Dominari’s biggest risk is its trading costs. In the midst of losing 6 days in a row, I found myself extremely concerned about Dominari’s performance. Did the signals go bad all of a sudden or is this a normal drawdown? Is Dominari losing because of trading costs?
I decided to start analyzing my FXCM account. Part of the nerves were driven by the fact that it took 2 weeks to setup the account. The compliance process took far longer than usual because I’m a former employee. Two weeks later, I turned on the account just in time to a) miss the biggest equity growth and b) to catch the biggest drawdown.
I felt more hostile to the FXCM account performance because I didn’t have any profits to pad the losses. This is all coming from my original risk capital. And I’m having my third child soon. Giving birth to kids in the US is incredibly expensive. I’ve got better uses for the money than to throw it away in the markets!
So, the real question is: am I losing because it’s just a rough patch or because FXCM is eating my lunch?
This image is a backtested equity curve over the same period of my live performance. I’ve traded live since January 28, but the trading didn’t begin until the afternoon. As you can see, I again missed another patch of strong performance.
The rest shows something of a fairy tale. The backtest shows a return of 19.13% over that period, whereas my live performance is down 10%. How much of that is due to commissions, spread, rollover and slippage?
The backtest shows a profit of $956.65 with no trading costs.
My real results, which 1) show a profit on the backtest but 2) are actually showing a loss in real life, can be used to estimate a floor for my trading costs. The formula for that is
( Total profit and loss + commissions + rollover) / total trades, which is currently $1.58 in costs per trade.
The commissions and rollover are easy to separate out using either Myfxbook or the FXCM account report. The grand total spent so far on commissions is -$239.80 and -$3.05 on rollover.
The hardest part to separate is the spread paid. I’m not recording the spread paid on every trade (maybe that’s a mistake and I need to add it). But I’m going to use the table below to estimate. I took a random sample of 30 trades from the 501 trades completed at the time of my analysis.
| Spread Paid | Slippage |
|---|---|
| 0.000198523 | 1.49E-05 |
| 0.000153951 | -5.13E-05 |
| 0.000455823 | 0.000227912 |
| 9.98E-05 | 0 |
| 0.000161242 | -0.00313413 |
| 2.76E-05 | -9.19E-06 |
| 5.55E-05 | 6.94E-06 |
| 0.000110898 | -1.01E-05 |
| 9.24E-05 | 0 |
| 9.91E-05 | -1.57E-16 |
| 6.55E-05 | 1.31E-05 |
| 4.85E-05 | 2.08E-05 |
| 8.22E-05 | -1.67E-16 |
| 6.87E-05 | 0 |
| 6.95E-05 | -1.65E-16 |
| 0.00015173 | -2.17E-05 |
| 9.43E-05 | -2.36E-05 |
| 9.38E-05 | -0.00225922 |
| 7.61E-05 | -0.0024735 |
| 0.000160038 | 1.00E-05 |
| 0.00013502 | 0 |
| 0.003542625 | 4.52E-05 |
| 0.000222978 | -0.00376275 |
| 7.62E-05 | 0 |
| 0.000432797 | 7.73E-06 |
| 2.61E-05 | 0 |
The average slippage (the right column) is a stunning -0.044%. I’m getting negative slippage on average with FXCM. That’s outstanding! FXCM is improving my fills even though my entries are requested at a worse price. Whatever misgivings I’ve had about FXCM in the past are alleviated. That’s impressive execution.
Estimating the spread paid is much more difficult. I’ve chosen to take my average trade profit on a $5,000 account as the starting point. The trouble is that the value of an average winner can depend on the account performance. If I use stagnant position sizing, then the drawdown doesn’t effect the value of the average winner. Under that assumption, the average winner is $3.48 per trade.
But if I use compound position sizing, the drawdown eats away most of the profits. That drops the average trade value down to $1.70.
I converted the spread paid from pips into percentages. Using EURUSD as an example, a 1 pip spread works out to 0.0001/1.12727 = 0.000089. The reason for doing this is so that I can compare the spread on EURUSD to something with a much wider spread like AUDNZD. The spread is wider on AUDNZD, but the value of a NZD pip isn’t the same as a USD pip. Percentages allow for an apples to apples comparison.
The average spread paid in my sample was 0.00026157605, which is 0.026%. Putting that back into terms relative to my account balance, I’m paying 0.026% * $5,000 = $1.31 per trade in spread. Across 420 trades, that’s -$550.20 in spreads.
Total costs are spread, commissions and rollover:
$550.20 + $239.80 + $3.05 = $793.05
On a per trade basis, that is $1.78 in costs per trade from my estimates.
The total profit on the backtest was $956.65, but I missed about $550 of it because trading didn’t start until 17:00 on the 28th of January. That leaves the backtest profit somewhere around $406.65.
That puts the re-estimated profit and loss at $406.65-$793.05 = -$386.40. The actual loss is -$469, which I feel is a reasonable discrepancy based on the fact that I’m estimating how much profit was contributed on January 28 instead of knowing for certain.
The conclusion is that I need to turn off this trading at FXCM. Even if I joined their active trader program and traded in the top tier, it would only save me half the commissions. Most of the trading costs are in the spread and not commissions. I’m seriously considering a move to a broker that will allow me to make a market by posting limit orders. But first, I’ll need to go over my Pepperstone account to review the trading costs for myself and clients.
Curious if you will get better trading costs (spread, slippage and commissions) at another broker. Please let us know.
I’ll keep you posted on all of my live trading. It’s not just a trading cost issue. I’m actually impressed with FXCM. They’re just not a fit for my strategy.
Shaun, Why not move to Futures where you can manage the slippage and costs better?
That’s certainly true. One thing we’re working on here is finding a way to post liquidity into the market instead of taking it. No special effort is required to do that with futures. You just post a limit and it shows up in the book.
The problem with my strategy is that I trade 28 pairs, the vast majority of which are not offered as emicro contracts. The cross rate contracts don’t offer enough pairs, either.
Lastly, position size is a huge issue in futures. I’d realistically need to trade a $250,000 account to consider FX futures. That would be punching above my current weight.
Wonder if your poor FXCM performance has anything to do with the fact that their MarketWatch bid price (and the price you are actually executed on) are >= 1 pip higher (at least on EURUSD and USDJPY) than the MT4 chart bid price. Have you looked into that? Or, maybe for your strategy it doesn’t matter? I was surprised to learn this along with their excuse for why it is this way.
Part of the reason for the difference in MT4 price feeds is that MetaQuotes collects a rebate based on trading volume. It’s more expensive for brokers to offer MetaTrader than other platforms.
This strategy executed within Seer, giving me direct access to FXCM’s API.
such is the brutality of trading… I send you my best wishes for a positive outcome–
Thanks, Ken!
Nicely done. I have noticed that when you get stuck in the trade the swaps slowly eat up your profits. How were you able to get all the details about your slippage?
Hi Lucjan,
I was pleased to observer that the swaps on my trading were minimal ($3 in a month). I reverse engineered the slippage by comparing the backtest execution on the bid compared to the actual price received.
My MetaTrader account tracks it directly. I’ll know for certain what my slippage is once I write software to grab it out of the log files.
–Shaun
My 8 years of trading experience has always resulted in unacceptable trading cost . That broker list is very long. About 96% of us know their broker names.
Shaun, we wish you and your wife all the very best for your child’s birth.
Thanks, Barry!
Hi Shaun. Thank you for the analysis. I have the Active trader account and it has the best execution of at least 10 very popular brokers I’ve tried for my algo. The slippage is so small except at big news times – which I avoid!
I have a friend in USA who is getting $4 round trip commission from FXCM – I’ve seen the proof. He has big bucks in there and is trading yards. I am paying $6.
All the best with new baby’s arrival.
Thanks, Ed. I’ll admit that I was pleasantly surprised at FXCM’s execution. They do a good job, but it’s just not a fit for my strategy.
I don’t want to advertise here but there is a MT4 software add-on which allows you to backtest with 1) real raw spreads on every tick 2) with chosen commission and 3) even simulate slippage (both positive and negative) with chosen probability. This will allow you to run extremely realistic backtests!
I have installed this software and backtested all (!) systems available on the Metatrader market. Result – with exception of 2-3 systems, all equity curves (and especially the most beautiful ones) took a very deep dive when I applied these 3 cost types!
Bottom line is – you have to design systems on realistic backtests, considering all possible costs (spread, commision, slippage) and build the system so that it can handle all of them on the fly (factor these cost into your entry/exit/stops). Backtesting on fixed spreads and then substracting certain amount to account for these 3 cost types will always lead to failure.
Hi Michal, thanks for sharing. I don’t have a problem with anyone using backtesting software to ballpark costs. The problem with those assumptions is that they’re exactly that – assumptions. I find it better to spend a little money to find out the exact costs.
I also think that this article illustrates nicely, why FX market making (i.e. being a broker) is very lucrative business. It has 3 reasons: 1) on tick-level, the market is pure noise and finding inefficiency is next to impossible 2) as broker you earn bid-ask – buy at bid, sell at offer 3) you don’t pay commission – you receive it! — the sum of these 3 means that being FX broker is a money printing machine (that’s why there are so many out there). At least under normal market conditions and only as long as you are lucky/good enough to avoid black swans (SNB floor, NFP, central bank interventions).
They did used to be money printing machines. That’s changed in the last 5-7 years. Look at FXCM’s income. They have a market cap of ~$55 million with hopes of earning about 7 million this coming year. It’s a good business, but not the money-machine that it used to be.
Shaun: Be very careful. I always remind myself of a my margin call, years ago.
We are happy with FXCM, despite the costs.
And congratulations for your growing family. That is an outstanding asset in your life.
Thanks, Joe. Good to hear from you, as always.
Shaun,
9% drawdown is not a bad performance. mine was worst a whopping 60% that was done by a german professional scalper trader.
ONe things about professional traders and do some managed forex fund management. We do reserve the right to have high expectation cuz they are pros. that’s simple it is.. However, on your case you are just doing fine with your newly developed trading system.
So, I took a quick look and if you are a managed fund and I would accept this drawdown or drawback as a normal fluncation. But 20% is not normal and unacceptable.
Again, you just doing fine..
take care
And congratulation with your newborn baby.
Paul Nelson
Thanks, Paul!
Shaun,
Curious about cost comparison with Pepperstone Rasor. Account.
Last Friday I made 28 trades I had a success rate of 64% and made $20.46.
I thought I did well, considering I increased my account 36%.
I was trading 0.05 lots.
Following your lead I then went about to see how much the broker made.
Commosions $6.00
Swap ———-$0.04
Spread ——$108.81
———————————
Total ———$114.85
Cost per trade $4.10
On one trade I made $0.11 Profit and the Broker made $12.80.
On this one the Broker made near 12,000% more than I did.
Looking forward to hearing how your EA did on Pepperstone.
Bob
So this is where they get you at a disadvantage right off the bat,
Hey Bob,
Very interesting to see your numbers. I’ve got everything written in terms of the software to crank out the numbers. I’m spending most of this week getting ready to launch my Total Access program. I’m hoping to do the Pepperstone numbers some time next week.
–Shaun
Also, the spread costs seem improbable on only 28 trades with 0.05 lots. What kind of spreads are you paying???
Shaun,
I realize that I was dealing with points on the spread not pips. Sorry. My Gold trades cost came in at $1/trade, and the currency pairs now average cost is mow $0.977 mt average profit on the currency pairs was $1.065.
Bob
That sounds more like it! It’s great to hear about traders doing well.
hi Shaun, have you thought about trading with LMAX? they run an exchange; and what you see is what you get.
I previously traded with many MT4 brokers; including Pepperstone, FXCM, and others.
At some point I run 3 accounts with different brokers; and running same strategies from my VPS. LMAX came up top.
from my experience so far; LMAX is the best in terms of trading cost. I get positive and negative slippage all the time.
hope this help
best
Good point. I’ve heard of LMAX many times but they never came to mind for this problem. Thanks for the suggestion.
Which platform do you use to connect? Multicharts?