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.
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.