Excuse my meta-comment, but I notice that HN seems to have an obsession with proving that active trading is bad and that we should all buy low-cost indexes. And before anyone jumps on me, I 100% agree with that investment strategy and use it myself. I'd just like to comment on the intersection of that belief and tech enthusiasts.
It seems to generally come from a place of binary/analytical thinking which we're all so good at. Studies show that active investing is a losing battle for the average investor, so we assert that as fact and invest our money that way.
But I think deep down in myself (and probably others) it comes from a place of wanting to justify risk aversion. It seems that many people that we all know do become quite rich as investors, and the secret to their good fortune is not apparent. Studies promising us "they'll all lose in the long run!" makes us feel good about our decision not to participate in the game.
It's similar to the derision of startup equity, etc. I know many people who have become very rich at a very young age by latching on to the right startup, but I like my comfortable BigCorp job. The HN comments are a place where I can feel smart about my decision to not take risks even as we celebrate those who took risks and won.
Anyway I don't know why I chose to write this comment or explore this topic at this moment, I hope someone else reads it and understands my sentiment.
I don't think this is it. In fact, I think it's the exact opposite. I think risk aversion is what's justified by default. You don't need to defend being steadily employed or your lack of interest in stocks. It's the reasons people give to take risks that most of us are challenging.
Stock trading is gambling. It just is. So to deny it's gambling is already a red flag. To say you have more information than other people is another. And to say you're smarter so you're okay, well, maybe you are, but no one is smart enough to compete with those who cheat. And if you're cheating, none of these comments apply to you.
So for those who insist day trading is profitable, the empirically backed scientifically proven answer is simply, no it's not. And that's why it's so easy to knock on those who disagree with this claim. Yes, people make money, but so does every single person who continues to gamble. If you never won, you wouldn't keep gambling.
But to be fair, for entrepreneurs, it's the decision to not have a steady job that needs defending and that is analogous to the irrationality of the day trader. They may claim it's a great idea, but the empirically backed scientifically proven answer is, no it's not.
But I think a key difference in values is that entrepreneurs feel like they're actually building something. They value their work. And that's where you just have to agree to disagree. Passion is not an opinion.
Given an efficient market, stock trading with non-inside information is gambling, while stock trading with inside information is illegal. Markets exist to allocate capital efficiently, where the market invariably is designed to draw out information and intelligence that was previously not visible (a fine line between that and inside info).
If we all just bought indexes, of course, none of that would happen, capital would be divided conservatively according to the index manager. So at a higher level, there has to be some strategy that works beyond a brain dead index one, or markets wouldn't be successful at all. There must be some smart players out there that are doing efficient capital allocation (maybe not day traders, maybe not most of us, but someone...).
But the problem is no one is day trading to contribute to the balance of the system. They do it purely to make money or because they have a gambling problem.
> There must be some smart players out there that are doing efficient capital allocation
Right. Either that, or they're encouraging day trading from behind the scenes (which would totally explain the financial news networks). And that's why the system frightens the shit out of me.
I think what you're talking about lies between index funds and day trading, and it's called value investing. You buy stock in companies that you believe in for whatever reason (maybe you know someone really smart who works there and likes it), and hold that stock for several years.
Active day trading has its place in ensuring market liquidity. Without it, the market would be much less dynamic. If it serves a good role, then someone must be doing it right and making money off of it.
I agree with you to an extent, but want to elaborate for anyone who may read your comment and misunderstand.
Value investing does involve investing in companies you believe in, but that belief stems from research and a deep understanding of the market and intrinsic value of the company you are investing in.
The more you truly know prior to investing, the better your investments will likely perform. The key is to eliminate areas of uncertainty (which may ultimately be gaps in your own knowledge).
I've had a similar line of thinking recently. Sure, average investors lose money on active trading. Well, let me tell you what an average investor looks like. They have little to no accounting background, no coherent thesis for their investments other than "it's hot", they lack even a rudimentary understanding of 101-level finance topics like NPV/IRR/cost of capital, they have no informational edge one gets from working in an industry, no understanding of tax law (either personal or corporate). They're basically gamblers. They look at stock charts, see a big line going up and to the right, and guess / let FOMO take the driver's seat. Oh, and they probably think watching Jim Cramer counts as "research". They also have no appreciation for the fact that individual securities within an asset class are highly correlated and misattribute the asset class's performance to their "stock-picking" prowess.
I've been thinking, if one is willing to do actual primary research -- reading financial statements, getting on investor calls, really thinking hard about long-term trends, reading history, etc., there's almost certainly alpha to be had. Do people honestly think indexing is the best way? The UK just mandated that all coal generation will be gone by 2025. Is this really a time to be buying coal stocks? Or cigarette companies?
For me it's about risk/reward. I was talking to a friend at a wedding two weekends ago who manages a prop book (his own cash) of about 2-3 million. If he can get 15%/year consistently, that's about 300-400k pretax. He lives in Puerto Rico where there's apparently a tax loophole where capital gains of any character -- short or long-term -- aren't taxed. I'd bet he's coming out ahead of 95% of the people reading this thread. And yet, life isn't all about money.
I guess what I'm saying is, I also disagree with this "orthodoxy" of index, index, index. Maybe I'll sound arrogant saying this, but I'm not an "Average" investor. I trade once/quarter, read the Ks and Qs for every company I'm investing in, and have written theses that guide my decisions. I'm not a millionaire yet but I'll let you guys know how it goes after a while. I was a pure, 10+ year indexer until about 6 months ago.
For most people, indexing is the best. If you are lazy or don't enjoy investing, which is probably 95% of all people, it's better. If you have a full time job, it's almost always better (because it's harder to plow through SEC filings after a long at the office, etc). Proper long term investing (and getting 15-20% returns per annum) is hard work, and there's risk associated with it. You need to enjoy it. But it's definitely doable to beat the index every single year if you understand certain industries well. If technology is your industry, and you have a good understanding of the financial side, you will be able to better assess technology and related stocks.
While I would agree that there are many uninformed participants in the market, it is often found that professional market analysts are outperformed or on par with a random stock picker (dartboard, spinning wheel etc). These are people trying to estimate true value and market value with models and acting accordingly.
Even as stated in the article they don't all lose, which is why most of us know a few winners. But for each of those winners we probably know four losers, though they're likely not as vocal about it.
It seems that many people that we all know do become quite
rich as investors, and the secret to their good fortune is
not apparent. Studies promising us "they'll all lose in
the long run!" makes us feel good about our decision not
to participate in the game.
This would be a way stronger argument if the king of the buy-index-fund team wasn't Warren Buffett:)
Buffet wouldn't have gotten rich in today's environment. When he was growing up, the stock market was a plaything of the rich. Valuations were lower across the board, markets weren't nearly as efficient (in the technical sense) as they are now, volumes were much thinner, in general it was a lot less systematized.
Nowadays, much like YC, he's a brand, so while he might be a very smart and capable investor, it's his deal flow that puts him in such a strong position. He gets calls normal people don't get because he's made a name for himself over the past 50 years and people want his name for their company, as much as anything else.
I wonder what lesson can be drawn from all this. The primacy of reputation in today's world?
In my first year investing, I read The Intelligent Investor, then promptly found out that no stocks were trading below their value. Not even close; more often at multiples. The only time shares trade below book these days are either when book is seriously questionable, or when cash burn is expected to deplete the value.
An investor with low funding costs and stable funding source can always beat the market in theory. Studies suggest that the bulk of BRKs excess returns are due to leverage and deep balance sheets that allows him to buy deep value but more importantly to be able to hold those stocks long term.
A smaller investor who tried to duplicate that strategy would have been stopped out due to margin calls. For example it isn't everyone that can sell, and hold, a ten year billion dollar put on the S&P 500 like BRK did in 2008.
He isn't buying a stock here or there either. He's mostly doing deals in bulk that the average investor can't. For example, his investment in Goldman Sachs during 2008.
The parent comment said criticisms of private day traders were motivated by jealousy, and I said that's certainly not the case for the most notable of the critics. Buffett could have made his success as a rodeo clown for all it matters to my point.
I don't even consciously think of risk aversion. For me, it's purely about making the locally optimal decision.
Money is a tool to me, and an annoying one at that. I kind of hate it. I want to think about it and handle it as little as possible in my life. So I make the financial fire and forget decisions.
I take all the exciting and potentially rewarding risks in the other parts of life.
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 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.
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.
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.
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'.
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 :)
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.
> 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.
"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.
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.
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?".
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.
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.
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.
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.
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 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.
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.
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.
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.
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.
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.
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 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.
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.
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?
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.
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.
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.
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.
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.
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?
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.
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
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.
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.
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.
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.
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.
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.
Even worse than day trading are "binary options". This allows betting on, for example, whether the price of gold will go up or down in the next minute. Most of those are total scams. There are about 100 binary trading firms based in Tel Aviv, Israel, and most of them are telemarketing operations for a software platform called SpotOption.[1] Features of the scam include 1) they're not brokers, they're the other party, so you're betting against the house, 2) the house controls the price info and may tweak it slightly to make you lose, 3) there's a "margin trading" system which prevents you from withdrawing until you've done a certain amount of trading volume, and 4) even if you win, they make it really hard to withdraw money. Most "investors" lose 100% of their money.
Read "The Wolves of Tel Aviv" in the Times of Israel.[2] All these outfits are prohibited from operating in the US (the CFTC catches some of them trying; "Banc de Binary" was forced to return all US customer losses) but they've been able to operate in the European Union by registering in Cyprus and using that as a passport to the entire EU.
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.
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...
@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.
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.
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.
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 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.
> 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.
Since 2012, I'm interested in financial markets. I read some university books. I trade from time to time (mostly index ETF and futures/options for experimental reasons).
I would argue that ~80% is quite optimistic estimation. I think in long-term more than 99% of retail day traders lose money.
It's NOT because making money on financial markets is ridiculously difficult.
It's because if you trade frequently, you get feedback from market pretty quickly.
The feedback in terms of profit and loss of your money.
If you become day trader, I would guess that you want beat the market (otherwise you just buy and hold index ETF).
It means that you as a day trader is willing to take risks to lose money in case you are wrong that you think you are able to beat markets.
What does it mean "to beat the market" in long-term? It means that you are smarter or faster or have some insider information. In other words it means that you have competitive edge.
Well, obviously, average person doesn't have competitive edge against hedge funds and other institutional investors who hire people with outstanding intellectual capabilities. Just read hedge fund interview questions to see how they filter people.
Other way to estimate your situation as a retail day trader: if hedge funds don't want to hire you, why do you think you are still capable to outsmart hedge funds while you can't answer their interview questions for trader role?
I don't say that it's inherently impossible to beat the market as a retail investor. It's fairly possible if you are REALLY smarter than others. And in this case, you most probably are capable to impress professional traders and investors while talking about markets. If so, they will bring you their money, and incorporate hedge fund, and you are not retail investor anymore. Just like Michael Burry did.
In other areas, ~99% of failed attempts is also true. For example, ~99% startups fail to make money. So it's normal state of affairs.
>if hedge funds don't want to hire you, why do you think you are still capable to outsmart hedge funds while you can't answer their interview questions for trader role?
You're not playing the same "game" as hedge funds. They have different mandates and liquidity.
Putting 100 million into play on a position is completely different than 10k. You can choose different strategies, different trading vehicles, and different risk management parameters as a retail trader compared to an institutional trader.
So you don't necessarily need insider information or a massive technical infrastructure. You can get an edge, but it won't be the same edge you'd have running serious money.
> Putting 100 million into play on a position is completely different than 10k.
True. But it's also true that in order to make living from profit of 10K investments you have to make 300% as retail investor, not 30% as institutional investor.
I.e. you may be compensated to choose alternative strategies, but as disadvantage you have to have much higher ROI than institutional investor.
And as you will pursue to make your 300%, you will take significantly more risks.
Here's a story of my mom's journey as a day trader: My mom got laid off in 2008. The job market was brutal and she had a hard time looking for a new job. She had to find ways to make money to support my sister and I through school so she turned to the only other place where she could earn some money - the stock market.
She started with around 100k, read up about stock options, and decided that shorting calls and puts would work well. The time value decay seems to work in the investor's favor. Every time she made enough money, she would take them out and buy houses (all cash) and start from 100k again. Now, 8 years later, she has acquired a few properties in West LA and Oakland and makes more rental income per month than my salary as a senior software engineer. She still trades today.
> decided that shorting calls and puts would work well. The time value decay seems to work in the investor's favor
Yeow that could go wrong very easily. For shorting a call/put option, the maximum amount of money you can make is 100% when the contract expires worthless. However, you can potentially lose way more than 100% if the contract ends up being worth a ton of money.
This could bankrupt you if you don't know what you're doing, especially if you're trading with volumes where you can buy houses off the profits...
I might have taken this at face value if the houses weren't in LA and Oakland (well, maybe you mean condos, or cash for down payment only). To make that much money (>million?) with 100k means selling massive amounts of naked options. Theoretically it could all work out - but what broker let her take out so much risk?
Yeah. Its an incredible amount of luck. 30-40 naked calls/puts at a time. I'd never do this myself, but time and time again I am still awed at how its worked out over the years.
Here's an example:
10 naked puts of Netflix at 95 strike that expires at the end of the week will yield 1k, with a margin req of 10k. Same with calls, thats potentially 2k earnings / week with 20k margin req (very optimal case).
If Netflix goes down, she'll short more calls or puts (I forget) that expires at the end of the week. If stock goes in the money, she closes it and opens a new position for the week after so she never exercises the options unless they are too deep in the money.
Its all very messy and very crazy, just wanted to share a story of how day trading worked out for my mum.
> Theoretically it could all work out - but what broker let her take out so much risk?
Margin rules on options (including naked options) are highly standardized.
For naked options, you need a pretty strong stomach. Most of your trades will be winners but it's that overnight black swan event that's going to hurt you.
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.
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.
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.
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.
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.
>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.
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.
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.
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.
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.
If someone is consistently good at losing money 60% of the time. Why not just do the exact opposite of whatever their initial hunch is. Then they should make money. Based on loss of 36% from the article that is more than just transaction and trade fees which are 1 to 2%of trade therefore if they just do the opposite of what they are doing they should make money.
If you lose money because you don't quite beat the spread, doing the opposite might mean that you just lose money faster. There are also fees, and the enormous risk of taking short positions (the natural opposite of long positions).
The risk profile changes when you switch to an opposite strategy
If you went long, and lost money, going short instead doesn't mean you would make money, it means you could lose on the interest payments, you could lose on being forced to close, could lose on the different risk profile of having unlimited loss potential
There are borrowing costs with shorting, but you usually don't go long on shorting stocks its more of short term thing. In that case borrowing costs are not too bad.
Shorting is perfectly symmetric with longing (except linguistically -- because "shorting" is perfectly normal, but "longing" not): in the former you have unlimited downside risk and limited upside set by the price at which you sold, in the latter you have unlimited upside potential and limited downside set by the price at which you bought.
You can't just flip all your decisions because that would only work if your decisions are inversely correlated to the right decision. Losing traders are usually completely uncorrelated.
You buy stocks for two reasons. Either you think they will go up (long) or you think they will go down (called "shorting"). You can think of them as opposites.
Buying short isn't the opposite of buying long - it's the reciprocal. Which is an important distinction: if you buy a diversified portfolio of 10 stocks and one goes bust, if you bought long you've lost 10%. If you bought short, you're completely broke.
I looked into trading a while back after my dad lost a bunch in the market. I read a lot of info and in the end finally found someone who stated information like this in the link. In the end I learned that the vast majority of retail traders lose money, I think 85 or 90% was listed, the majority of people who get into professional day trading quit within a couple years, day traders make profit by leveraging their money many times over just to make a living, and day traders actually take an income instead of letting their money ride and losing it all in a few trades but this also keeps them from progressively getting richer. Day traders expect to lose on at least 40% of their trades which is apparently one of the biggest issues mentally with trading. None of the retail platforms explain these facts nor many other sources of info online.
It's an interesting stat, but the chart doesn't speak as to the levels of experience of the traders. All beginners lose money, but it's entirely possible for an amateur to become a profitable day trader with time.
Speaking from experience, the real issue for me was that once I started to get good at it (after 2 years) I realised just how awfully boring it was. It's not intellectually demanding and for the investment of your time, stress and the risk involved, the rewards even if you reach profitability aren't worth it.
Now that I can reflect on it, I couldn't be happier that I stuck with software development instead.
Here's a quote from a guy who runs one of these shops:
"90% of the customers lose 90% of their money in 90 days."
A friend of mine was chatting to him about doing some business.
I would think it's more about leverage than commission. Looking at FX, you can get tiny spreads, almost comparable to what I saw in a hedge fund. It takes a while to eat up a whole account on such small percentages. Leverage, on the other hand is something you can use to demolish capital over an afternoon. Ratios like 1/200 are a formula to go broke if you haven't had a look at something like Kelly Criterion.
Isn't day trading a zero-sum game? If so, it's not very surprising that the majority of day traders lose money. Every dollar you make comes from someone who lost it. So unless you have a competitive advantage, such as lower brokerage fees, you should stay away.
If you take the amount of money involved in the stock market every year, and assume that as a percentage of the total amount of money sloshing around the economy it remains broadly the same, then owing to monetary expansion (~7-8% a year in the USA), there is that percentage to be extracted from the financial system every year. Which Wall Street is quite efficient at.
If you factor in things like financial feedback loops essentially acting to concentrate money over long periods of time in the financial sector (well, what did you think was causing the ever increasing wealth gap?), then it's a little more than that of course.
It isn't zero sum.... the stock market has, at least so far, gone up over time; so on average, the sum of all money made on the stock market each day is positive. This means it is possible for everyone to 'win' and gain money.
Fighting over that 'gain' for each day, however, is zero sum.
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.
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.
>On the 1st of August, 2016, I downloaded the publicly available data through their ranking API. I selected all users who were active during the past twelve months, traded with real money, and had at least three trades. The results consist of 83.3k traders who fulfill these conditions.
What may be interesting is to see a graph where the number of trades a person executes is on the x axis and on the y axis is median return. Do people who make more trades make more or less money? It would also be interesting to look at a window larger than 12 months. Do people with trades going back years do better than people with trades going back months? Is this gambling, or can some people build some skill in this?
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 smartest thing an individual investor or trader can do is put their money in extremely low-cost index funds and leave them there. I have worked as a trader at various large financial services firms for almost a decade now. Even though I believe I have more insight into the markets in general than the lay person - the moment I decide to trade for myself, I will not get the same quality of execution and breadth of services I would sitting at my work desk...
> The data source for this post is eToro, a brokerage company that offers a feature called Social Trading, which is social network for traders. It is enabled by default and allows users to view and copy other users’ trades. Therefore, everyone’s trading performance is publicly available who have not disabled Social Trading.
What if the winners are choosing not to make their trades public? That alone could introduce some serious bias.
Legislators aren't insiders. Insider trading requires being an employee, board member, or otherwise owing a fiduciary duty to the company. The crime hinges on breaking that duty.
It does _not_ mean merely trading on so-called "insider information", unless you're in cahoots with an insider who will benefit directly or indirectly.
If it were otherwise, trading on a "hot tip" about a stock could put anybody at risk of federal felony charges, no matter how far removed they were from the company. That would be ridiculous.
Insider trading also requires trading on material, non-public information. Few employees have access to that; usually only C-level executives and board members have that kind of information before it's made public. Many of the trading window restrictions imposed on you by your employer aren't required by the law or SEC regulations. Often it's to maximize the window that large investors and stock holders (including executives, through their trusts!) can profit on big movements, without legions of employee stock option holders raining on their parade.
That said, the SEC can be super aggressive about insider trading, whether or not any court would ultimately permit the charges to stick. They'll go after people with a noose in one hand and a slap on the wrist in the other; most sane people know which to choose. Racking up plea deals makes the SEC look effective at policing the market when in fact they're anything but. Which is why the decision a couple of years ago by the 2nd Circuit reaffirming the law of insider trading really upset the SEC.
Honestly, I'd rather that all Congressmen's investments were made public. Unlike the law discussed in the article, it could be anonymized before publication for all I care. But transparency would make it less profitable for Congress to trade on insider information because people could follow and mimic their trades. And big corporate investors might then pressure companies to stop disclosing so much information. That'd be a far preferable state of affairs than trying to criminalize trading on non-public information. Everybody and their Uncle tries to trade on non-public information; that's exactly how the market is supposed to work--provide a profit motive to uncover non-public information and effectively make it public by pricing it into the stock.
And a Congressman trying to subvert the transparency rules provides much more clear-cut culpability. Otherwise there's too much plausible deniability regarding the how, what, and why of their trades.
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)?
"Why I don't trade stocks and (probably) neither should you", a very good summary about why it is stupid(#) to try to be "smart" about stock market:
https://news.ycombinator.com/item?id=6831461
"80%" it's very unlikely, say it is true, you just do the opposite and you have free money. I suspect the correct overall percentage should be much closer to 50%. Finding a profitable strategy should be much more difficult than "do the opposite of day traders", right?
No, I was just pointing out that 80% is not very likely and is probably some sort of bias or mis-representation. In fact it would be a great compliment for them because they would be getting consistently the opposite of the market (If they overall lose money it must be that at least on the weighted average of their bets they get it wrong, maybe one big wrong and many little right ones, or mostly all moderately wrong, etc..).
it is at least partly because 100 % of day traders do less than 100 % of trades. And they play against people who are vastly more intelligent, better equipped, etc... on average. As a day trader, the odds are overwhelmingly against you.
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.
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)
Did not read the article; but is anyone looking at the kooky square-wave action on SPY and DIA today? I'm totally hopping on to the next 60m cycle! Can't lose.
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?
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'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.
It seems to generally come from a place of binary/analytical thinking which we're all so good at. Studies show that active investing is a losing battle for the average investor, so we assert that as fact and invest our money that way.
But I think deep down in myself (and probably others) it comes from a place of wanting to justify risk aversion. It seems that many people that we all know do become quite rich as investors, and the secret to their good fortune is not apparent. Studies promising us "they'll all lose in the long run!" makes us feel good about our decision not to participate in the game.
It's similar to the derision of startup equity, etc. I know many people who have become very rich at a very young age by latching on to the right startup, but I like my comfortable BigCorp job. The HN comments are a place where I can feel smart about my decision to not take risks even as we celebrate those who took risks and won.
Anyway I don't know why I chose to write this comment or explore this topic at this moment, I hope someone else reads it and understands my sentiment.