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Trade for a living? Whats your T.E.R.?

Vijay L Bhambwani Apr 24, 2018

It's a given that trading for a living is -

b) not for everyone &

c) a tightrope walk.

So much so that many veteran traders "blow up" their accounts many times before they finally "make it". I've experienced that "sinking feeling" a few times in my 32 years of trading myself. Take my word for it - its not good. Starting over from scratch is a life draining process, which may not be everyone's cup of tea. Yet it's an inevitable process that we must go through to earn our spurs in the trading arena. This is one of the many reasons why a majority of traders give up within the first few years and choose another commercial activity.

One of the many reasons is that we traders maybe too focused on the take home profits eod (end of the day). It maybe the bottomline, yes, but what if your take home profits (post all execution costs + taxes) are Rs 5,000 for the day but your costs incurred to earn that profit of Rs 5,000 exceeds this amount? In the Indian context, the STT / CTT in the equities and commodities markets respectively are your biggest costs, followed by other costs like brokerage, GST, SEBI tax, stamp duty, exchange transaction charges. The more you trade, the more you add up these costs. Do not take STT lightly, even at a "measly" Rs 1000 per Rs 10000000 of transacted value, day traders know how it weighs on your trade book if you were to ramp up a turnover of Rs 10 crores in a day ! In such cases, you onscreen profit may appear decent enough but when your contract note arrives via email late evening, much of it has dissipated in statutory charges and taxes ! You were working for somebody else, rather than being "your own man". If your trading style is one where you need to pay execution costs higher than your profits (on a profitable day), imagine what would transpire on a loss making day? Your high execution cost trading style will eat into your capital account. All professional traders know that drawdowns (losses) occur as a matter of routine but few appreciate that a trader loses not just money but also morale and the ability to make clear judgemental calls. The leaner is your trading style, the longer you are able to stay in the game. Maintain a log book wherein you segregate your net profits / losses (post all costs) and the costs incurred to earn these profits on a daily basis. That is your TER (trade efficiency ratio). As you mature as a professional trader, your TER must remain over 1 - 1.50 ideally. In a good year, it must be over 2 or even higher. Which means for every Re 1 paid in execution costs, you take home Rs 2 in net profits. You are then working for yourself rather than Mr. Market. And to make this possible, a few things to keep in mind -

Do not trade unless absolutely sure of your trade/s. A trade where you exit at no profit / no loss also involves execution costs.
Aim to capture atleast one-third of the intraday / swing move of the security that you are trading
Follow a minimalist approach wherein the bigger picture of the move is more important than the temptation to earn a few hundreds / thousands at the risk of the overall trade
Diligent adherence to stop losses. We all make mistakes, acknowledge them and move on to the next trade.

Trading is a difficult business to be in, a trader must get everything right to make money and just 1 slip to suffer losses, a good buffer by way of a higher TER is always handy for a rainy day.

Vijay is a Mumbai based best selling author of "A Traders Guide to Indian Commodity Markets" published by CNBC TV18 and sponsored by the NCDEX exchange, the first and only book to be so distinguished. Vijay a professional trader, trading mentor to corporates and individuals alike, with over 32 years of trading and 15 years of training experience. Vijay is a lifelong student of the markets and regularly updates his trading regimen by absorbing knowledge of new developments. He invites feed back at vijay@bsplindia.com and www.Bsplindia.com