Conservative Daytrading

A friend of mine has taken up a form of daytrading as a hobby, using a discount online broker. First, he relies on a stock analysis service to identify the best stocks, and only trades stocks that received their highest rating. He then uses technical analysis to identify which of the highly rated stocks are likely to break out (and up) from a base pattern. When one of his targeted stocks begins to move up, he buys; he sells when the upward move appears to be ending (or at the end of the day). For nearly two months now, he's been averaging one such trade per day. Over 90% of these trades have been profitable, usually yielding a gain of 1% to 4%. Since he is quick to cut his losses, the magnitude of the losses has been less than the gains.


This approach to daytrading appears to be low risk with rather high reward. Has my friend just been "running good," or might he really be onto something?

He's running good. His sample is only 40 or 50 reps, so that's just noise. Also, if he's going to hold a stock for a day, what difference does it make if it's a "good" stock? He just wants volativity/movement. The costs will eat him up unless he makes a market. The bid-ask spread beats him down, too. And that technical crap...


I might be willing to wager that a dart-throwing monkey would do as well (given same costs) if the targets were ten heavily-traded NASDAQ 100 stocks. Have the monkey throw one dart once a day, buy (or short, it doesn't matter) that stock, and liquidate at the end of the day. I see no reason why the monkey wouldn't have as good a chance as anyone else in daytrading. Good luck.

I admit I haven’t spent a great deal of time looking for one, but I haven’t yet found a pet store that sells a monkey that can flip (36 out of 40) or (45 out of 50) heads using a fair coin.


For sure, he’d go for a pretty penny.

I'm not saying the guy doesn't have real skills. He might be the best. But 40 trials isn't nearly enough. I'm not a statistician, but I don't think we can conclude the guy's found the grail based on so few trials in a market that's been up the last two months. Well, hell, lemme look at it and see what the Wilshire 5000 has done over the last two months: looks to be up about 15% since 3 April, or in about 45 trading days. About two-thirds of the trading days appear to have ended positive.


The "coin" is not fair, see. Flipping heads 36 out of 40 times when heads is 33% more likely to show up anyway is essentially meaningless. If he does it 360 out of 400, it means a little more. 3600 out of 4000 and maybe we're able to measure something.


Good luck with the monkey, but I hear they bite...

Er, did I say the "coin" was 33% more likely to come up heads? I'm wrong. It's -twice- as likely to come up heads, bit I guess ya catch my drift.


I must admit that my aversion to daytrading may come from my suspicion that I'd love it and burn through a bundle. But at least I'd still have the monkey to keep me company and hold out the cup...

My friend does not have "real skill." However, he does have real discipline in following a fairly simple trading formula. He often buys and sells the same couple of stocks for many days, and is studying technical indicators which he hopes will enable him to hold positions for more than one day with little risk when conditions are favorable.


One reason he has limited his trades to only the highest rated stocks is that he has not had tools which enable him to monitor thousands of stocks for movement, so he just targets the highest rated ones that meet his criteria. However, he also believes his EV is increased by betting on these highly rated (and relatively fundamentally sound) stocks. Is it possible that his EV is further enhanced by the fact that many other investors use the same stock ratings, helping to create greater demand for these stocks?


By the way, I slightly understated his batting average. Thus far, over 95% of his trades have been profitable (though some of the profits were very small after commissions and taxes).

Suppose his technical indicators allowed him to trade ( from the long side ) only when the market figured to go up twice as often as down? And, btw, it still would be difficult, by chance, to get 45/50 heads.


What’s really going on, I think, is this:


He’s taking small profits and, so far, has the discipline to take small losses.


But there will come a day when he won’t be able to take a small loss, either because he’ll be unable to ( because the stock stopped trading ) or because he just doesn’t feel like it.


Just yesterday, he’ll say to himself, I waited another hour, and the stock reversed itself and gave me a profit.


That day will wipe out all the small profits.


>I must admit that my aversion to daytrading may come from my suspicion that I'd love it and burn through a


>bundle. But at least I'd still have the monkey to keep me company and hold out the cup...


Sometimes folks fear what they are, or would be, good at.


Only untalented musicians and actors don’t get stage fright.

I disagree about the chance of the 45/50 heads when heads are a 2 to 1 favorite; I'd look it up in an old stats text if I weren't so damn lazy, but I imagine it's within a standard deviation. And technical indicators are a load of crap: why would anyone not buy something when it's cheap and then buy it when it gets expensive?


But I'm pretty sure you're right about blowing the small profits in one bad trade.


Who knows, anyone could be a good trader, but the only way she'd find out is if someone gave her a big bankroll, certain liquidity, a sales staff, and nearly frictionless transactions. Only the big guys can provide that stuff, and only for their employees, who have limits on what they can trade on their own accounts. If you can't afford to be wrong, can't dump your position, and have to pay retail, you get chopped up and you have to sweat your positions every damn day. It sounds very exciting, but not the life for me. I'll stick with index funds and low limit poker...

"But there will come a day when he won’t be able to take a small loss, either because he’ll be unable to ( because the stock stopped trading ) or because he just doesn’t feel like it. That day will wipe out all the small profits."


I don't think he would ever ride a stock down based on a feeling. He does not trust his feelings/knowledge and is very disciplined. As far as trading be stopped in his stock, I think his sticking to the highest rated stocks may provide some protection. If it did happen, it might wipe out most of his "small profits," but many of his trades had large profits. If the whole market crashes, he is more likely to be able to cut his losses than traditional investors like me.

"why would anyone not buy something when it's cheap and then buy it when it gets expensive? "


Perhaps a stock price becomes cheap for a reason, and begins to rise for a reason. I don't think my friend would buy relatively "expensive" stocks (the stock ratings take into account value indicators), but I do know he avoids stocks that have become cheap...at least until their price begins to rise again.