Day Trading

[frizzfreeling]

Currently I play poker for a living, but I have been seriously considering learning how to day trade. I want to make sure that if my poker career hits some sort of snag in the future, that I have an appreciable source of income to fall back on. I have read a few of the books out there and so far have a very basic grasp of technical trading, and I realise that it may take years of practice and study to become a profitable day trader. However, one aspect of day trading that I am having trouble with is finding information on the "true" profitability of this type of trading.
Searching on the web, I constantly find what I believe to be outlandish claims of "steady" gains, some as high as 1200% a year! I think this is highly unlikely to be the case. What I would like to know is this: Is day trading for the professional truly that much more profitable than, say, investing in a mutual fund, or holding stocks for long periods of time? If I am going to spend hours each and every business day trading stocks, or looking for buy signals, etc. , I would definitely want a return of more than the 15% a year or so that I may expect from a long-term holding, but I also know that the idiotic claims I see can't be true. So what is reasonable? Are there any day traders that post here that can honestly give me some sort of Idea of the profitability involved?

[lu_hawk]

Anybody that tells you that you can make > 50% /year day trading is just trying to sell their book. Honestly, I don't know that the successful day traders make but I do know that it is extremely rare for anyone to be able to make a decent amount of money trading from home on a limited capital base.

[playerfl]

you don't realize it but here is what you just said....

"in case my gambling career hits a snag in the future, I would like to have another form of gambling to fall back on."

I am a newbie at poker but have plenty of experience in the stock market. I can tell you with absolute certainty that the stock market is a casino, and daytrading is gambling.

I can also tell you that all u.s. financial markets are unusually risky at the moment. The pro's are playing against the pro's and you would not even be a fish, but a tadpole.

the daytrading frenzy of 1998-2000 was when amateurs had a chance and we may not see another period like that in our lifetimes.

[MMMMMM]

"the daytrading frenzy of 1998-2000 was when amateurs had a chance and we may not see another period like that in our lifetimes."

Could you please explain why?

[GeorgeF]

"120%/yr" for 20 years is 700 million percent.

Consider reading the 'Market Wizards' Books. Atleast they are fun to read, possibly for free at your library.

"income to fall back on"
Read 2+2s poker dealer book. That might be a better plan B. No insult intended.

[playerfl]

Basically because there were periods of weeks and months at a time when you could throw a dart at the wall street journal to pick 10 tech stocks and if you went long you would make money.

There were a lot of "bull market geniuses" at the time. The only time period like that in recent history was the late 1920's, or roughly 70 years previous. There was another bubble before that in the 1800's.

[lu_hawk]

If you are young there is a chance you might see it again, if you are older then you probably won't.

Mass hysteria in the financial markets, like we saw in the dotcom bubble, does not happen very often. When it does happen there is a looong period of time before it happens again. Basically everybody involved in the last bubble needs to die or retire before it can happen again. It was 70 years between hysterical periods in the US(1929-1999), I don't know if it will be quite as long until the next one but it won't be much shorter and it could be longer.

[Paluka]

[ QUOTE ]


Consider reading the 'Market Wizards' Books. Atleast they are fun to read, possibly for free at your library.


[/ QUOTE ]

The Market Wizards books are pretty silly. After reading some of the interviews I decided a more appropriate name for the books would be "Dudes Who Got Lucky".

[MMMMMM]

Paluka,

I read those books and some others years ago, and have always considered it an interesting subject. Do you have some "best book" recommendations? Thanks.

[gvibes]

That's really all they probably were (lucky, that is).

If you start out with 1000 day traders, then let them go for ten years, there are bound to be a few that end up a bit of money (even with -ER, a random probablility distribution will dictate that some end up positive). You hear the stories about the 3 who made it - You don't hear the stories about the 997 who didn't.

[gvibes]

[ QUOTE ]
"120%/yr" for 20 years is 700 million percent.

[/ QUOTE ]

Ummmm... If you start with one dollar, increase 120% a year (every year), you will have 7 million after 20 years.

Put 2.2^20 into a calculator

[gvibes]

You have the changc of beating the market picking random stocks now as you did in 1998-2000. However, a rising tide lifts all boats (that's not right...). If you were averaging 15% a year, that doesn't look so good when the market goes up 20, but looks very good when the market is down 10.

[adios]

[ QUOTE ]
You hear the stories about the 3 who made it - You don't hear the stories about the 997 who didn't.

[/ QUOTE ]

Ah but that doesn't prove that 3 who made it are lucky as opposed to skillful. Also they weren't necessarily "day traders." Believe me I'm about as faw away as I could be from being a "day trader" or trying to make market predictions.

[RocketManJames]

[ QUOTE ]
[ QUOTE ]
"120%/yr" for 20 years is 700 million percent.

[/ QUOTE ]

Ummmm... If you start with one dollar, increase 120% a year (every year), you will have 7 million after 20 years.

Put 2.2^20 into a calculator

[/ QUOTE ]

Ummm... isn't that exactly what he said? 700 million percent. So, if you have $1 and it becomes $7 that is 600% increase, or final value is 700%. If it were to become 7 million, that would be a 699,999,900% increase or 700 million percent final value.

Or am I missing something?

-RMJ

[playerfl]

try reading "fooled by randomness" by Taleb.

Its about the basic logic behind trading and he illustrates the rise and fall of traders. The author actually knows what he is doing and runs a successfull hedge fund, unlike most so called experts. Also he has never gone broke, which some people seem to think is a badge of honor.

[playerfl]

i get your point that it ain't gonna happen, thats what matters.

[gvibes]

I am a moron. Feel free to ignore all subsequent posts by me.

[OrangeCat]

[ QUOTE ]
... one aspect of day trading that I am having trouble with is finding information on the "true" profitability of this type of trading.

[/ QUOTE ]
Trading is as profitable as your trading strategy is. In poker, you can kinda go by instinct and reading the opponent but that approach will wipe you out in the market real fast.

What you can do is read up on technical analysis and develop a strategy. Then get a software package that will allow you to back test your strategy to determine what you would have won/lost if it were put in practice. There are a few programs that do this but TradeStation is probably the best. It includes an analysis of the risks of the strategy, graphs showing the max draw down and lots of other stats. Of course, past performance is no guarantee of future performance, but if a strategy sucks in the past it will most likely suck in the future. If you just want end of day data without the back testing (a good place to start) TC2000 is a very good charting package.

Start by paper trading. As in poker, preservation of capital is all important. To put it in poker terms, you should play the market like the rock of Gibraltar. No such thing as table image here. Only when all your indicators say go, the equivalent of pocket aces or kings, should you pull the trigger. Unfortunately, like poker, AA gets cracked plenty of times. Good luck.

Recommended reading:
Trading Systems that work, Stridsman
Trading for a living. Elder
High Probability Trading, Link
Day Trader Survival Guide, Farrell

[Senor Choppy]

Day trading today is a bad idea for several reasons.

Brokerage fees will quickly eat into your profits (if you have any) and the spread between the bid and ask is even worse. Add to that the lack of volatility, and the potential for an average person just starting out to do well is almost nil.

The only way to come out ahead is to either have some kind of insider information, be a hell of a lot smarter than everyone else doing the same thing you are, or buy and hold for a decent period of time, long enough to significantly negate the effects of fees and the spread.

I personally made the mistake of trying to make a quick buck back in college when the net stocks were taking off. I remember waking up one day, going long CD Now (b/c of their outstanding fundamentals, to be sure) watching it go from 14 to 32, and being completely unsurprised by the whole thing. Who knew that companies doubling in value everyday wasn't going to last? /images/graemlins/smile.gif

[Paluka]

[ QUOTE ]
Paluka,

I read those books and some others years ago, and have always considered it an interesting subject. Do you have some "best book" recommendations? Thanks.

[/ QUOTE ]

First of all let me say that I don't think everyone in those Market Wizards books are just people who got lucky. Some of the people profiled are very smart people who had very good strategies.
I don't know anything about books about trading. I find it hard to believe there are any useful ones.

[MMMMMM]

What do you think about the trading style and techniques
of Linda Bradford Raschke? I have been reading parts of www.lbrgroup.com (http://www.lbrgroup.com) recently and find it quite interesting.

The FAQ describes many of her favorite trading techniques, among other things. She also sells a book called Street Smarts on her site but it is not cheap and I don't know if it is available elsewhere or not. I believe she was in the newer Market Wizards book but I could be wrong.

In particular I am curious as to what you think of trading techniques such as she has described briefly in the FAQ such as the Short Skirt trade, the Holy Grail setup and use of the ADX,and so on. If you don't have time to check it all out, I understand, I am just curious as to it all.

Thanks to you and playerfl for your responses.

[playerfl]

she's no worse than most of them.

[Paluka]

I don't know anything about this stuff. I am a professional trader, but I'm a derivatives market maker. I only know enough about day trading (and equity trading in general) to know that most strategies are bull*$!%.

[tech]

[ QUOTE ]
I can tell you with absolute certainty that the stock market is a casino.

[/ QUOTE ]

How so?

[RocketManJames]

A short article on Day Trading and whether or not it is possible. I am not a day trader, though I do *some* short-term trading.

Day Trading Article (http://biz.yahoo.com/bizwk/040806/b3896131mz026_1.html)

[blg3rad]

I have read a few books on day trading as well and if you would check the dates on yoru books i would bet that they are pre-bubble and almost every legitimate article on day trading on the internet is pre bubble as well. Day traders recieved lots of coverage when stocks like amazon and ebay were going up 10 dollars a day, also back in the 90's stocks were list in 16ths, so it was alot easier to gain 10,000 shares of a stock at 1 and 1/16 and sell it for 1 and 2/16 for a small profit, now you would be selling it back on the market at a penny or two higher, so the immediate income of day tradings golden days of buying and selling millions in second for small steady profits is over, i would say you could do much better sticking with a solid stratedgy of picking good solid companies that will not dissapoint you in a years time, better to have a steady grower than one big loser to wipe out all your funds. Good Luck

[gvibes]

I disagree personally. The "house edge" in the stock market is actually negative (historical equity returns ~= 11%). That's a huge distinction.

[playerfl]

decimalization definitely made scalping a lot tougher.

[Paluka]

[ QUOTE ]
I disagree personally. The "house edge" in the stock market is actually negative (historical equity returns ~= 11%). That's a huge distinction.

[/ QUOTE ]

Could you explain this?

[moondogg]

[ QUOTE ]
[ QUOTE ]
I disagree personally. The "house edge" in the stock market is actually negative (historical equity returns ~= 11%). That's a huge distinction.

[/ QUOTE ]

Could you explain this?

[/ QUOTE ]

The stock market, on average, makes money and increases value. Historically, the S&P 500 steadily increases. I believe this is what he meant by ~11% (I thought it was more around 8%, but that's not really the point).

However, day trading has nothing to do with any of this. Each trade is "raked" by the commission. The more trades you make, the larger the hill you have to climb just to break even after commissions.

BTW, any edge that may materialize in the short run will quickly be diluted away (or even overcompensated for) by mutual funds and investment groups, who have teams of trained and experienced research analysts looking for these things and far more direct and immediate access to the trading floor. Those "edges" disappear almost before the actually appear. In the end, the individual investor is left only to luck.

IMHO, anyone who believes they are going to out-think the teams of security analysts at the institutional investment firms is dangerously ignorant or blatantly delusional. IMHO.

I have avoided this discussion because I didn't want to get too involved an argument over the subject, but I am amazed that people in this day and age still give any serious consideration to something as fiscally irresponsible, wasteful, and historically doomed as day trading.

[Senor Choppy]

[ QUOTE ]
I am amazed that people in this day and age still give any serious consideration to something as fiscally irresponsible, wasteful, and historically doomed as day trading.

[/ QUOTE ]

It's no more wasteful than poker, although I agree with the rest of the points you made.

[BadBoyBenny]

[ QUOTE ]
IMHO, anyone who believes they are going to out-think the teams of security analysts at the institutional investment firms is dangerously ignorant or blatantly delusional. IMHO.

[/ QUOTE ]

I don't support day trading, but I think those teams are very overrated and can be beat easily. Individual investors have the ability to concentrate on a few good ideas (I know diversification, portfolio theory, blah blah blah).

You are right that's its nearly impossible to beat anyone paying trading fees all the time while trying to guess what Mr. Market is going to say offer tomorrow.

Most people are better with an index, it beats those teams of professionals, but someone with patience, willingness to learn, and a rational mind can easily beat actively managed funds.

I think I'm one of them, not banking my whole future on it, but I am buyng individual stocks with my own money with the expectation that in the long haul I will beat the institutions. I just made 3 picks in a different thread. Wait one to two years, and call me delusional and ignorant if they don't beat the S&P.

[tech]

[ QUOTE ]
I have avoided this discussion because I didn't want to get too involved an argument over the subject, but I am amazed that people in this day and age still give any serious consideration to something as fiscally irresponsible, wasteful, and historically doomed as day trading.

[/ QUOTE ]

How is trading any more "historically doomed" than poker? Sure the majority of people don't win, but there are successful traders just like there are successful poker players. There have always been such, and there always will be.

[moondogg]

[ QUOTE ]
[ QUOTE ]
I have avoided this discussion because I didn't want to get too involved an argument over the subject, but I am amazed that people in this day and age still give any serious consideration to something as fiscally irresponsible, wasteful, and historically doomed as day trading.

[/ QUOTE ]

How is trading any more "historically doomed" than poker? Sure the majority of people don't win, but there are successful traders just like there are successful poker players. There have always been such, and there always will be.

[/ QUOTE ]

It's true that there are plenty of successful people in both fields, but in both cases the people who are successful and stay successful are not concerned by short term results.

Trading in itself is not doomed, but daytrading is. Over a period of days, weeks, or even months, the market is too random to predict. Granted, with careful research you could pick stocks that will succeed in the short term more often than not, but there will be a lot of wrong picks in the process. It's not enought to be right most of the time when day trading, because it is large wager with a very small edge, which results in a hell of a lot of variance. With that variance, it requires a long time for your results to be meaningful (i.e. to achive the results that you are "supposed" to achieve due to the edge). Over that long period of time you are making a hell of a lot of trades, for which you paying a hell of a lot of commission.

Compare the long term growth rates of standard stock portfolios (where the tax is paid out of the portolio) vs. 401(k) and IRAs. The constant taxing every year drags the return down significantly, and the gap between the two returns grows exponentially over time because it is consistantly hindering an exponential growth. Day trading introduces the same problem, except both your gains and losses are being "taxed" constantly, so it would require much more spectacular returns just to overcome the commissions, much less the wrong guesses caused by the high variance.

There are plenty of successful traders, and there are plenty of successful poker players. In both cases, the people who are successful and stay successful over time are the ones look only at the long term impact of their decisions, and care little to nothing about variance of the short term. You may be able to find a person who has been day trading all year and making money, but how many people have been doing it profitably for several years or decades?

[playerfl]

if you take the most specific definition of day trading ( no overnight positions ever ), then yes daytrading is not a viable thing to do for a long career. The best you could hope for is to quit after a winning streak. It is very close to betting on coin flips. Even if you have an edge, say a 60% win rate ( which would be high ), you still must pay commissions, and if you hit a losing streak ( and you will ) you are toast.

If you read the high quality books on the subject you will see that many successfull traders started out as daytraders, then learned the error of their ways and increased their time frame.

[moondogg]

[ QUOTE ]
if you take the most specific definition of day trading ( no overnight positions ever ), then yes daytrading is not a viable thing to do for a long career. The best you could hope for is to quit after a winning streak. It is very close to betting on coin flips. Even if you have an edge, say a 60% win rate ( which would be high ), you still must pay commissions, and if you hit a losing streak ( and you will ) you are toast.

If you read the high quality books on the subject you will see that many successfull traders started out as daytraders, then learned the error of their ways and increased their time frame.

[/ QUOTE ]

Yeah, it really comes down to what people mean when the say "day trading". If someone is usually holding stocks for only one or day, obviously that is insane and they will soon be broke.

But if you expand the timeline to weeks, it's not as bad. If you expand it to months, it's even better. If you go to years, you're not really day trading anymore.

There is a large grey area in between day trading and holding for years/decades, which I guess would be considered "active" trading.

IMHO, the farther you get from day trading and the closer you get to buy-n-hold, the better your long term results will be. Active trading is not as bad as more literal forms of day trading, but the less active the better.

[Officer Farva]

Both day trading and poker have high variances on performance, even if you are an expert, so it does not make sense to pick day trading as something to fall back on.

I currently work at a hedge fund. We use some highly advanced hedging techniques. We employ "technincal expert" as well as experienced fundamental traders who scour the market for trends and information. Over the last few years, we have averaged a 18% net return with a standard deviation of 7%. This is well above the industry average.

This year, we are struggling to break even (up 1.9%). Luckily, we run $500 million dollars, which means we are roughly up 10 million (after taking our administrative 1.5 and twenty percent of returns).

It is extremely difficult to perform well in the current market, even for the experts. Find a real job...

[illiquid]

[ QUOTE ]
Currently I play poker for a living, but I have been seriously considering learning how to day trade. I want to make sure that if my poker career hits some sort of snag in the future, that I have an appreciable source of income to fall back on.

[/ QUOTE ]

In all honesty, if you're thinking about trading as a "fall back" source of income, forget about it. Go to night school, get some technical training in some skill with very high demand (nursing perhaps), you'll be much better off. The learning curve for successful trading is steep and extremely costly, both financially and psychologically, and if you can't take the variances over poker in the long run, you will never be able to stand the drawdowns that inevitably come with trading.

Trading is not something you can just apply an hourly win rate to, nor find "profitability figures" for -- if you can succeed in the markets, the amount of return you can expect will be ridiculously enormous. But getting to that point will take years and years, it's just not something to rely on in case you happen to get a cold streak at the tables.