Restricted to the publically-available data from one particular and rather odd site, but probably not crazy.
At first it seems counterintuitive, shouldn't it be roughly 50% gaining and 50% losing? But I guess that people typically put in a modest amount of play money, and then tend to trade until either they run out or get discouraged from losses.
I am sure someone will come here and say they have made their fortune from day trading, but every single person I know personally who has tried has lost a fortune. It is like lotto - sure someone wins each week, but nearly everybody loses.
Yes this is totally true. I am not much of a gambler (outside of my investments, but at least I can lie to myself here that I know what I am doing), but I was stuck on my last visit to a casino how nobody was having fun. I saw hundreds of miserable people losing masses of money and not a single smile or laugh.
Depends on the casino and the game. European casinos are very depressing. The Monte Carlo for example should be fun, but it's extremely stuffy. The 'american' style part is a bit more fun.
But, find a cheap casino in Vegas and you can have some fun. Last time I was there, Casino Royale (across the street from the Belagio) had $2 craps with 50x odds. Craps is social to play and $2 is super cheap to learn with.
Well, I don't make a fortune from it, but after losing a fair amount of money day trading, I wrote an iOS app where people can practice their day trading. The income from it has covered my losses from trading. So, yeah I can say I make some thing from day trading!
Do you see what the parent's point is? You may not be one of the people making money directly from day trading itself, but you are an outlier, in that you used your experience to create a product. Which is something that only you did.
I do think its a smart idea though. My comment was directed more at the appropriateness of the parents' observation.
>shouldn't it be roughly 50% gaining and 50% losing
1) They aren't trading against each other (they're trading against professional investors)
2) When you trade randomly you should expect to lose money (paying fees, paying spread, getting 'good' executions rarely and getting 'bad' executions often, etc.)
50% losing and 50% gaining, without any spreads or commissions, would eventually destroy all your wealth. It's the classic "random walk" or Brownian motion study in finance, and it destroys your wealth because every time you lose 50% you have to gain 100% to get back to where you started.
1) There's a spread between buy and sell prices, so after many trades, both sides can lose.
2) As there is high leverage, traders are encouraged/forced to put up stop loss orders. These limit the amount you can lose on a trade, but effectively kick out a trader at maximum loss in even tiny amounts of market turbulence. Plus in times of volatility, the automatic market sell orders may get even worse prices. The market volatility kills many a trader.
One thing I've always wondered, if you take a day trader that was wiped out in some time span, and reversed all the trades (ie sell rather than buy and buy rather than sell), would they still be wiped out?
Possibly. Also, due to the nature of trading, they may have been wiped out in this hypothetical "reverse all trades" scenario before they were in reality. For example, they could have had one potent stochastic windfall early in their career that, had it gone the other way, would have wiped them out.
This is truly accurate. You try it out and make some money a couple of times, then spend the rest of your time taking small losses trying to repeat the feat.
Basically. Occasionally I'll trade the e-mini futures and have likened it Vegas without having to leave my house. All the lights, sounds, charts, order flow, etc... is just like a fancy slot machine.
This picture is much more accurate than I would admit. I've seen many of my older relatives "playing" the stock market all day. Basically sitting in front of their computer, buying and selling stocks like a game. And that picture looked eerily similar to when I saw them in Vegas spending all day in front of those electronic slot machines.
Agreed! _A Random Walk Down Wall Street_ convinced me that asset allocation and saving regularly were the true ways to wealth in the stock market, especially if you consider $/hour of effort.
If we assume day trading is gambling, I wonder what the house odds look like contrasted against other forms of gambling (e.g. blackjack, poker, slots, horses, etc)?
I guess what I am asking is, if we take it for granted that it is gambling (and I am happy to do so) is it gambling with the best odds around?
I would say the stock market more represents a poker game with hundreds of thousands of participants. There is no house, it's a free for all, and day traders simply don't have the capital or manpower to survive.
Depends on the rake system, in timed games this is the case but more common they take it from the pot so only the winner pays. But typically you win some pots even in a losing session so it's a pedantic point.
Blackjack, a casino game with unusually good odds, has a house edge of 0.43%
You can certainly get brokers that'll accept a lower commission than that per trade, and if you're not hugely overleveraged the variance of your expected returns is going to be lower[1]. As with poker, the difficulty isn't so much the house edge as the fact there will be people or bots who are much better at it than you and/or have much bigger bankrolls to force you out of the market even if your suspicion they're holding a weak hand is justified
[1]Your expected returns are also on average positive in the long term if you buy and hold rather than trading
There are "pari-mutual" betting systems, for instance the system used for horse racing in New York State, which are very market-like by design. Instead of an oddsmaker as in the European or Vegas systems, the odds on a particular outcome (e.g. a particular horse to win/place/show) are determined by market activity: the weight of bets on that horse vs. others in that race.
If you are honestly better at judging the ability of particular horses and jockeys to win races than the average market participant, it is possible (at least in theory, I don't know how many people do it in practice) to make money.
However, the house "takeout" is pretty high; most places are 15+% on straight bets and can be more than 20% on exotic bets (Exactas, Quinellas, etc.). If not for the high takeout, it would be a very nice system for the bettor.
The only time I've ever made money at a horse track was a time when I went with a friend who rode and owned horses, and we spent the entire day in the paddock area (not even watching the races), watching the horses and jockeys come in. She pointed out particular instances where she thought the favorite didn't seem likely to win, and in those cases I'd put down straight bets on the next-best favorite horses, essentially "shorting" the favorite. It worked pretty well, enough to get around the house takeout and almost offset the drinks we consumed in the process. Not exactly something you'd want in your 401k, but not a bad way to spend an afternoon.
Is there absolutely no skill or expertise involved in it? I don't know because I haven't spent too much time studying it, but it seems a lot more like poker than slot machines. People who are better at the game should have an edge on others.
But with day trading you have the same problem you have with poker - there isn't any way to know if you're better than other people. Your advantage will be so small you can lose money month after month even if you've managed to tilt the odds in your favor. Worse, you can easily trick yourself into thinking you can make money on average after a prolonged lucky streak.
In poker it's possible to be enough better than the competition that your advantage is obvious (to people who are similarly skilled, at least). I'm not sure that's the case with day trading.
If you think that's bad, check out forex trading accounts. I don't have the exact stats on hand but an insane percentage of them get completely wiped out.
I'm not talking about losing some of your money, I mean 100% of the money in your account and possibly owing even more.
That is due to the amount of leverage used in retail FX trding. Most people don't understand how leverage works, let alone the negative impact it can have on a trading account.
I'd love to see some references for that if you do find them (I'm not disagreeing with you, just would be interested to read more). That's been my impression of most Forex trading too, and I've seen people running 'Forex education' courses where style/bling and motivational Instagram quotes seem to be their main selling point. Forex is so highly leveraged that even if you have some degree of success, it seems easy to wipe yourself out with a bad incident or two.
Forex is not highly leveraged per se, but obviously you have to leverage it to help people lose money more effectively, as buying some yen or something and watching it go up and down a bit is a bit boring.
Basically you can lose 100%+ of your money because of the leverage. When the Swiss Franc unpegged, brokers went out of the business because they could not get clients to cover losses.
eToro wouldn't be used by any remotely professional day trader. Most of those accounts are most likely idle and judging by eToro's target audience - highly amateur. Whilst majority of course loose money, so do majority of businesses in any industry, from startups to restaurants to hedge funds. The nature of human economics is such that there's more money chasing opportunities than the value of those opportunities.
I recommend against "Economics in One Lesson". It's basically a libertarian promotional pamphlet. If one wants an economic education, something like "The Undercover Economist" is much better.
I did it for a while in the very exciting year of 2008. I see-sawed back and forth and was profitable for months at a time, but in the end I was down. I strictly kept my daily losses limited at $50/day. So really small risk. At the end of that year my day trading losses were about $1500 and otherwise I was in cash just watching the world burn. My long term funds lost more than that in a day.
I've lost out on more money by not being in the market long term going up.
Of course I thought I might get good at it (everybody dreams), but the main reason I did it was to learn to confront fear and to keep logical and strict to the trading plan in the face of it. I am still risk averse though, so I didn't really learn thoroughly.
The other main thing I learned is that if you aren't a robot then you don't have any business out on that killing floor. The age of human day traders is over.
Developing that trading strategy is a continuous job; that's what successful traders do. They don't play stocks, they play strategies. There are going to be computers involved no matter what. Your indicators, your trading platform, what analysts you trust.
So what is a bot ?
A "bot" suggests to me something just trading in and out of some security at some average frequency: weeks, days, intraday, minutes, seconds and then there is HFT.
These things are all just feeding off of the movement of whales: major flows of money that cause those waves that small technical traders think they can figure out just by watching the shape of them.
There is really an amazing amount of intelligence involved in playing the day's game and you are taking in a lot of data, watching other markets (oil versus airlines, currencies, futures, sovereign debt) and using this to either realize the moment is now or to just scare the shit out of yourself and end the day up frazzled and $30 richer. That was my experience.
Successful traders reduce their risk even further by choosing what they are trading, shortlisting things that might pop and being able to jump on those (manually or automatically) in less than a heartbeat. That's where the bots will rip an entire sector up before an amateur trader has any chance to understand what is happening let alone why it happened. But those bots are just extensions of the trader.
Anyway, the whole thing is retarded and I have more fulfilling things to do on the planet.
> would it have performed better?
Definitely. Discipline is tough when somebody just demolished your chinese solar stock and you are down a week's earnings. The bot would've cut and run.
Thanks - I like the idea of strategies being an extension of the trader. Until we have fully independently trained NN-based trading algorithms, I guess there will always be domain knowledge being applied. (Even with NNs the domain knowledge will be applied in choice of layers etc.)
>Definitely. Discipline is tough when somebody just demolished your chinese solar stock and you are down a week's earnings. The bot would've cut and run.
What stopped you from cutting and running in that case? Was it the hope that the stock would swing back?
> What stopped you from cutting and running in that case? Was it the hope that the stock would swing back?
I believe you have to experience this yourself, since this is about emotions, bias, and insecurity. Everybody only has a sample size of one with this.
I can say that I found it very similar to playing Poker. In both cases you need to conquer your emotions and biases and simply follow the damn strategy. In both cases, the edge cases will make you constantly doubt your strategy.
It isn't, there's fanous people like Warren Buffet of course, but I personally know of 3 individuals in investing forums who post all their trades and handily beat indexes over long periods.
> Nearly a decade ago, Warren Buffett made a million-dollar bet: that by investing in a completely unmanaged, broad-market low-fee index fund, he could beat the gains earned by a high-powered hedge fund with a team of managers at the helm. His opponent was Protege Partners, LLC, a New York City hedge fund with $3.5 billion in assets under management.
[...]
> His simple Vanguard S&P 500 (VFINX) fund has delivered returns more than 40 points higher than those of the hedge fund. “I believe this is the most important investment lesson in the world,” he said.
Warren Buffet has so much money in his control that he cannot beat the market - his very investments change the value of the good companies he invests in - and not in his favor. He can make small bets of companies, but even if the bets all pay off (they will not - even great investors make mistakes) it isn't enough to be very significant.
> More dollars have flowed to index strategies that track a market benchmark, such as the S&P 500 index, partly because such funds typically have lower costs than active funds and more investors believe that stock-picking managers can't regularly beat the financial markets.
> Now a new Morningstar study, released this week at the Morningstar Investment Conference, finds that actively managed funds lagged their passive counterparts across nearly all asset classes, especially over a 10-year period from 2004 to 2014.
"Essentially nobody" is admittedly not well-defined, but I don't take it to mean that a handful of guys doing better would disprove it (and in any case have trouble finding any data points in favor of the opposite position).
I claim that the top 20% (as specified in the headline) could not be reasonably described as "essentially nobody". And the article you linked two posts ago found that more than 20% of funds beat the market.
That's over the course of a year, which is not what I would consider a long-term measure. Over the course of the year, sure, you could easily have people who beat the market.
Warren Buffett is not a day trader. To paraphrase, "My favourite holding period is forever."
He is a good data point to demonstrate that long term investors can beat the indices. Most don't, however, and it is my understanding that day trading is even worse. Just as there are professional poker players that can consistently make money, I'm sure there are some day traders that do very well, but it is not a skill that most people have.
People actually misstate the argument regularly. It is of course possible to beat the index over long periods, but there is little evidence that there is any skill that allows you to do it. That is, could those 3 individuals write down a prescriptive algorithm that allows someone to replicate their results ahead of time?
Another way to describe the problem is, given the same number of bots, randomly picking tades, as members of a trading forum, how many would beat the index? Is the number more than 3?
I think you also have to define "the index". There are dozens of indexes on the NYSE alone, and many come with legitimate questions about how well they actually represent the market. In that sense, I think it is possible to choose (and not luck into) a better basket of stocks than what goes into the indexes. Of course, it isn't easy.
If there's no evidence that beating the market depends on any particular skill, that would seem to be saying it's essentially a matter of chance. If that is the case then it stands to reason that, as the period of time observed grows longer, it becomes less and less likely for anyone to beat the market.
An online friend just got into currency trading and went into some tutorials about reading curves. Apparently there are recurring curve patterns, which allows one to predict where a rate is going. If you can code up some pattern recognition algorithm, there might be a way to make money.
Although I'm very skeptical about those patterns, because there could be someone trading back and forth to create those trends, and screw you when they want.
Anyway analyzing data and gaining money with it makes really no sense at all. Surely you can make money to live, but there is no point to it until you really are able to win big, and nobody does. Investing money where real business create economic activities that are in effective demand, maybe. But trading numbers, that's really an awful thing.
If those patterns existed and were detectable, the moment people started trading on those patterns (or wrote bots to do so), the pattern would disappear.
This is one of the services the market provides. It creates uniform price conditions across time and space. If there is a discrepancy that doesn't make sense (like a recurring profitable pattern in stock prices), you can make money by fixing it.
"Trading numbers", as you call it, is (through a layer or two of indirection) helping to establish true prices, transmit market information, provide liquidity, etc. All of these things are critical for "real business" to operate efficiently in a large economy. The abstract markets create huge value for "real business" and its users charge a small percentage of the value created.
I am a technical analyst. Patterns do occur but ultimately prices are driven by fundamental events. Interest rate decisions, market data releases and similar.
When that occurs no pattern can survive on the smaller timeframe.
Technical analysis works but it is not written in stone.
What are your thoughts on A Random Walk Down Wallstreet? He pretty thoroughly picks apart the efficacy of technical analysis vs buying some indexes with supporting data.
Problem is, those patterns do exist, but they are chaotic behaviors, and transition probabilities are already priced in. So that, for a non-causal analyst looking at past data they look very reliable, but for somebody with no forward knowledge, they are useless.
By getting your data with days after the fact, and looking at the patterns with all the data graphed.
Or, in other words, the way those market analysis courses and gurus teach people to read the market. The patterns are very reliable if you ignore causality.
I traded a little during the crisis until I got hit with the pattern day trading rule. I cashed out up 28%. Maybe they were doing me a favor cause I probably wouldn't have done so well on a longer timeline.
> The possibility to make money increases if one acts more like a robot, i.e. acting strictly upon rules decided a priori.
Only if the rules are correct, for all situations. Robots have lots vast amounts of money because there was a missing or wrong rule. Good luck figuring out in advance all the rules - remember that the situation is changing, and your robot in the mix is itself a change.
>>> And the primary reason is that one loses more in a single trade than what one probably earned in 5 or more trades.
This is the key. Once in a while, on the internets, I see people who say that they developed a strategy that can profit 5% month on month, etc. Excluding the ludicrous claims of 30% and similar monthly profit. However, they are often totally wiped out by a highly unlikely outlier event that should happen once in a century, as they like to call it. Or something similar.
The Black Swan: The Impact of the Highly Improbable by Nassim Nicholas Taleb is a good book on this subject.
The stock market isn't a zero sum game (or a negative sum game for that matter). If you think it is, you are over simplifying. At the very least you need to account for traders' differing time spans on their trades.
Say a day trader buys a stock for $9/share and then sells it to me at $10/share a week later. I then put the stock into my investment portfolio and hold on to it for forty years and sell it at $100/share. You could make a simplistic argument that the day trader "lost" the game because he missed out on the appreciation to $100/share but you are neglecting the different investing timespans. The day trader doesn't have a job if he is holding on to stocks for 40 years. He was happy to buy and sell quickly for a small profit. I'm happy because I held on to an appreciating asset. Bankers are happy because they made a few dollars in commissions. No one losses here.
But you two are not the whole market. Someone sold a stock to a day trader and someone bought it from you. There are no other money in a stock market except those people bring (minus commission) so how everybody can win?
The way the math works out with that distribution: only 80% of them lose money over one year, but as time continues over multiple years, the percent losing money approaches 100%.
This is not how the math works, and it shows a common statistical fallacy. We cannot assume that the chance that a person loses money one year is uncorrelated with the chance that the same person loses money the next.
Here is a simple model a mathematician might realistically use to model this. Given N traders, let P_1..P_N be iid Beta(α, β), and let the chance that trader n loses money during a year be Bernoulli(P_n). The nice thing about this more complicated model is that the simpler model is a limit case of it.
This "first approximation" lets us use simple mathematical tools to test hypotheses like that by providing an alternative model. If our beta distribution looks more like a constant distribution (with high values for α and β) then we can conclude that the number of traders who lose money approaches 100% as time goes on. If the estimate for α and β is lower, we might reasonably conclude that there is some factor of skill involved.
This is just one possible model you could use to test if there is skill involved in day trading. There are many other models which we could test which would also mean that the proportion does not approach 100%, such as a models which assume correlations between different years.
Are you saying that it's unreasonable to suppose that some people can make money day trading in the long run? I was just illustrating a simple model you might use to test that theory.
I'm saying it's not reasonable to think that a private individual can make a long-term profit day-trading, skilled or not. It's quite reasonable to suppose lots of impossible things.
There are professional day traders who earn an income over the long run by day trading. This is a true fact. It seems like you are trying to contradict this fact… or do I misunderstand what you are saying?
The model I gave was the simplest model I could think of that would let you test the theory that skill is a factor in day trading. It was an illustration of how someone with mathematical training might think about statistics like "80% of day traders lose money" without jumping to the false conclusion that all traders eventually lose money.
And then there are these terrible products they promote to retailers (at least in Europe). Like CFDs and such. Orders in these things don't even go to the market, like in those bucket shops from old days.
The Financial Times often refers to spread betting companies as 'debt collection agencies with a side interest in trading'. Emptying the accounts of users and then collecting the additional money owed is what these companies do. Then they use some of the profits to advertise for new customers to continue the cycle...
Yes, I should have really said FT Alphaville rather than just the FT, it has a slightly less serious tone than the main paper, but equally informative and has some quality in-depth articles. The Plus500 coverage is very good, for instance.
I re-read Michael Lewis' Liar's Poker once every few years. In new reprints he's added a prologue where he says something along the lines of "I tried to write a book about the horrors of wall street and instead it became a recruiting tool for wall street"
In a similar vein whenever something like this comes up I write something that says don't try and do this and inevitable I get 10+ emails from people saying "Ok I understand but I still want to do it anyway."
So if you really want to try and day trade, here is my 5 points of advice
1) You haven't done anything until you trade with real money. Ever played poker with friends that wasn't for money? You always get some jerk bluffing and going all in on Ace-7 because why not, it doesn't matter.
If you want to trade you need to learn your own emotional limits. Get invested as soon as possible. Learn what kind of stress you can deal with.
2) The average successful individual algo trade looks like John Turturro charter Joey Knish in rounders. You are always grinding out a living $100 to $1000 at a time. If that isn't' appealing then stop before you start.
http://www.imdb.com/title/tt0128442/fullcredits/
3) You need money to begin. It takes as much effort to trade 2000 as it does 200,000. Above a million or so things change. A minimum amount I'd use would be 50,000. If you can't set that aside to trade then don't start.
I mean if you have a great year trading 5,000 and make 20% you have made $1,000. That's not worth the effort. But at say 100,000 your 20% is starting to be real money!!
Be clear to yourself that you are doing this for the money. Any other reason just gives you an easy out.
4) The most important number to look at is draw down, not sharp ratio. I see lost of people on quantopian show great backtested algos that return 200% over 5 years, but have a 70% draw down at one point.
Most people don't have the psychology to loose money. At 10% down you start to question yourself. At 20% down you get really grumpy in all aspects of your life. Most people don't have the ability to let their positions fall to 30% down. If your backtest has a draw down of more than 30% you don't have a workable algo.....period.
Sharpe ratio is great if you are an HFT firm trying to decide how to divvy up your money across 30 successful algos. You don't have 30 successful aglo's. You will be lucky to have one.
5) Don't use leverage....... you can break the other rules, this one you can't. I've seen people go bankrupt. Don't use leverage.
@chollida1 , you should write a book; help drive Michael Lewis' point home. In my last project for a brokerage system, I developed features for day traders. What was most surprising to me how much money the brokerage system generated for the bank regardless of the outcomes for the day traders.
With commissions per trade, brokerages love day traders. The more activity, the more money they make. They hate people that buy a stock with 3% dividend yield and don't touch it for 10 years.
Its not just the trades that generate fees; the application enables you to borrow money with a click of button ( kind of like how they place ATMs near slot machines). The trader pays a borrowing fees plus interest.
If you get to 5, make sure you are judgement proof, and any loaned money is unsecured credit card money.
I honestly couldn't care less about credit card money losses, but I've seen too many people with assets(home, profitable website, really good job, nice cars) get reamed in bankruptcy court. Or, they lie about assets. Lie about assets, but make sure they never show up anywhere.
And just because you lied about your income on that cc form; in 99 percent of the time, it won't be mentioned in bankruptcy court. Credit card companies use your credit credit score to give you of money, and I believe they still redline(give more to certain individuals). Bankruptcy lawyers know most people lie on those cc applications. Yes, it's technically fraud, but try to prove it. They just don't. Nolo Press has a glaring error concerning income, fraud, and potential bankruptablity. It think newer editions corrected it?
If you get onto financial troubles, try to be proactive. Learn about what assets are legal to transfer. Learn about statue of limitations. Protect yourself from these bottom feeders.
(I don't want to debate anyone on the ethics of the cc industry. I just got a cc plea offering me a 29 percent offer, and if I could do it again, I would have ripped up that first cc card sent to me upon graduation, endorsed by my school.)
Do you have any literature you can recommend for when one gets into financial troubles. I don't think I would ever feel comfortable using leverage, but would like to know what I'm up against if I get to medical bankruptcy, for example.
Medical bankruptcies are the number one reason people file for protection. Don't beat yourself up. I once got a hospital blood test, and they charged me $1100 dollars. When they found out I had insurance through my Union; that total bill went down to $90.00. That's the total price they charged my insurance company. My portion was $7.00. So the medical system is rigged. I find the system very unfair, and it doesn't make any sense economic sense.
O.k., I am obviously not a lawyer, but have dealt with these individuals. If you think you get a funny feeling about your lawyer; walk--they are a dime a dozen. If you have nerves of steel, and are good at research it's not unheard of to do your own bankruptcy. Yes, I know the adage, just there's some people that can do some sophisticated legal work themselfs.
Most lawyers offer a free first visit. See a few of them. Take notes. The slimey ones try to scare you. The moral ones are strait shooters. Double check verything they state. Try to get a money back guarantee.
Back to you medical bankruptcy; hospitals, and doctors say they use the judicial system to get their overpriced fees only sometimes. They do go after thousands of people yearly though. They are basically lie. They get judgements, and force previous patients out of their home. Completely disgusting in my world. If I was a rich dude looking to donate money to a hospital, I would have one question, "Have you ever sued a patient for nonpayment? How many? What were the facts of the case?
If you are forced into bankruptcy, and have a house there's a homestead exemption in most states. I believe it's $125,000. It's not much. I know in Texas it's basically unlimited--which it should be nationwide! No one should be able to touch your home, especially in a medical bankruptcy.
Now if you have a house, and a bank account. String the creditors on for as long as possible. In the mean time, talk to a lawyer about getting rid of assets. You don't want hide assets, by illegial transfers, but it's complicated. Their are ways to hide that house, but it's tricky, but doable. Don't be the idiot that goes deep in collections, and transfers the home into a family members name, and then a week later file for a chapter 7. Again, talk to a lawyer if you have assets.
The whole process scared me. Be strong! Everything will work out, especially in a medical bankruptcy. I was so scared over my financial difficulties at one point, I considered committing suicide. Talking to the right lawyer, a guy who basically told the truth--really settled me down. I knew he was my guy when he said, "All my clients lie about they annual income."
(Don't take advice too seriously form Internet chat rooms, or even myself. There is still so much wrong information, even by porported lawyers. I didn't help you much, but you seem to have a straight forward bankruptcy. Don't let this ruin you life. I spent so many unneeded nights worrying. I won't even say good luck, I don't think you have a sticky bankruptcy. As to lituraure, Nolo Press is pretty good, but they too make mistakes. Learn how to do legal research. Become familiar with bankruptcy codes/procedures for your state.)
My comment is independent of your discussion of medical bankruptcy, which I find abhorrent.
I take issue with your statement that housing should be exempted from bankruptcy. As someone who rents and doesn't own, and thus has a net worth that is more concentrated into savings/investments, why should a house be protected? I'm not protected from losing the savings that I haven't invested into a house.
This is a great list, and it should be higher up in this thread. Most of it applies to longer-term investing as well (the area I work in).
1) I always tell this to people. So much of investing / trading comes down to your emotional reaction, and paper trading does not invoke these emotions.
Contrary to your #3, I actually suggest starting with a small amount they can afford to lose. Better to work out the kinks and/or find out you're not cut out for it before you bet serious money. It doesn't have the full psychological effect, but it can be a big wakeup call for people.
2) Absolutely. Grind it out. Every day you try to get a little smarter and make better decisions. Learn to love the process and don't lie to yourself. I like to rub my nose in mistakes to make sure I don't repeat them, but I also take a moment to appreciate things I did well, like getting out of a situation when I realize I don't have a handle on it, even if it means taking a loss.
4) No textbooks can prepare you for the mental anguish of watching your portfolio sink. You feel like the biggest idiot in the world, even moreso if you are underperforming the market. Of course, when you're up, you feel like a genius. Its during those times I find it wise to reflect on the not-so-good months to remind myself that I'm not invincible.
5) As Buffett says about leverage, "If you're smart, you don't need it, and if you're dumb, you got no business using it."
To add my own:
6) If you don't know what your edge is, you probably don't have one. What advantage do you have over the other market participants?
7) "If you want a good gambling life, make positive expectation bets." - Ed Thorpe, in Mathematics of Gambling
Your (4) is much better than the original because of the second point about how prone people are to assuming a few positive results mean you're definitely outsmarting the market.
So much of the day trading dream is based around the idea that consistent gains show the strategy is working, and not just that you haven't paid to hedge for the event that's going to wipe out all those gains in a very short period...
On #5, I would argue that intraday leverage may be ok, depending on the assets you're trading. If you have a $50K account, buying 1000 shares of AAPL (a roughly $100K position) for an intraday trade isn't necessarily dangerous. Overnight leverage is a whole different risk profile.
I would also add another rule:
6) Think of your job as a trader is not to make money - it is to manage risk. If you have an edge, the money will come. But if you fail to manage risk, you will fail.
Isn't is possible that the sample is biased because you only looked at the subset of traders who were not sophisticated enough to turn off the feature that allows others to observe their trades?
This is a good point. And we shouldn't assume this means that the number of successful traders is automatically higher due to their greater understanding. There could be a large number of people hiding their trades due to a losing record, or an unlucky streak inducing paranoia.
I have a serious problem with the "conclusion" of this post. This data isn't normalized against some kind of control group to show that maybe day-trading during Brexit is a different beast than index-tracking during Brexit. Or maybe its the same beast, we can't conclude anything...
I'm beginning to realize the difference between "data scientist" and just looking at numbers to put them on a chart.
Anybody who doesn't understand exactly where money are coming from and why, will be ripped off, and probably deserves it. If you want to gamble, you will be gambled. If you want to reduce your risks, you have to research accordingly.
This blog post did not answer it's own question because it's conditions were not day trading (over 3 trades in 12 months). That condition selects for people choosing individual stocks hoping for a moonshot, for which people tend to choose riskier stocks rather than stocks actually likely to make them money. So no wonder 80% lost money. On the other hand, notice that the 20% who do make money have a large power distribution curve.
A better way would have been to compare performance versus frequency of trading (I don't expect this to prove one way or another though). The fact is, there are many strategies one could take, and it's how well you execute them that counts.
Personally, I don't find daytrading riskier than holding stocks. By far my biggest losses come from holding the wrong stocks for a long period. It just seems riskier because you have to confront yourself with the possibility of loss each day, rather than hold "long term" and deny that you are wrong.
I now take the Doyle Brunson approach. The poker champion loved to pick up small pots and felt it was critical to do by aggressively playing small hands. That way, these little wins pay for the risk of playing bigger hands over time. I've had the same experience - my daytrading tends to be small money but it stems from work done for holding long term stocks. So why not put it to use?
But, to actually make good money daytrading is still really difficult. Commissions alone can make you have to be 55/45 correct, but there is also the steamroller affect where people tend to hold on to losses and double down further. So it's also about mastering yourself in addition to your market. Otherwise, there is not reason why you can't be better: you are putting in more work than others to make good decisions, and that's how you profit. Trouble is, when are you still outgunned informationally?
I started actively trading around 5 years ago, and only picked longs another 5 years before that. It's difficult to give an exact % because I'm not a day trader per se. I trade around a position I know well, but do day trades when I spot an opportunity. Sometimes you know something will happen, but only on a short time frame.
For example, I went into oil stocks earlier this year, and I knew that the market was panicking over the low oil price. So some days the market would bounce back right when the oil pits close at 2:30 (since the oil correlation can't get much worse then). Take a chance to ride the way back up, why not? But you can't do this all the time, which is why I gave you this esoteric example.
Well, if you still want a percentage, I'd say 10-20% might be a reasonable achievement.
If you ask me, daytrading seems riskier because you're essentially trading within noise. A company could rise or fall a few (and more rarely, a lot of) percentage points within a day. Is it fluctuating based on anything other than the feedback loop and noise? Usually not, I think.
It seems far more unpredictable and lacking in reasoning than something like "Amazon's strategy for the next couple of years involves X, Y, and Z, so I think they will be successful/fail."
> "Amazon's strategy for the next couple of years involves X, Y, and Z, so I think they will be successful/fail."
That's not really the right question. If Amazon's strategy is hugely successful, but everyone else already thought Amazon's strategy was going to be even more hugely successful and had priced that in, then you could be 100% correct about your question and lose money.
What other people think is only relevant insomuch as it determines the price. You need to ask "Is Amazon's strategy for the next years going to work well enough that I should buy at the price the stock is currently offered at?".
> If Amazon's strategy is hugely successful, but everyone else already thought Amazon's strategy was going to be even more hugely successful and had priced that in, then you could be 100% correct about your question and lose money.
Yet, Amazon is about 100% more valuable stock wise in 2016 vs. 2014. The strategy is about the same.
The real question is: "How will stock X perform vs some baseline". I use a 90/10 VTI/BND portfolio as that baseline. If you have the time to understand how to answer that question, you can make a good return as an individual investor. (Either by identifying good investments, or reverting to the baseline)
For example, if as a tech person, you used your insights into the industry and ended up picked any one of Amazon, Apple, Red Hat, Oracle and/or Google as investments 10 years ago, as part of a diversified basket of 4-5 stocks, you would have beat a safe Boglehead portfolio by a significant margin, even factoring in the market implosion in 2008/9. If you picked Apple or Amazon, you hit a home run.
It depends on your needs though. If you're saving for college and your kid is 16, you need a portfolio with a lower volatility. If you're retired and need income, you want to minimize volatility and minimize tax impact. If you're a mid-career professional like me who won't need a dime until 2030, you can take more risks.
I don't understand why your comment is prefaced with "Yet". Did you misread my comment?
It seems like we're agreed that investing should not be done by reasoning like "Amazon's strategy for the next couple of years involves X, Y, and Z, so I think they will be successful/fail."
> For example, if as a tech person, you used your insights into the industry [...]
... then I would be radically under-diversified. If tech is doing well, my biggest asset (my career) is performing well. I'm most likely to need to draw on my stocks in an emergency precisely when they'll be doing poorest.
"If you picked Apple or Amazon, you hit a home run."
Well, sure you did. If you picked Yahoo in the late 90s, a home run hit you. If you picked Intel or Microsoft in the recent past, nothing happened to you.
A good article on using insights as a tech person is Phil G's piece on shorting Microsoft in the 80s. (Microsoft was much less appealing to a tech person in the 80s than it is now, and a much better investment.) http://philip.greenspun.com/materialism/money
This is not to say that tech people can't make money banking on their instincts, just that I personally am not tremendously confident about my own instincts. I can certainly make a very compellingly sounding bull or bear case regarding any currently famous tech company.
A great example from recent history is LinkedIn's stock tanking hugely in one day and then Microsoft bringing it back to the original level in one day some time later. And I'll be damned if Microsoft ever makes that money back. But I totally should have bought the dip.
> If you picked Yahoo in the late 90s, a home run hit you.
To abuse the baseball analogy, even exceptional hitters don't get on base > 60% of the time. If you picked Red Hat or Oracle, you didn't hit a home run, but you still beat the VTI.
That's why you diversify. One safe way to do it is to buy the market. Another way is to buy a basket of diverse stocks. That basket is a higher risk but also has a higher potential of reward.
And even that isn't necessarily true - the cost of illiquidity and the risk of holding Amazon's stock for a few years could mean that even though you underestimated that everyone else thought that Amazon would be hugely successful, you could still make money.
That's mostly true with growth stocks. If you buy Amazon trading at 300x earnings with the expectation that earnings will grow 50% per year over the next five years, then it's tough to say whether the price will be higher or lower if they meet your expectations.
Value trades rely a bit less on others' expectations. If you were to buy a company trading at 12x earnings with the expectation that earnings would grow 15% per year over the next five years, then it's pretty likely that if your expectations come to fruition then you'll make money on the trade.
I think the opposite of every you said. Short term factors are far more predictable, with less noise, but this is only true if you trade defined situations and have good understanding of counterparties. Noise really isn't much of an issue except for illiquid stocks. The rest have highly correlated movements and random noise averages out anyways.
If your minimum bet is $1000, commissions are less than 1%.
As long as you don't over leverage, the expected return should be positive relative to s&p if you sell options. But you got to hold them to collect some premium.
No I'm not, and I don't see how that is relevant. You claimed that it was hard to find stocks that moved 10% in a day. I show that this is not the case.
I think the individual retail trader is almost always outgunned informationally when it comes to intraday trades. Most short-term price action is driven by order flow and cross-asset correlations, which machines are very good at trading. They are often net trading cost earners due to rebates and capturing bid-offer spreads. That means their win rate doesn't need to be as high, so they can pull the trigger on a trade before you can, just by having lower fees and superior execution. In addition to that, they're faster, more scalable, have more access to liquidity, and are more disciplined than humans could ever be. For the ones who trade off statistical correlations, they have the best data and armies of PhDs working on signals.
There are some event-driven fast trades still done by humans, like after news or responding to economic releases, but hedge funds have highly-educated people modeling the effects of an interest rate change or earnings release as their full-time job. This area is also becoming dominated by bots doing sentiment analysis.
I think the retail trader could have an edge in a few ways. One would be an illegal edge like inside information or market manipulation. Another would be finding illiquid stocks that proprietary traders and hedge funds won't bother with and trading using similar techniques. You could also look for extreme situations that model-based traders can't understand well due to lack of data, like a merger target breaking away. Those trades would be very risky though.
FWIW I'm a professional trader and never day trade my own account or pick individual stocks. My company allows it, but I don't believe I have any edge in doing so. I just buy and hold a portfolio of ETFs.
Thanks for a great answer! Similar threads keep popping up quite often here and I can see why. It probably seems romantic and all that to beat the machines, beat the armies of PhDs and make some real cash.
But for a retail trader, it probably can be summed as 'don't bother, you are strongly against all odds, proceed only if it is fun to do and don't expect to make any money and lose all'.
So, if you believe in this sort of analysis at all, why doesn't the individual retail trader do "week trading" or "month trading" where the effects of machine trading may be smaller?
(Disclaimer: I'm a "buy and hold" guy. Of broad-based mutual funds. And I beat 80% of day traders...)
Event driven trades are definitely not done by humans, especially when they are scheduled such a economic releases or some other periodically released number. These are all computer driven. (I have written these for HFT shops for years now.)
Working on the pro side too, I also just hold ETFs mostly. No way an amateur day trader beats me at my job except by luck or finding trades too small for me to really care about.
Out of curiosity - do you get some kind of template version of the earnings report before it is released so you can parse the numbers? Are they just always worded the same way? Or do they broadcast the numbers directly somehow?
Earnings reports are the worst. Most of the economic numbers and other statistics are released in a machine readable format by a few companies that compete on speed. (There are some anomalies that come over the web and they are horrible to deal with.)
Earnings reports though I've tried numerous things from subscribing to services that release numbers electrically to writing parsers based on prior reports. Earnings though you care about things like one time charges, gaap and non-gaap numbers, etc. They are one of the less consistent things to trade.
I believe there sometimes are opportunities you can take, because a "Hacker" knows more about some parts of the world than most traders. My prime example: When Apple released the iPad it quickly became a great hit. For me it was obvious that a lot of cheap copycats would spawn soon. What would you use for a cheap iPad knockoff? An ARM processor for sure. Strategy: Buy ARM and hold for years. First iPad was released April 2010. ARM.F [0] at $3. By the end of 2010 it was near $6. Now near $20.
"My prime example: When Apple released the iPad it quickly became a great hit. For me it was obvious that a lot of cheap copycats would spawn soon. What would you use for a cheap iPad knockoff? An ARM processor for sure. Strategy: Buy ARM and hold for years. F"
Do you think that Wall Street hasn't figured that out?
Apple is one of the most watched stocks in the world. To the original commenters point: the banks have reams of 'technically astute' Analysts making those assessments, and much, much, more.
Wall Street has people all the way up and down Apple's value chain. They pay 'consultants' the world over to eek out any tiny bit of information WRT Apple's supply chain.
Again - I agree with the original commenter: individual traders are severely outgunned when it comes to these things and that's why they lose money.
Yes - theoretically, there are some very narrow areas where a savvy investor might be able to win, and surely, Wall St. has some gaping systematic problems ... but by enlarge, I agree with the sentiment of the analysis as well, even as other have pointed out flaws.
Investing is 90% gambling. The world only has so much GDP growth and there's not enough to go around to make every investor super happy. Most returns that an investor makes are someone else's loss. The losers are usually those with less information, or are lazy about it all (like some 'big dumb funds')
>Do you think that Wall Street hasn't figured that out?
Yes, I think Wall St hasn't figured that out. Sentiment regresses to the mean, and so do analyst expectations.
If Wall St had figured out what the iPad meant there would have been a huge rush towards ARM.
That didn't happen. There's your answer.
It's also worth pointing there's a big difference between tactical short-term trading and strategic long-term trading.
Short-term trading is not a winning option for non-professionals.
Long-term trading can be, because - here's the obvious point - most traders are looking for quick returns.
Unspectacular stocks with robust longer term returns tend to be systematically undervalued - more so if they're in a specialised technical niche not many people understand.
Conversely stocks with a good historical record but signs of a less robust future tend to be overvalued.
There's a huge amount of fashion and trend-following on Wall St. People who research fundamentals in depth - like Warren Buffet - are very much the exception.
You're assuming the research Wall Street publishes actually has anything to do with their own market positions, they do not. Research that an investment bank publishes is for customers; they work independently of their traders who have their own proprietary methodology and information sources.
"Do you think that Wall Street hasn't figured that out?"
"Wall Street", whoever that is on Wall Street, may have figured it out, but the stock doesn't instantaneously move to the correct value afterwards. There is a time lag where traders who are paying attention can still get in at a good price.
I made a >100% return in the last 6 months by buying companies that made products that I understand and use frequently: nvidia and Amazon. I think if you focus on particular industries that you know well you can get an edge on 'the market'. I'm not day trading though, I'm just keeping an eye out for opportunities and trying to balance as much as I can. I'm also just playing with a small IRA account that I can afford to lose.
You could have picked almost any company and made a great return in the last 6 months, assuming you did not buy at the all time highs. The market is reaching record highs right now, so it is easy to believe you have an edge as the times are good.
I would not go so far to say that simply buying companies of products you buy and understand is a viable trading strategy that will give you an edge for >100% returns. When the market is in a downturn this could be very different.
"You could have picked almost any company and made a great return in the last 6 months" - exactly. Like crowing about being a great stock picker in '99. So was everyone.
You're making a logical error of assuming that because you made money, your actions caused it, that's not a valid assumption. It's a bull market, that doesn't mean you're a good stock picker.
I agree with what you say, and I actually have grown to appreciate what the bots are doing. They basically do the supply/demand discovery for you and you can trade off of this information. Especially for stocks you follow that haven't moved yet.
Example: back in February crude prices crashed, and the weekly EIA reports were very bearish. But the bots bought the initial drop on report release and crude strongly rallied after each bearish report. Maybe that's the time to buy oil stocks :)
Taxes are different. Taxes won't make a winning position a losing one, but commission very easily can. That is because taxes are on profit. Small profit => small tax and large profit => large tax, but that will not turn a winning position into a losing one.
In real dollars (after adjusting for inflation) taxes will most easily turn a winning position into a losing one. This has always been the problem with taxing capital, often you are just taxing inflationary gains.
As another commentor mentioned: you're not comparing against a 0% baseline, but against the relevant index fund. Or, at the very least, against normal savings accounts interest. So taxes can indeed turn a winning position into a losing one.
Most of the people I know who've been profitable day-trading have earned less than they would have in an index fund. They consider themselves successul because they're up 17% since 2014. Of course the market is up 22%, so they've actually lost money relatively to everyone else.
It's also easy to make a net return when the market is up. The trick is not losing your shirt when the market tanks.
Was all in into Barclays shares the day before it was going bust in 2008 but got out before 5pm fearing the night and the wiping out. Instead, Gordon Brown bailed them before the market reopened the next morning ("too big to fail") and I missed my once-in-a-lifetime opportunity to make the big money as an indie trader. Done.
I suspect this is a relatively new development- I think 5 years ago I would have been pretty comfortable with my chances against AI trading bots. But in 2016, not so much.
Based on my own anecdotal evidence, I think the large corps building HFT systems with AI have gone a long way towards eating the lunch of "lone wolf" day traders in the last few years.
I highly doubt that it would affect you, tbh, and I suspect that it's a highly sentimental matter. Only if I did have money to buy Apple stock 10 years ago, that kind of :) no offense if I am totally wrong, it's just that you didn't provide any specific argument for your reasoning.
Aren't these folks with hundreds of millions in the trading accounts in a totally different league and they do not affect you, unless you want to play in their own game (e.g. high frequency)?
It would be interesting to know whether the gains were concentrated among a small group of same individuals over time, or equally across the large group (ie everyone getting lucky once)
I'd love people's opinion on this. From my understanding, HFT (High frequency trading) firms are front running stock orders. NYSE sells them data on stock orders. They buy data center space in order to front run stock orders. That is how the HFT guys make a profit when Day Traders can't make the same kind of profit. Is that true?
I'm in HFT (as per my handle). Exchanges like NYSE, NASDAQ, etc. sell stock data to firms but not before they get processed. The only way you get front run is if the broker that you submit through (ETrade, Schwab, etc.) notes your order, knows that it's big enough to move the market, and then prioritizes their own action over yours (which I'm reasonably sure they do not). Buying data center space (colocation) means they can react to activity quickly, but only after said activity has happened.
80% are losing who the hell is winning and how? I fell like they are cheating or have some sort of advantage that is not easily available to private day traders and no I don't think that advantage is a PHD and fast data connection.
The spread betting companies are winning, of course. They are the market makers and they can manipulate the market as much as they like, even pushing the price up or down temporarily to hit stop loss orders and the like. And of course they adjust the spread to suit them, esp. in equities. I always thought the safest markets are forex because the huge liquidity tends to limit the spreads somewhat, but I have no idea if that is actually true.
Okay, but there's plenty of highly liquid things to trade. For example the SPY has a spread of 1 penny, same with SPY options.
You mention a potential strategy for manipulating the market like pushing prices to hit stops, well if these strategies are common then it seems there exists a potential strategy to take advantage of this.
It seems like so long as the market's next tick price is not completely uncorrelated from its previous tick price, then there will always be a way to 'beat' the market. The market price is not completely uncorrelated (as you mentioned, there's price manipulation driving it to certain prices throughout the day).
I think the analysis could be improved by excluding people who made a couple of trades worth of a few dollars just as an experiment, etc. This way, leaving only the people who took it somewhat seriously. Even then, the data would be heavily biased - it includes only traders who decided to use eToro AND keep the history public. This is far from a random sample and very biased.
However, I would not be surprised if the actual results (across all brokerages, etc) are close to that, or even more extreme.
277 comments
[ 3.7 ms ] story [ 331 ms ] threadAt first it seems counterintuitive, shouldn't it be roughly 50% gaining and 50% losing? But I guess that people typically put in a modest amount of play money, and then tend to trade until either they run out or get discouraged from losses.
But, find a cheap casino in Vegas and you can have some fun. Last time I was there, Casino Royale (across the street from the Belagio) had $2 craps with 50x odds. Craps is social to play and $2 is super cheap to learn with.
I do think its a smart idea though. My comment was directed more at the appropriateness of the parents' observation.
1) They aren't trading against each other (they're trading against professional investors)
2) When you trade randomly you should expect to lose money (paying fees, paying spread, getting 'good' executions rarely and getting 'bad' executions often, etc.)
2) As there is high leverage, traders are encouraged/forced to put up stop loss orders. These limit the amount you can lose on a trade, but effectively kick out a trader at maximum loss in even tiny amounts of market turbulence. Plus in times of volatility, the automatic market sell orders may get even worse prices. The market volatility kills many a trader.
I guess what I am asking is, if we take it for granted that it is gambling (and I am happy to do so) is it gambling with the best odds around?
You can expect, on average, to perform as well as the market, less your trading fees (which for most of us small-timers are ~$10 per round trip).
The problem is not knowing the odds (and hence expected earnings) ex-ante. That said, horse racing would probably be the best analogy.
You can certainly get brokers that'll accept a lower commission than that per trade, and if you're not hugely overleveraged the variance of your expected returns is going to be lower[1]. As with poker, the difficulty isn't so much the house edge as the fact there will be people or bots who are much better at it than you and/or have much bigger bankrolls to force you out of the market even if your suspicion they're holding a weak hand is justified
[1]Your expected returns are also on average positive in the long term if you buy and hold rather than trading
http://thefinalwager.co/2015/04/28/horse-racing-parimutuel-w...
If you are honestly better at judging the ability of particular horses and jockeys to win races than the average market participant, it is possible (at least in theory, I don't know how many people do it in practice) to make money.
However, the house "takeout" is pretty high; most places are 15+% on straight bets and can be more than 20% on exotic bets (Exactas, Quinellas, etc.). If not for the high takeout, it would be a very nice system for the bettor.
The only time I've ever made money at a horse track was a time when I went with a friend who rode and owned horses, and we spent the entire day in the paddock area (not even watching the races), watching the horses and jockeys come in. She pointed out particular instances where she thought the favorite didn't seem likely to win, and in those cases I'd put down straight bets on the next-best favorite horses, essentially "shorting" the favorite. It worked pretty well, enough to get around the house takeout and almost offset the drinks we consumed in the process. Not exactly something you'd want in your 401k, but not a bad way to spend an afternoon.
In poker it's possible to be enough better than the competition that your advantage is obvious (to people who are similarly skilled, at least). I'm not sure that's the case with day trading.
I'm not talking about losing some of your money, I mean 100% of the money in your account and possibly owing even more.
Basically you can lose 100%+ of your money because of the leverage. When the Swiss Franc unpegged, brokers went out of the business because they could not get clients to cover losses.
Suggested reading: "Economics in One Lesson"
I've lost out on more money by not being in the market long term going up.
Of course I thought I might get good at it (everybody dreams), but the main reason I did it was to learn to confront fear and to keep logical and strict to the trading plan in the face of it. I am still risk averse though, so I didn't really learn thoroughly.
The other main thing I learned is that if you aren't a robot then you don't have any business out on that killing floor. The age of human day traders is over.
Does a greater proportion of non-HFT bots make money?
So what is a bot ?
A "bot" suggests to me something just trading in and out of some security at some average frequency: weeks, days, intraday, minutes, seconds and then there is HFT.
These things are all just feeding off of the movement of whales: major flows of money that cause those waves that small technical traders think they can figure out just by watching the shape of them.
There is really an amazing amount of intelligence involved in playing the day's game and you are taking in a lot of data, watching other markets (oil versus airlines, currencies, futures, sovereign debt) and using this to either realize the moment is now or to just scare the shit out of yourself and end the day up frazzled and $30 richer. That was my experience.
Successful traders reduce their risk even further by choosing what they are trading, shortlisting things that might pop and being able to jump on those (manually or automatically) in less than a heartbeat. That's where the bots will rip an entire sector up before an amateur trader has any chance to understand what is happening let alone why it happened. But those bots are just extensions of the trader.
Anyway, the whole thing is retarded and I have more fulfilling things to do on the planet.
> would it have performed better?
Definitely. Discipline is tough when somebody just demolished your chinese solar stock and you are down a week's earnings. The bot would've cut and run.
>Definitely. Discipline is tough when somebody just demolished your chinese solar stock and you are down a week's earnings. The bot would've cut and run.
What stopped you from cutting and running in that case? Was it the hope that the stock would swing back?
I believe you have to experience this yourself, since this is about emotions, bias, and insecurity. Everybody only has a sample size of one with this.
I can say that I found it very similar to playing Poker. In both cases you need to conquer your emotions and biases and simply follow the damn strategy. In both cases, the edge cases will make you constantly doubt your strategy.
> Nearly a decade ago, Warren Buffett made a million-dollar bet: that by investing in a completely unmanaged, broad-market low-fee index fund, he could beat the gains earned by a high-powered hedge fund with a team of managers at the helm. His opponent was Protege Partners, LLC, a New York City hedge fund with $3.5 billion in assets under management.
[...]
> His simple Vanguard S&P 500 (VFINX) fund has delivered returns more than 40 points higher than those of the hedge fund. “I believe this is the most important investment lesson in the world,” he said.
> Pity the active fund manager.
> More dollars have flowed to index strategies that track a market benchmark, such as the S&P 500 index, partly because such funds typically have lower costs than active funds and more investors believe that stock-picking managers can't regularly beat the financial markets.
> Now a new Morningstar study, released this week at the Morningstar Investment Conference, finds that actively managed funds lagged their passive counterparts across nearly all asset classes, especially over a 10-year period from 2004 to 2014.
He is a good data point to demonstrate that long term investors can beat the indices. Most don't, however, and it is my understanding that day trading is even worse. Just as there are professional poker players that can consistently make money, I'm sure there are some day traders that do very well, but it is not a skill that most people have.
Another way to describe the problem is, given the same number of bots, randomly picking tades, as members of a trading forum, how many would beat the index? Is the number more than 3?
Although I'm very skeptical about those patterns, because there could be someone trading back and forth to create those trends, and screw you when they want.
Anyway analyzing data and gaining money with it makes really no sense at all. Surely you can make money to live, but there is no point to it until you really are able to win big, and nobody does. Investing money where real business create economic activities that are in effective demand, maybe. But trading numbers, that's really an awful thing.
This is one of the services the market provides. It creates uniform price conditions across time and space. If there is a discrepancy that doesn't make sense (like a recurring profitable pattern in stock prices), you can make money by fixing it.
"Trading numbers", as you call it, is (through a layer or two of indirection) helping to establish true prices, transmit market information, provide liquidity, etc. All of these things are critical for "real business" to operate efficiently in a large economy. The abstract markets create huge value for "real business" and its users charge a small percentage of the value created.
Works 60% of the time 100% of the time.
Problem is, those patterns do exist, but they are chaotic behaviors, and transition probabilities are already priced in. So that, for a non-causal analyst looking at past data they look very reliable, but for somebody with no forward knowledge, they are useless.
Or, in other words, the way those market analysis courses and gurus teach people to read the market. The patterns are very reliable if you ignore causality.
Past performance is no guarantee of future results.
Humans are inherently risk-averse when it comes to protecting their profits and risk-taking otherwise.
The possibility to make money increases if one acts more like a robot, i.e. acting strictly upon rules decided a priori.
Only if the rules are correct, for all situations. Robots have lots vast amounts of money because there was a missing or wrong rule. Good luck figuring out in advance all the rules - remember that the situation is changing, and your robot in the mix is itself a change.
This is the key. Once in a while, on the internets, I see people who say that they developed a strategy that can profit 5% month on month, etc. Excluding the ludicrous claims of 30% and similar monthly profit. However, they are often totally wiped out by a highly unlikely outlier event that should happen once in a century, as they like to call it. Or something similar.
The Black Swan: The Impact of the Highly Improbable by Nassim Nicholas Taleb is a good book on this subject.
(HFT, stat arb, volatility arb, smart automated market making etc.)
That's exactly what happening - the only source of money are participants, and part of the money goes to brokers.
But you two are not the whole market. Someone sold a stock to a day trader and someone bought it from you. There are no other money in a stock market except those people bring (minus commission) so how everybody can win?
Here is a simple model a mathematician might realistically use to model this. Given N traders, let P_1..P_N be iid Beta(α, β), and let the chance that trader n loses money during a year be Bernoulli(P_n). The nice thing about this more complicated model is that the simpler model is a limit case of it.
This "first approximation" lets us use simple mathematical tools to test hypotheses like that by providing an alternative model. If our beta distribution looks more like a constant distribution (with high values for α and β) then we can conclude that the number of traders who lose money approaches 100% as time goes on. If the estimate for α and β is lower, we might reasonably conclude that there is some factor of skill involved.
This is just one possible model you could use to test if there is skill involved in day trading. There are many other models which we could test which would also mean that the proportion does not approach 100%, such as a models which assume correlations between different years.
>only 80% of them lose money over one year, but as time continues over multiple years, the percent [that loses some] money approaches 100%.
How does your model account for magnitude?
The model I gave was the simplest model I could think of that would let you test the theory that skill is a factor in day trading. It was an illustration of how someone with mathematical training might think about statistics like "80% of day traders lose money" without jumping to the false conclusion that all traders eventually lose money.
Got anything to back up this "fact"?
> The model I gave was the simplest model I could think of that would let you test the theory that skill is a factor in day trading.
You can't assume the existence of skill proves the existence of long-term profits.
Nor can you even assume that a good up/down ratio proves skill without considering the magnitude of the ups and downs or the impact of compounding.
In a similar vein whenever something like this comes up I write something that says don't try and do this and inevitable I get 10+ emails from people saying "Ok I understand but I still want to do it anyway."
So if you really want to try and day trade, here is my 5 points of advice
1) You haven't done anything until you trade with real money. Ever played poker with friends that wasn't for money? You always get some jerk bluffing and going all in on Ace-7 because why not, it doesn't matter.
If you want to trade you need to learn your own emotional limits. Get invested as soon as possible. Learn what kind of stress you can deal with.
2) The average successful individual algo trade looks like John Turturro charter Joey Knish in rounders. You are always grinding out a living $100 to $1000 at a time. If that isn't' appealing then stop before you start.
3) You need money to begin. It takes as much effort to trade 2000 as it does 200,000. Above a million or so things change. A minimum amount I'd use would be 50,000. If you can't set that aside to trade then don't start.I mean if you have a great year trading 5,000 and make 20% you have made $1,000. That's not worth the effort. But at say 100,000 your 20% is starting to be real money!!
Be clear to yourself that you are doing this for the money. Any other reason just gives you an easy out.
4) The most important number to look at is draw down, not sharp ratio. I see lost of people on quantopian show great backtested algos that return 200% over 5 years, but have a 70% draw down at one point.
Most people don't have the psychology to loose money. At 10% down you start to question yourself. At 20% down you get really grumpy in all aspects of your life. Most people don't have the ability to let their positions fall to 30% down. If your backtest has a draw down of more than 30% you don't have a workable algo.....period.
Sharpe ratio is great if you are an HFT firm trying to decide how to divvy up your money across 30 successful algos. You don't have 30 successful aglo's. You will be lucky to have one.
5) Don't use leverage....... you can break the other rules, this one you can't. I've seen people go bankrupt. Don't use leverage.
I honestly couldn't care less about credit card money losses, but I've seen too many people with assets(home, profitable website, really good job, nice cars) get reamed in bankruptcy court. Or, they lie about assets. Lie about assets, but make sure they never show up anywhere.
And just because you lied about your income on that cc form; in 99 percent of the time, it won't be mentioned in bankruptcy court. Credit card companies use your credit credit score to give you of money, and I believe they still redline(give more to certain individuals). Bankruptcy lawyers know most people lie on those cc applications. Yes, it's technically fraud, but try to prove it. They just don't. Nolo Press has a glaring error concerning income, fraud, and potential bankruptablity. It think newer editions corrected it?
If you get onto financial troubles, try to be proactive. Learn about what assets are legal to transfer. Learn about statue of limitations. Protect yourself from these bottom feeders.
(I don't want to debate anyone on the ethics of the cc industry. I just got a cc plea offering me a 29 percent offer, and if I could do it again, I would have ripped up that first cc card sent to me upon graduation, endorsed by my school.)
O.k., I am obviously not a lawyer, but have dealt with these individuals. If you think you get a funny feeling about your lawyer; walk--they are a dime a dozen. If you have nerves of steel, and are good at research it's not unheard of to do your own bankruptcy. Yes, I know the adage, just there's some people that can do some sophisticated legal work themselfs.
Most lawyers offer a free first visit. See a few of them. Take notes. The slimey ones try to scare you. The moral ones are strait shooters. Double check verything they state. Try to get a money back guarantee.
Back to you medical bankruptcy; hospitals, and doctors say they use the judicial system to get their overpriced fees only sometimes. They do go after thousands of people yearly though. They are basically lie. They get judgements, and force previous patients out of their home. Completely disgusting in my world. If I was a rich dude looking to donate money to a hospital, I would have one question, "Have you ever sued a patient for nonpayment? How many? What were the facts of the case?
If you are forced into bankruptcy, and have a house there's a homestead exemption in most states. I believe it's $125,000. It's not much. I know in Texas it's basically unlimited--which it should be nationwide! No one should be able to touch your home, especially in a medical bankruptcy.
Now if you have a house, and a bank account. String the creditors on for as long as possible. In the mean time, talk to a lawyer about getting rid of assets. You don't want hide assets, by illegial transfers, but it's complicated. Their are ways to hide that house, but it's tricky, but doable. Don't be the idiot that goes deep in collections, and transfers the home into a family members name, and then a week later file for a chapter 7. Again, talk to a lawyer if you have assets.
The whole process scared me. Be strong! Everything will work out, especially in a medical bankruptcy. I was so scared over my financial difficulties at one point, I considered committing suicide. Talking to the right lawyer, a guy who basically told the truth--really settled me down. I knew he was my guy when he said, "All my clients lie about they annual income."
(Don't take advice too seriously form Internet chat rooms, or even myself. There is still so much wrong information, even by porported lawyers. I didn't help you much, but you seem to have a straight forward bankruptcy. Don't let this ruin you life. I spent so many unneeded nights worrying. I won't even say good luck, I don't think you have a sticky bankruptcy. As to lituraure, Nolo Press is pretty good, but they too make mistakes. Learn how to do legal research. Become familiar with bankruptcy codes/procedures for your state.)
I take issue with your statement that housing should be exempted from bankruptcy. As someone who rents and doesn't own, and thus has a net worth that is more concentrated into savings/investments, why should a house be protected? I'm not protected from losing the savings that I haven't invested into a house.
1) I always tell this to people. So much of investing / trading comes down to your emotional reaction, and paper trading does not invoke these emotions.
Contrary to your #3, I actually suggest starting with a small amount they can afford to lose. Better to work out the kinks and/or find out you're not cut out for it before you bet serious money. It doesn't have the full psychological effect, but it can be a big wakeup call for people.
2) Absolutely. Grind it out. Every day you try to get a little smarter and make better decisions. Learn to love the process and don't lie to yourself. I like to rub my nose in mistakes to make sure I don't repeat them, but I also take a moment to appreciate things I did well, like getting out of a situation when I realize I don't have a handle on it, even if it means taking a loss.
4) No textbooks can prepare you for the mental anguish of watching your portfolio sink. You feel like the biggest idiot in the world, even moreso if you are underperforming the market. Of course, when you're up, you feel like a genius. Its during those times I find it wise to reflect on the not-so-good months to remind myself that I'm not invincible.
5) As Buffett says about leverage, "If you're smart, you don't need it, and if you're dumb, you got no business using it."
To add my own:
6) If you don't know what your edge is, you probably don't have one. What advantage do you have over the other market participants?
7) "If you want a good gambling life, make positive expectation bets." - Ed Thorpe, in Mathematics of Gambling
So much of the day trading dream is based around the idea that consistent gains show the strategy is working, and not just that you haven't paid to hedge for the event that's going to wipe out all those gains in a very short period...
I would also add another rule:
6) Think of your job as a trader is not to make money - it is to manage risk. If you have an edge, the money will come. But if you fail to manage risk, you will fail.
I'm beginning to realize the difference between "data scientist" and just looking at numbers to put them on a chart.
https://news.ycombinator.com/item?id=12330285
Anybody who doesn't understand exactly where money are coming from and why, will be ripped off, and probably deserves it. If you want to gamble, you will be gambled. If you want to reduce your risks, you have to research accordingly.
- Charlie Munger.
https://old.ycombinator.com/munger.html
A better way would have been to compare performance versus frequency of trading (I don't expect this to prove one way or another though). The fact is, there are many strategies one could take, and it's how well you execute them that counts.
Personally, I don't find daytrading riskier than holding stocks. By far my biggest losses come from holding the wrong stocks for a long period. It just seems riskier because you have to confront yourself with the possibility of loss each day, rather than hold "long term" and deny that you are wrong.
I now take the Doyle Brunson approach. The poker champion loved to pick up small pots and felt it was critical to do by aggressively playing small hands. That way, these little wins pay for the risk of playing bigger hands over time. I've had the same experience - my daytrading tends to be small money but it stems from work done for holding long term stocks. So why not put it to use?
But, to actually make good money daytrading is still really difficult. Commissions alone can make you have to be 55/45 correct, but there is also the steamroller affect where people tend to hold on to losses and double down further. So it's also about mastering yourself in addition to your market. Otherwise, there is not reason why you can't be better: you are putting in more work than others to make good decisions, and that's how you profit. Trouble is, when are you still outgunned informationally?
For example, I went into oil stocks earlier this year, and I knew that the market was panicking over the low oil price. So some days the market would bounce back right when the oil pits close at 2:30 (since the oil correlation can't get much worse then). Take a chance to ride the way back up, why not? But you can't do this all the time, which is why I gave you this esoteric example.
Well, if you still want a percentage, I'd say 10-20% might be a reasonable achievement.
It seems far more unpredictable and lacking in reasoning than something like "Amazon's strategy for the next couple of years involves X, Y, and Z, so I think they will be successful/fail."
That's not really the right question. If Amazon's strategy is hugely successful, but everyone else already thought Amazon's strategy was going to be even more hugely successful and had priced that in, then you could be 100% correct about your question and lose money.
Yet, Amazon is about 100% more valuable stock wise in 2016 vs. 2014. The strategy is about the same.
The real question is: "How will stock X perform vs some baseline". I use a 90/10 VTI/BND portfolio as that baseline. If you have the time to understand how to answer that question, you can make a good return as an individual investor. (Either by identifying good investments, or reverting to the baseline)
For example, if as a tech person, you used your insights into the industry and ended up picked any one of Amazon, Apple, Red Hat, Oracle and/or Google as investments 10 years ago, as part of a diversified basket of 4-5 stocks, you would have beat a safe Boglehead portfolio by a significant margin, even factoring in the market implosion in 2008/9. If you picked Apple or Amazon, you hit a home run.
It depends on your needs though. If you're saving for college and your kid is 16, you need a portfolio with a lower volatility. If you're retired and need income, you want to minimize volatility and minimize tax impact. If you're a mid-career professional like me who won't need a dime until 2030, you can take more risks.
It seems like we're agreed that investing should not be done by reasoning like "Amazon's strategy for the next couple of years involves X, Y, and Z, so I think they will be successful/fail."
> For example, if as a tech person, you used your insights into the industry [...]
... then I would be radically under-diversified. If tech is doing well, my biggest asset (my career) is performing well. I'm most likely to need to draw on my stocks in an emergency precisely when they'll be doing poorest.
Well, sure you did. If you picked Yahoo in the late 90s, a home run hit you. If you picked Intel or Microsoft in the recent past, nothing happened to you.
A good article on using insights as a tech person is Phil G's piece on shorting Microsoft in the 80s. (Microsoft was much less appealing to a tech person in the 80s than it is now, and a much better investment.) http://philip.greenspun.com/materialism/money
This is not to say that tech people can't make money banking on their instincts, just that I personally am not tremendously confident about my own instincts. I can certainly make a very compellingly sounding bull or bear case regarding any currently famous tech company.
A great example from recent history is LinkedIn's stock tanking hugely in one day and then Microsoft bringing it back to the original level in one day some time later. And I'll be damned if Microsoft ever makes that money back. But I totally should have bought the dip.
To abuse the baseball analogy, even exceptional hitters don't get on base > 60% of the time. If you picked Red Hat or Oracle, you didn't hit a home run, but you still beat the VTI.
That's why you diversify. One safe way to do it is to buy the market. Another way is to buy a basket of diverse stocks. That basket is a higher risk but also has a higher potential of reward.
Value trades rely a bit less on others' expectations. If you were to buy a company trading at 12x earnings with the expectation that earnings would grow 15% per year over the next five years, then it's pretty likely that if your expectations come to fruition then you'll make money on the trade.
There are some event-driven fast trades still done by humans, like after news or responding to economic releases, but hedge funds have highly-educated people modeling the effects of an interest rate change or earnings release as their full-time job. This area is also becoming dominated by bots doing sentiment analysis.
I think the retail trader could have an edge in a few ways. One would be an illegal edge like inside information or market manipulation. Another would be finding illiquid stocks that proprietary traders and hedge funds won't bother with and trading using similar techniques. You could also look for extreme situations that model-based traders can't understand well due to lack of data, like a merger target breaking away. Those trades would be very risky though.
FWIW I'm a professional trader and never day trade my own account or pick individual stocks. My company allows it, but I don't believe I have any edge in doing so. I just buy and hold a portfolio of ETFs.
But for a retail trader, it probably can be summed as 'don't bother, you are strongly against all odds, proceed only if it is fun to do and don't expect to make any money and lose all'.
(Disclaimer: I'm a "buy and hold" guy. Of broad-based mutual funds. And I beat 80% of day traders...)
Working on the pro side too, I also just hold ETFs mostly. No way an amateur day trader beats me at my job except by luck or finding trades too small for me to really care about.
Earnings reports though I've tried numerous things from subscribing to services that release numbers electrically to writing parsers based on prior reports. Earnings though you care about things like one time charges, gaap and non-gaap numbers, etc. They are one of the less consistent things to trade.
The problem is, such opportunities are rare.
[0] https://finance.yahoo.com/quote/ARM.F
Do you think that Wall Street hasn't figured that out?
Apple is one of the most watched stocks in the world. To the original commenters point: the banks have reams of 'technically astute' Analysts making those assessments, and much, much, more.
Wall Street has people all the way up and down Apple's value chain. They pay 'consultants' the world over to eek out any tiny bit of information WRT Apple's supply chain.
Again - I agree with the original commenter: individual traders are severely outgunned when it comes to these things and that's why they lose money.
Yes - theoretically, there are some very narrow areas where a savvy investor might be able to win, and surely, Wall St. has some gaping systematic problems ... but by enlarge, I agree with the sentiment of the analysis as well, even as other have pointed out flaws.
Investing is 90% gambling. The world only has so much GDP growth and there's not enough to go around to make every investor super happy. Most returns that an investor makes are someone else's loss. The losers are usually those with less information, or are lazy about it all (like some 'big dumb funds')
Yes, I think Wall St hasn't figured that out. Sentiment regresses to the mean, and so do analyst expectations.
If Wall St had figured out what the iPad meant there would have been a huge rush towards ARM.
That didn't happen. There's your answer.
It's also worth pointing there's a big difference between tactical short-term trading and strategic long-term trading.
Short-term trading is not a winning option for non-professionals.
Long-term trading can be, because - here's the obvious point - most traders are looking for quick returns.
Unspectacular stocks with robust longer term returns tend to be systematically undervalued - more so if they're in a specialised technical niche not many people understand.
Conversely stocks with a good historical record but signs of a less robust future tend to be overvalued.
There's a huge amount of fashion and trend-following on Wall St. People who research fundamentals in depth - like Warren Buffet - are very much the exception.
Actually ARM's stock went x10 in six years time. Having Apple as a key customer was no small part of that.
"Wall Street", whoever that is on Wall Street, may have figured it out, but the stock doesn't instantaneously move to the correct value afterwards. There is a time lag where traders who are paying attention can still get in at a good price.
But still, good move and your point stands. I took a position in ARM (my former employer) again half a year ago, too bad it was tiny!
I would not go so far to say that simply buying companies of products you buy and understand is a viable trading strategy that will give you an edge for >100% returns. When the market is in a downturn this could be very different.
https://en.wikipedia.org/wiki/Post_hoc_ergo_propter_hoc
You're making a logical error of assuming that because you made money, your actions caused it, that's not a valid assumption. It's a bull market, that doesn't mean you're a good stock picker.
Example: back in February crude prices crashed, and the weekly EIA reports were very bearish. But the bots bought the initial drop on report release and crude strongly rallied after each bearish report. Maybe that's the time to buy oil stocks :)
Don't forget taxes!
At least, not by the usual standard for "making money day trading", which ignores fixed, nondeductible costs like rent.
It's also easy to make a net return when the market is up. The trick is not losing your shirt when the market tanks.
Why are taxes on short term gains never considered?
Commissions, taxes, and being a small player means you don't get the best price, all make for quite a hill needed to climb just to break even.
The paper for this would be the famous barber/odean's "boys will be boys" [1]
[1] https://faculty.haas.berkeley.edu/odean/papers/gender/BoysWi...
Based on my own anecdotal evidence, I think the large corps building HFT systems with AI have gone a long way towards eating the lunch of "lone wolf" day traders in the last few years.
I highly doubt that it would affect you, tbh, and I suspect that it's a highly sentimental matter. Only if I did have money to buy Apple stock 10 years ago, that kind of :) no offense if I am totally wrong, it's just that you didn't provide any specific argument for your reasoning.
Aren't these folks with hundreds of millions in the trading accounts in a totally different league and they do not affect you, unless you want to play in their own game (e.g. high frequency)?
You mention a potential strategy for manipulating the market like pushing prices to hit stops, well if these strategies are common then it seems there exists a potential strategy to take advantage of this.
It seems like so long as the market's next tick price is not completely uncorrelated from its previous tick price, then there will always be a way to 'beat' the market. The market price is not completely uncorrelated (as you mentioned, there's price manipulation driving it to certain prices throughout the day).
However, I would not be surprised if the actual results (across all brokerages, etc) are close to that, or even more extreme.