Step 1: Find a brokerage platform that will let you trade commission-free. It used to be that you had to pay a flat fee to a broker to place your trade on top of all the other incidental costs. Things have changed since then, and now it is normal to not pay any commission to a broker just for placing your trade. Find a brokerage that will let you place trades for free.

Step 2: Use Limit orders rather than Market orders. These order types make different trade-offs between guaranteeing execution of your order and guaranteeing the price you will pay. Market orders tell your broker to fill your position immediately at whatever the best offer is. Limit orders allow you to set a price limit for your order, meaning you can determine the maximum you’re willing to pay per share to enter the market. The trade-off is that you run the risk of not getting your order filled. Prices have to “run into” your order to get execution. Using limit orders allows you to avoid paying the implied commission that comes with using market orders. The implied commission is incurred when using market orders because you have to “cross the market” to get instant execution.

All markets are ultimately a collection of buyers and sellers that are willing to transact at different prices. Where there is agreement on price between a buyer and a seller, a trade occurs. Buyers who do not want to meet sellers asking prices form the bid side of the market, and sellers who do not want to meet buyers bids form the ask/offer side of the market. This can be visualized using a price ladder, a ubiquitous feature on trading platforms with the proper data feed. The price ladder is also known as the order book, a made-up version of which is displayed below.

The quantities (# of shares) bid are on the left in green, the quantities offered are on the right in red. The prices in the middle are the prices associated with those bid/offer quantities. The top bid price is $100.02, and the bottom ask price is $100.03. If you want the highest odds of getting execution without crossing the market, you would have to place a limit order to buy at $100.02. However, if you cannot risk failing to get execution, then you can pay the bottom ask price of $100.03 and get filled immediately. However, to do so you had to pay higher than the best bid price and cross the market to take whatever the best offer is. This $0.01 of extra cost for immediate execution is the implied commission in this case. You paid “commission” to get immediate execution.

In summary, Limit orders allow you to avoid the implied commission of crossing the market, however you do not have a guarantee that your trade will be executed, which takes us to step 3.

Step 3: Set your limit orders close to the open price to help ensure execution. While you cannot guarantee execution of your limit orders on any given day, you can make execution more or less likely depending on how far from current prices you place your order. The closer your order is to the last traded price, the more likely it is to be filled; the further away it is, the less likely it is to be filled. You can estimate the odds of getting filled on a given day for whatever market you want to trade in using historical data. Consider historical daily data for SPY. The historical data includes the open, high, low and close prices for SPY for each day going back in time. If you subtract the quotient of the low divided by the open from 1 (1 – low/open), you have the maximum percentage drawdown in price for that day (called Maximum Adverse Excursion, or MAE). You can compute daily MAE for all the days in your data set, and then you have a historical distribution of daily MAE you can use to calibrate where you place your limit orders. I have done this work for SPY and the results are below.

Based on this data, the median MAE for SPY is 0.35% of the open price. Were you to place a limit buy order 0.35% below the open price that day, you have a 50% chance of getting filled. The closer to the open you place your order, the more likely it is to be filled that day. So you can be more or less aggressive with your orders depending on your level of urgency.

Given the access individual investors have to brokerage services and market data, trading for free is more possible now than it ever has been. The costs you save going this route may be small at first, but could add up over time. Why pay a broker or the markets themselves when you could keep that money yourself?