Adrian Reid explains why trading a mean reversion system with a small account can be unprofitable when broker commissions are high. He uses numeric examples (e.g., a $40 round-turn commission consumes 8% of a $500 trade) and cites broker minimums (ComSec high fixed minimums; IB minimums around $5 per side for Australian stocks) to show commissions can erase typical mean-reversion profits. He recommends shopping for cheaper brokers or increasing percent equity per trade (e.g., on a $10,000 account taking $2,000–$2,500 positions) to mitigate commission impact.
Questions this video answers
$40 round-turn commission (presented as $20 per side or similar multiple examples in chat).
8%.
$5 per side.
Chapters
Are you starting out trading with a mean reversion system and a relatively small account? You could be in real trouble when it comes to commissions with your brokers. In this video I'm going to talk about why mean reversion with some brokers can be really difficult when you've got a small trading account. So stick around. But before we go any further, make sure you hit the subscribe button and give this video a thumbs up so that you get notified of all of my future videos because I've got new trading content coming out all the time and I don't want you to miss a thing. So if you've got a small account and you want to trade mean reversion that has small average profit per trade, can you do that with a small account or do the commissions really basically eat up the profitability of the system? I think is the question, and this is the answer. Depends on what broker you're using, what your commission structure is. For example, if you've got a fixed minimum commission, like say you're using ComSec, God forbid, and it's a $25 or $29 per side, I don't know what it is nowadays. Maybe it's 19. Either way it's expensive. Let's say you're paying 1995 per to buy in 1995 to sell. It's going to be really hard with a $500 trade size and a $40 round turn commission to break even on a mean reversion system. Because I mean let's, let's just work it out, right? $40 as a percentage of 500, it's 8%. So your system has to have an average profit per trade of 8% on average just to break even. If you're trading a $500 trade size and you've got a $40 round turn commission. Never going to happen with mean reversion. Okay, so the first thing you can do is shop for a cheaper broker. Shop for a broker that doesn't have a minimum or has a much lower minimum. And, and look at how much you're actually paying commission on interactive brokers. You're not paying nine, $19 buy $19 to sell for $500 trade. You know, on self wealth you're not paying that much. So if you are paying that much, then it's a problem. So in the chat I can see that someone said that the minimum commission on Australian stocks in IB is $5 on each side. So 1% like that could be a problem still. Right? So you've got to have a look at that. Now if you've got a $10,000 account and your first system is a mean reversion system, typically on a mean reversion system you have a higher percent equity per trade than you do on a trend following system because the win rate on the system is much higher. So you can probably afford to take if on a $10,000 account much bigger trades than $500. In fact if you looked at the Fear Harvester system.
The percent equity per trade is much higher than that. I mean you might be taking $2,000 trades or two and a half thousand dollar trades on a $10,000 account. Could be right. So think about, okay, the $500 minimum. Do I need to trade that small with this account? If it's a trend following system, yeah you do. Right, because you need that diversification. If it's a high reliability mean reversion system, you don't, you can trade bigger, you know, just know you can have the occasional large loss. It's going to hurt a bit but you, you don't need to stick to the minimum of $500.
