talk about trading fees. This is an area that most people who trade don’t put enough thought into, but it can make a huge difference to your bottom line. This is especially the case when dealing with percentage based commissions in combination with leverage.

Many people, especially those who mainly trade crypto, will be using services that charge percentage based commissions, with fees that can be as high as 0.5% ! But even if you’re trading at one of the more trader-friendly exchanges you’re likely to be paying in the region of 0.1% taker fees for spot trading and 0.04 - 0.06 % taker fees on futures.

That sounds pretty cheap, right? 0.06% fee on a trade sounds almost negligible, which is why most casual traders don’t pay too much attention to it. Firstly though, you need to remember that this is the fee for both buying and selling, so for a round trip (buy and sell, assuming taker fee of 0.06% for each) you’re paying 0.12%
Suddenly that starts to look a bit more significant, especially for short term intraday traders and scalpers.

Let’s take a quick example. Let’s say you’re an intraday trader paying 0.06% taker fees on futures, and your typical Risk/Reward is aiming for a 1% gain and a 0.5% loss for an R of 2.

The breakeven rate with an R of 2 is a 33.33% win rate, which is why many traders aim to trade this way. If they can achieve a win rate in the region of 50% they can be highly successful.
But then we take your trading fees into account.
That 1% average win becomes 0.88 % after your 0.12% round trip of taker fees.
And your 0.5% average loss becomes 0.62 % after your round trip to fee-town.

So now with an average win of 0.88% and average loss of 0.62% your R is down to 1.42!
That means your breakeven win rate has changed from 33.33% to 41.33%!

What if you’re aiming to catch even smaller percentage moves?
If you were aiming for 0.5% average wins and 0.25% average losses for Risk/Reward of 2, but without considering fees, you might be in for a nasty surprise.
Your average win would now be 0.38% and your average loss would be 0.37% after accounting for 0.12% round trip fees on all trades.
The 2 R you were aiming for to require a 33.33% win rate actually becomes 1.02 R, requiring a 49.33% win rate to break even!

And as a last example, let’s say you take a different approach. Perhaps you’re the type of trader aiming to take equal sized wins and losses but aiming for a 60 - 70% win rate to make your money.
At 1% average win and loss (1 R), your wins become 0.88% and your losses become 1.12% after fees. Instead of a 50% break even rate you now require a 56% win rate just to break even!
And if you aim for 0.5% average win and loss (1 R) your average wins become 0.38% and your losses become 0.62% after fees, requiring a 62% win rate to break even!

Can you overcome those odds?

The key takeaway here is that factoring trading fees into your trading plan is absolutely vital to understanding your risk/reward.
The smaller the trading fees are as a percentage of your average trade, the less impactful the fees will be on your bottom line.

To keep your trading fees small as a percentage of your average wins and losses, the simplest way is obviously to trade for larger average wins and losses, taking a swing trading approach with smaller position sizing.
Alternatively, most exchanges/brokers will offer cheaper trading fees for “makers” using limit orders, as opposed to “takers” using market prices. This discount for maker fees will usually slash your fees by 50% - 80%. Many will also offer additional discounts for using a specific token for paying fees (e.g. BNB or KCS) or various discounts for VIP levels/tiers. Do not underestimate the value of these discounts, they can have a very substantial impact on your bottom line, especially if you are a short term intraday trader or scalper. Just a 50% saving on fees could be enough to turn a short term trader from a breakeven trader to a winning one.