Estimate the Monthly Cost of Your Habit on the Back of an Envelope

[Fairman]

Estimate the Monthly Cost of Your Habit on the Back of an Envelope

Scenario: you take about 60 trades a month, at an average of 0.30 lots, on pairs with a typical spread of 1.2 pips. Your account is 5,000 dollars. How much do you pay each month before any market movement?

Work it out. One pip on 0.30 lots is 3 dollars. A 1.2-pip spread costs 3.60 dollars per trade. Over 60 trades: 216 dollars. As a share of the account: 216 divided by 5,000, which is 4.3 percent.

So your strategy must make 4.3 percent a month in gross terms just to break even. That is a high bar, comparable to what skilled professionals hope to earn in a good quarter.

Now see what changes if you cut trade count by a third, to 40 trades, by skipping marginal setups. The cost falls to 144 dollars, 2.9 percent. If the skipped trades had no edge, you save 72 dollars a month, 864 a year, with no loss of gross profit.

Next try the effect of trading hours. If you move activity from hours with a 1.2-pip average spread to hours at 0.8, the cost for 40 trades falls to 96 dollars, 1.9 percent.

The point of an envelope estimate is to find where the money goes before deciding what to optimize.

Do the same for commissions and swaps if they apply.

Compare with your actual statements. A large gap means you missed some costs.

Exercise: estimate your own monthly cost in dollars and as a percentage of your account, then check it against your statement.