CHAPTER FOUR:
Trading Rules
Page 1WHEN a person contemplates an extensive trip, one of the
first things taken into account is the expense involved.
In planning our excursion into the realms of day trading we
must, therefore, carefully weigh the expenses, or fixed
charges in trading.
Were there no expenses, making a profit would be far easier
- profits would merely have to exceed losses.
Whether you are a member of the New York Stock Exchange or
not, in actual trading - profits must exceed losses and
expenses. These are incurred in every trade, whether it
shows a gain or a loss They consist of:
- Commissions
- Invisible eighth (i.e. the difference between bid
and ask price, assuming that you buy and sell at the
market price)
- Income Tax on sale
- Exchange fees
In addition… interest if the trade is carried over night.
By purchasing a New York Stock Exchange seat, the commission
can be reduced to $1 per hundred shares, if bought and sold
the same day, or $3.12 if carried over night. This advantage
is partly offset by interest on the cost of the seat, dues,
assessments, etc.
(Continued after the box of related
articles.)
The "invisible eighth" is a factor that no one - not even a
member - can overcome. The bid and asked price is never less
than an eighth apart. If the market is 45¼ to 3/8 when you
buy, you will as a rule, pay 45 3/8. Were you to sell it
would be at 45 ¼. This hypothetical difference follows you
all through the trade and has been designated by the writer
as the "invisible eighth". The Tape Reader who is a
non-member of the exchange must, therefore, realize that the
instant he gives an order to go long or short 100 shares, he
has lost an eighth of a point. In order that he may not fool
himself, he should add his commissions to his purchase
price, or deduct them from his selling price immediately.
People who boast of their profits usually forget to deduct
expenses. Yet it is this insidious item that frequently
throws the net result over to the debit side. The expression
is frequently heard, "I got out even, except for the
commissions," the speaker evidently scorning such a trifling
consideration. This sort of self-deception is ruinous, as
will be seen by computing the fixed charges on a trade of
100 shares. Bear in mind that a loss of the commission on
the first trade leaves double that amount-to be made on the
second trade before a dollar of profit is secured.
It therefore appears that the Tape Reader's problem is not
only to eliminate losses, but to cover his expenses as
quickly as possible. If he has a couple of points profit in
a long trade, there is no reason why he should let the stock
run back below his net buying price. Here circumstances seem
to call for a stop order, so that no matter what happens, he
will not be compelled to pay out money. This stop should not
be thrust in when net cost is too close to the market price.
A small reaction must be allowed for. A Tape Reader is
essentially one who follows the immediate trend. An expert
can readily distinguish between a change of trend and a
simple, minor reaction.
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