Is a $5000 Questrade TFSA trading account cost effective? Part 2

Part 1 of this TFSA trading account cost analysis series considered the costs of a TFSA trading account using data from my recent forex trading (forex trading is not allowed in a TFSA, by the way) as a hypothetical case study. I conclude that even if I can trade in my best month, every month, I would still lose money in a TFSA because of the high relative commission versus a limited principal balance. In this second part of the series, I use my recent trading performance data to compare trading a TFSA trading account with a non-registered trading account (i.e. with capital gain tax). Feel free to skip to my conclusion in Part 4 if you don’t care for the calculations.

As I said in my previous post, the key problem with a Questrade TFSA trading account is the commission with respect to the small contribution limit ($5000 per year). The only way out of this is to risk more on each trade such that the commission isn’t as big as a portion of your cost anymore.

I normally risk 0.2% on each trade. In a $5000 account, that is $10 risked per trade. With a commission of $5 per trade, a round-trip commission would also be $10. So my total risk has doubled. But if I increase my risk to 0.5% of my account, or $25 per trade. A $10 commission is reduced to 40% of my total trading risk. As you can imagine, a cost analysis spreadsheet is starting to take shape.

It’s obvious that the more you risk on a trade (not a suggestion), the less the effect of commission have on you because the commission is a fixed cost. This isn’t telling us anything useful so far. So let’s take this a step further by conducting a cost-benefit analysis. For that, we compare net profits from a taxed trading account versus a tax-free trading account.

Consider the reward with respect to the risk per trade.

Step 1. Given each risk amount (e.g. 0.2%), what is my typical reward? In other words, what is my reward/risk ratio in trading? That’s easy for me to identify as I’ve been keeping detailed records of my trading. Based on my data from recent months, my reward/risk ratio is around 2.0. For example, with a risk amount of 0.2% per trade, my average reward is 0.4% per trade.

Step 2. I find out how much capital gain tax I’m paying on profit per trade. The capital gain tax in Canada is half the marginal tax rate. Say my marginal tax rate is 35%, my capital gain tax is effectively 17.5% because it is halved. So any profit which I derived from a trade is taxed 17.5%.

Step 3. Repeat steps 1-2 for each risk and reward values. Putting the results into a table, we get the following.

Risk amount vs. capital gain tax table

Because the Questrade TFSA trading account (affiliate link) is tax free, the column of tax amount is also representative of the saved dollar between a TFSA and a regular trading account. As such, given a total commission of $10 for a trade. We can see from the table that the tax saved is more than the commission for anything greater than a $30 risk ($60 profit) amount.

In more general terms, here’s my first finding in this case study. Given a reward/risk ratio of 2.0, the money saved per winning trade in a TFSA trading account will be better than the commission paid if I risk more than $30 per trade, or the average reward per trade is more than $60.

Notice I highlighted the word “winning”. This is merely the first part of a cost-benefit analysis. Unless you can win 100 percent of the time, we need to take into account the money lost when trades don’t go as planned (more often than not). We still pay commissions on top of the risked amount for all losing trades. That needs to be factored into our cost-benefit analysis.

In my next post in this cost analysis series, I will wrap up my calculations by incorporating simple probability theory to derive my expected profit after all is said and done.

Is a $5000 Questrade TFSA trading account cost effective? – Part 1

I recently talked about the benefits of a Questrade TFSA trading account. In this series of posts, I will take the other side of the debate. That is, to answer this simple question, with a $5,000 initial deposit, is a TFSA trading account a cost effective means to allocate your asset?

Part 2 and Part 3 of this series discuss my derivation of a spreadsheet to do the job. Part 4 is the conclusion along with a free interactive spreadsheet that I made so that you can get your own results with a few keystrokes.

The first step in any trading or investing is to consider your costs. After all, trading is a business and your bottom line is well… your bottom line (cue eye rolls). Every penny added to your costs means that you’ll just have to perform that much better to overcome it. Easier said than done. As such, here is my cost analysis in response to my previous post about the Questrade TFSA trading account, in particular.

Feel free to use this as a guideline for your own cost analysis if you’re considering opening a Questrade TFSA trading account (affiliate link) yourself. We each have our own unique financial picture so this cost analysis is merely a peek from my personal perspective. Here goes my calculations and rationales.

The minimal commission on stock trades is $5 at Questrade. A $5 commission may not seem much to most people. But consider this. For a $5000 account, $5 is 0.1%. On a basic single-lot round-trip (buy and then sell, all shares at once) trade, the total commission is $5 x 2 = $10. Thus, I will be 0.2% behind in my account on each and every trade!

Yes, 0.2% is a small number. However, take a look at my trading log from my recent forex trades and you’ll see that I made more than 10% in 4 months by taking 0.2% here and 0.3% there. In fact, if we consider the statistics frommy best forex trading month last year, my average net profit percentage per trade is 0.12%. I totalled 4.19% net profit on that particular month by raking in a lot of those +0.12% trades.

As you can see, a 0.2% commission would effectively break my profitable system. So conclusion #1. I cannot trade my TFSA with the same trading strategy as my forex trading. In other words, no aggressive day and swing trading.

In my next post in this cost analysis series, I will see if I can find an cost optimal risk amount to use per trade in a Questrade TFSA trading account. And if I can’t justify it, well, bye bye TFSA trading!

Not pay trading income taxes through a TFSA trading account

RRSP contribution deadline on March 1st is fast approaching. Like most Canadians, this is pretty much the only time when I give myRegistered Retirement Savings Plan some attention. Right now, my RRSP balance stands at $0. That’s right, nothing. I’ve been putting my money at work for 10 years trading all sorts of markets but willfully ignoring the biggest cost to any trader. Taxes.

Now that my marginal tax rate is for the first time running above 30%, and with no tax break in sight, it’s time that I take a hard look at my tax strategies to reduce my trading costs. Don’t worry, this isn’t yet another post about RRSP. (But if you’re indeed looking for RRSP information, I point you to a Canadian personal finance blog, MillionDollarJourney)

The reason why I haven’t placed money into my RRSP is same as why I don’t invest in real estates. Which is, a lack of liquidity. As the name suggest, RRSP is for retirement. Here’s the problem simplistically put. If I take money out while I’m still working, I get taxed at my full marginal tax rate for those money. Even if they were supposed to be capital gain. Thus I effectively lose my 50% tax discount from my investment capital gain. So money into my RRSP would effectively be locked in while my salary is still my main source of income! I don’t have a wad of cash where I can just stash away yet. So that’s why my RRSP stands at $0 this year. Although I am thinking of opening an RRSP soon… But I digressed.

The fact is, taxes in Canada is ridiculously high. So I need to do something about it soon. While looking for RRSP information, I came across Questrade’s Tax Free Trading Account. It is a reincarnation of the Tax Free Savings Account. As far as I know, Questrade is the only discount broker offering this type of account. Basically, it is a trading account in which there is no income taxes involved and any profit taken out would not count towards annual income too. Sounds too good to be true?

Here are 3 limitations for a TFSA trading account.

1. Limit of $5,000 contribution per year
2. Extra costs for trading the U.S. markets
3. Cash account only, no margin.

I will discuss #2 shortly.

But #3 is what matters the most to me as a trader. No margin means no leverage, no shorting, and no futures and forex trading.

No shorting?! One-way trading is not a good thing for a trader. This is obviously a ploy to get people to buy, buy, buy.

And no forex trading?!

Yet, I can’t expect to have my cake and eat it too. Yes, this TFSA trading thing has strings attached. But. It’s tax-free!

That’s enough incentive for me to consider incorporating it into my portfolio. Make no mistake, this will not be my primary, or even secondary, trading account. My plan is to use it as an ultra-conservative investment vehicle only. It’s about time that I replace my abysmal 1% yield savings account!

Beforeopening a Questrade TFSA trading account (affliate link) though, I need to do my homework on Canadian stocks. Because TFSA is a Canadian government offer, trading U.S. markets would incur extra costs (a devious way of “Buy Canadian”). As such, the only cost effective way for me to maximize a TFSA trading account is to trade TSX and TSX Ventures stocks.

This is yet another item on my to-do list. Come up with a strategy to trade this account with minimal risks (can’t stress this enough)using Canadian stocks. I actually have some ideas already. But I’ll save that for another time.

In my next series of posts, I ask a fundamental investment question like any trader should. Is a $5000 Questrade TFSA trading account cost effective?

P.S. For more information on Questrade, youngandthrifty.ca offers a review of this discount broker.

How Goldman Sachs Robbed You and Me of $3 Billions in 3 Months

After watching the videos below, and from months of observation of this latest global financial debacle, I am suddenly awashed with a feeling of hopelessly powerless to this gross unfairness. In which the average, hard working citizens are pouring money into the pockets of the filthy and uber rich. If you don’t know what I’m talking about here, watch the video attached below for the tip of the ice berg in this on-going problem.

While Goldman is arguably the best at “legalized stealing” from the moms and pops, they aren’t the only crook on the block. Governments around the world (not just the U.S.) were handing out money publicly left and right in the past few months. And many still are. The whole system is rigged as Bill Cara has opined countless times in the last few years.

Bill’s ingenious move to relocate his operation to the Bahamas is only starting to shine in these months (to me). In addition to voting with your ballot (which is useless if the whole system is rigged), we can vote with our tax money by relocating our financial operation.

However, for those of us that still rely on a day job, this is not an option. The best I can do right now is to become adequate with managing our own money instead of depending on the financial salesmen. This doesn’t seem enough for me as the balance of power appears to be getting worse by the day.

Our government grossly tax us on one hand and hand them out to the rich and well connected in the other. What have others done/plan to do with regard to this unfair trap us working bees are stuck in?

The first video is Ratigan explaining how Goldman Sachs made $3 billions in 3 months (tipped by Stop Investing blog). The second video is an interview with Michael Moore and Ratigan about where all these loots are going now.