Is a $5000 Questrade TFSA trading account cost effective? Part 4

Alright, so I'm back from the dead. Let's finish this cost-benefit analysis before the weekend. Here are back links for Part 1, Part 2, Part 3 in case you missed them. The table below shows my expected return as derived through part 2 and part 3 of this series. As you can see, I'm only expected to break-even by risking 1% of my \$5000 TFSA trading account. Trading just for the sake of break-even isn't exactly an enviable goal. Based on my statistics, I typically say an expected return of 0.10% per trade is acceptable. Looking at the table, that would require that I risk 1.5% per trade. [caption id="" align="aligncenter" width="570" caption="TFSA Trading Cost-Benefit for Reward/Risk = 2.0 and 40% win rate"][][][/caption] So I'll have to risk 1.5% just to scrape in 0.10% of profit? The problem is obvious. Using a \$5000 trading account with \$5 commission, along with my historical trading performance simply do not justify the odds. I started this series to study the cost effectiveness of a Questrade TFSA trading account. But the conclusion which I derived is much broader. Considering that even without being taxed, a \$5000 TFSA trading account is insufficient for trading with a commission of \$5 or higher. Thus, if this is a taxed, non-registered trading account, the cost would be even more. As such, not only is \$5000 an insufficient capital for a Questrade TFSA trading account; \$5000 is simply too little money to trade any trading account with \$5 of commission per trade for me. Remember though, this cost-benefit analysis is based on my own statistics. You can input your own parameters into this spreadsheet to get your own set of results. To be fair, I must clarify that the problem isn't with Questrade. Even with their lowest trading commission in Canada (affiliate link), a \$5 trading commission for an account of \$5000 is simply too much for me. Yes, there's nothing to stop you from trading with a \$5 commission for a \$5000 account. Heck, many have claimed to be successful with less than \$5000. However, that's just not my style. I don't gamble with my hard earned money. I only trade when the odds are in my favour. If the cost is un-proportionately high, it's as if I've suffered a setback even before I begin fighting the battle. As such, I'm going to say "no thanks!" to a Questrade TFSA trading account for now. My short term plan is to look for a guaranteed TFSA savings account until I can develop a trading system for Canadian stocks that would justify the cost-benefit.

Is a $5000 Questrade TFSA trading account cost effective? Part 3

This post continue on the calculations from part 2 of this TFSA trading cost analysis series. Part 1 is an introduction outlining the rationale for this work. Let's pick up where we left off. I was just about to figure out what is my expected profit using probability theory. To do that, I use my historical performance data to calculate my probability of profitable trades. I've been calculating my trading statistics in my monthly reviews, so it's just a matter of aggregating all the monthly data to a single number. After a few keystrokes, I find that my win/loss percentages are roughly 40%/60%. Given my known reward/risk ratio (discussed in part 2) and probability of win (40% as noted above), we can calculate a net return expectancy. This is a simple formula if you know statistics and confusing if you don't. So I'll just write it out as is but do refer to the Wikipedia onstatistical expectancy if you'd like to know more about how I derived this. Expected net return per trade = (Average Reward from Step 1 - Commission) * (Probability of Win from Step 2) - [(Risked Amount + Commission) * (1 - Probability of Win)] This formula is the result we seek. We apply the forumula to extend the cost-benefit table presented last time. Here's a complete cost-benefit table using the parameters of a \$5000 principal balance, \$5 commission, capital gain tax of 17.5% (half of marginal tax rate), reward/win ratio of 2.0, and a 40% winning rate. It likely that you'll have different parameters than me. So I am sharing my spreadsheet here so that you can use your own parameters for your own set of results. Download it in your preferred format and then edit the values under the Parameters column. Contact me if you have any problem using it. I will discuss the result and make [my conclusion in the next and final post in this TFSA trading cost-benefit analysis series][]. Hint: Short answer to the title's question is NO. [caption id="" align="aligncenter" width="570" caption="TFSA Trading Cost-Benefit for Reward/Risk = 2.0 and 40% win rate"][][][/caption]

Calculation Example

For anyone interested, let's calculate one data point of the table above using all the the steps discussed so far in this series. Using \$10 risk (0.2% of \$5000) as an example. Known data: risk = \$10, commission (comm) = \$5, reward/risk = 2.0, probability of win = 40% Round-trip commission = \$5 x 2 = \$10 Average Reward = risk * (reward/risk) = \$20 x (2.0) = \$20 Expected net profit = (Average Reward from Step 1 - Commission) * (Probability of Win from Step 2) - [(Risked Amount + Commission) * (1 - Probability of Win)] = (\$20 - \$10) * (40%) - [(\$10 + \$10) * (1 - 40%)] = 10 * 0.4 - [\$20 * 0.6] = -\$8 If I risk only \$10 on a trade, it is expected that I would lose \$8 on average based on my historical trading performance statistics.

[my conclusion in the next and final post in this TFSA trading cost-benefit analysis series]: http://www.quantisan.com/is-a-5000-questrade-tfsa-trading-account-cost-effective-%e2%80%93-part-4/

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. [caption id="" align="aligncenter" width="361" caption="Risk amount vs. capital gain tax table"][][][/caption] 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.

[costs of a TFSA trading account using data from my recent forex trading]: http://www.quantisan.com/is-a-5000-questrade-tfsa-trading-account-cost-effective-part-1/

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!