Day trading stocks: waste of time and money?

[poorgradstudent]

“So how can an individual know which stock to trade and make money doing it?”
The one advantage individuals have is they are (almost always) way smaller than the big firms, so we can buy significant (to us) shares of stocks without moving the price of said stock. Being nimble definitely has its advantages. It also allows us to invest in small and micro cap stocks, which over time typically outperform the S&P 500, admittedly with more risk.

Of course, it’s easy to make money in a bull market. High risk, high beta stocks tend to outperform in both directions. The true test of traders probably comes during bear markets.

I guess the other advantage individual investors can have over institutions is a willingness to carry cash when the market is overinflated and be patient. Mutual funds are paid to buy stocks, not just carry cash, hence the saying “cash is trash”.

I imagine being a professional trader is very challenging. I’ve been able to do fairly well with my modest stack of “mad money” for fun, but I haven’t been doing it that long, so I may just have been lucky or simply buying higher beta stocks.

[poorgradstudent]

“So how can an individual know which stock to trade and make money doing it?”
The one advantage individuals have is they are (almost always) way smaller than the big firms, so we can buy significant (to us) shares of stocks without moving the price of said stock. Being nimble definitely has its advantages. It also allows us to invest in small and micro cap stocks, which over time typically outperform the S&P 500, admittedly with more risk.

Of course, it’s easy to make money in a bull market. High risk, high beta stocks tend to outperform in both directions. The true test of traders probably comes during bear markets.

I guess the other advantage individual investors can have over institutions is a willingness to carry cash when the market is overinflated and be patient. Mutual funds are paid to buy stocks, not just carry cash, hence the saying “cash is trash”.

I imagine being a professional trader is very challenging. I’ve been able to do fairly well with my modest stack of “mad money” for fun, but I haven’t been doing it that long, so I may just have been lucky or simply buying higher beta stocks.

[Wiley]

4plex,

I use Tradestation also. It’s amazing. A few months ago I was in Denver getting my pilots license so in the mornings I would go to starbucks and trade before my lessons. I made 70k in a month trading nat gas. Got home and gave it all back in two weeks. Just cause their mini’s doesn’t mean its not still huge leverage (as I’m sure you know).

I love playing around with the automated trading but all “things” I believe trade differently which means you can only develop a system for one stock or contract. Then if you can find one that works eventually that “thing” will eventually start trading differently as well.

Even though net/net I doubt I made much if any (especially when you include tax implications) I love the challenge the market brings and I’m confortable my core holdings will do well.

Just my thoughts.

[Wiley]

4plex,

I use Tradestation also. It’s amazing. A few months ago I was in Denver getting my pilots license so in the mornings I would go to starbucks and trade before my lessons. I made 70k in a month trading nat gas. Got home and gave it all back in two weeks. Just cause their mini’s doesn’t mean its not still huge leverage (as I’m sure you know).

I love playing around with the automated trading but all “things” I believe trade differently which means you can only develop a system for one stock or contract. Then if you can find one that works eventually that “thing” will eventually start trading differently as well.

Even though net/net I doubt I made much if any (especially when you include tax implications) I love the challenge the market brings and I’m confortable my core holdings will do well.

Just my thoughts.

[Chris Scoreboard Johnston]

Chris Johnston

This thread is obviously right in my wheelhouse. I have had periods of my trading career where I did alot of day trading, and although during those years I was profitable, it is a very difficult and stressful way to trade. I know many day traders, and a few who make money. However, most of them blow up at some point due to poor risk management. At times I might add to a position that I am holding for a few days if I get a move against it during intra day action. An example of this was yesterday I shorted the S&P and added to it 4 points higher than my original entry. The market ultimately rolled over some and the trade closed profitably. I held it overnight, so it was not a day trade, and exited this morning for a nice profit, which was enhanced by the intra-day add. Keep in mind that I have been trading for 25 years, so I have a little bit of experience doing this type of thing.

I know of no completely mechanical way of day trading that is consistently profitable, and I would be willing to bet that I have studied just about every one that is out there. I am just waiting for the next MIT grad who is a genius that figures out some knew way of curve fitting an oscillator to past data, that ultimately fails in real time action.

Alot of bad habits were created during the late 90’s due to the parabolic upmove that happened, where no matter what you did, it would ultimately come back if you hung on long enough. One of those years I had a 100% accuracy year, meaning that I did not have one single loss the entire year. This was not due to trading brilliance, it was due to a very biased market condition. This ultimately pushed me to go to 100% cash at the beginning of 2000 because I knew something was really wrong if I could make all those trades, many of which were bad trades, and still have them all make a profit. I made much less than many amateurs that year who just swung for the fences, and felt like a damn fool to be honest. However, in the end I had the last laugh and now advise many of these people.

Unfortunately many folks due to this one sided nature of the move, quit their jobs, began trading, and bragged at cocktail parties, but the music eventually stopped and most were cleaned out. They only knew one way to trade, so when the trend changed, they were blown up. I had one friend who made over 2M by owning every perfect internet stock, and knowing nothing about how to trade. I told him to sell out in Jan of 2000, which he did the opposite and bought more, only to lose about 1.8 of the 2M by the time he finally cried uncle.

I agree with 4plex in that nobody would sell an effective system for 3k. I would not sell my bond and S&P systems for a million dollars, as they can make me much more by keeping them to myself. There are so few trading systems that actually work in real time, that I am constantly approached by brokerage firms for a piece of the action with my bond system, which I refuse to give them. The only way I would sell it is if I saw its efficacy diminishing enough where I was not going to use it anymore. Under that circumstance, it would not be worth buying anyway.

The average person should stick to a more medium term horizon, but at the same time do not get sucked into this “were in it for the long term” crap the brokers are selling. Timing the general larger swings can have a huge effect on your overall returns, so it would pay to get some knowledge in this area. Stay away from day trading, we call it NINTENDO due to how similar it is to a video game just clicking away with your mouse.

Sorry for the long post, this is just an area where I feel like I can contribute something of value.

[Chris Scoreboard Johnston]

Chris Johnston

This thread is obviously right in my wheelhouse. I have had periods of my trading career where I did alot of day trading, and although during those years I was profitable, it is a very difficult and stressful way to trade. I know many day traders, and a few who make money. However, most of them blow up at some point due to poor risk management. At times I might add to a position that I am holding for a few days if I get a move against it during intra day action. An example of this was yesterday I shorted the S&P and added to it 4 points higher than my original entry. The market ultimately rolled over some and the trade closed profitably. I held it overnight, so it was not a day trade, and exited this morning for a nice profit, which was enhanced by the intra-day add. Keep in mind that I have been trading for 25 years, so I have a little bit of experience doing this type of thing.

I know of no completely mechanical way of day trading that is consistently profitable, and I would be willing to bet that I have studied just about every one that is out there. I am just waiting for the next MIT grad who is a genius that figures out some knew way of curve fitting an oscillator to past data, that ultimately fails in real time action.

Alot of bad habits were created during the late 90’s due to the parabolic upmove that happened, where no matter what you did, it would ultimately come back if you hung on long enough. One of those years I had a 100% accuracy year, meaning that I did not have one single loss the entire year. This was not due to trading brilliance, it was due to a very biased market condition. This ultimately pushed me to go to 100% cash at the beginning of 2000 because I knew something was really wrong if I could make all those trades, many of which were bad trades, and still have them all make a profit. I made much less than many amateurs that year who just swung for the fences, and felt like a damn fool to be honest. However, in the end I had the last laugh and now advise many of these people.

Unfortunately many folks due to this one sided nature of the move, quit their jobs, began trading, and bragged at cocktail parties, but the music eventually stopped and most were cleaned out. They only knew one way to trade, so when the trend changed, they were blown up. I had one friend who made over 2M by owning every perfect internet stock, and knowing nothing about how to trade. I told him to sell out in Jan of 2000, which he did the opposite and bought more, only to lose about 1.8 of the 2M by the time he finally cried uncle.

I agree with 4plex in that nobody would sell an effective system for 3k. I would not sell my bond and S&P systems for a million dollars, as they can make me much more by keeping them to myself. There are so few trading systems that actually work in real time, that I am constantly approached by brokerage firms for a piece of the action with my bond system, which I refuse to give them. The only way I would sell it is if I saw its efficacy diminishing enough where I was not going to use it anymore. Under that circumstance, it would not be worth buying anyway.

The average person should stick to a more medium term horizon, but at the same time do not get sucked into this “were in it for the long term” crap the brokers are selling. Timing the general larger swings can have a huge effect on your overall returns, so it would pay to get some knowledge in this area. Stay away from day trading, we call it NINTENDO due to how similar it is to a video game just clicking away with your mouse.

Sorry for the long post, this is just an area where I feel like I can contribute something of value.

[ibjames]

I did some day trading also, while I turned a profit, the peaks and valleys were too drastic for me. I would do research on companies, try and look at the data and say this is def. a good buy then find out numbers were reported incorrectly etc. etc.

I’m back to reading and researching before money is put to the burner again

[ibjames]

I did some day trading also, while I turned a profit, the peaks and valleys were too drastic for me. I would do research on companies, try and look at the data and say this is def. a good buy then find out numbers were reported incorrectly etc. etc.

I’m back to reading and researching before money is put to the burner again

[kicksavedave]

Although my experience isn’t directly with day trading, I’ll post it because it still applies somewhat.

13 years ago I helped start up a new Mutual Fund called Rydex. (www.rydexinvestments.com) They were the first fund ever with a 100% inverse S&P 500 index… they shorted the S&P 500 with a -1 beta. It was called Ursa (latin for Bear) It was hot, and it grew like wildfire. They also had a 1.5 beta long S&P fund to match, called Nova. They were also the first fund to allow unlimited trades. So money managers, and professional portfolio advisers, flocked to the fund group because it allowed them to be 100% short one day and 150% long the next day, and back and forth as much as they wanted, using safe, protected Mutual Fund assets – retirement funds, etc.

Rydex grew quickly… but as the IT Manager, I was tasked with developing databases that tracked results. Over the time frame of 94-96, a period of some instability in the markets, about 90% of the clients lost money, and the other 10% did very well. It wasn’t intra day trading, but it was daily trades, sometimes weekly, and I found the better investors were generally going on a monthly or quarterly transaction cycle. The ones who traded every day were unanimous losers. And these were all supposed professional money managers, our minimum investment back then was $10K and our typical client size was more like $2M. Many of them used complicated technical analysys schemes and software, none of it worked reliably well.

My point is this – Day traders mostly lose money. A very few of them make good money over a long term. Day Trading from 1996-2000 was easy – just pick something and go with it. In uncertain times, it becomes nearly the same gamble as roulette or craps. And as mentioned above, it takes utter 100% concentration at all times to avoid massive losses and to maximize the gains. If you miss the top 5 gain days over a year, your ability to make a good return dwindles down to nearly nil.

All of the grissly portfolio managers at Rydex, even while managing the daily trading funds, all said the same thing. There is no substiture for buying good quality invesments and holding them for the long term. 5% annually is miles better than 50% one day, -50% the next, and 50% up the third day, etc.

[kicksavedave]

Although my experience isn’t directly with day trading, I’ll post it because it still applies somewhat.

13 years ago I helped start up a new Mutual Fund called Rydex. (www.rydexinvestments.com) They were the first fund ever with a 100% inverse S&P 500 index… they shorted the S&P 500 with a -1 beta. It was called Ursa (latin for Bear) It was hot, and it grew like wildfire. They also had a 1.5 beta long S&P fund to match, called Nova. They were also the first fund to allow unlimited trades. So money managers, and professional portfolio advisers, flocked to the fund group because it allowed them to be 100% short one day and 150% long the next day, and back and forth as much as they wanted, using safe, protected Mutual Fund assets – retirement funds, etc.

Rydex grew quickly… but as the IT Manager, I was tasked with developing databases that tracked results. Over the time frame of 94-96, a period of some instability in the markets, about 90% of the clients lost money, and the other 10% did very well. It wasn’t intra day trading, but it was daily trades, sometimes weekly, and I found the better investors were generally going on a monthly or quarterly transaction cycle. The ones who traded every day were unanimous losers. And these were all supposed professional money managers, our minimum investment back then was $10K and our typical client size was more like $2M. Many of them used complicated technical analysys schemes and software, none of it worked reliably well.

My point is this – Day traders mostly lose money. A very few of them make good money over a long term. Day Trading from 1996-2000 was easy – just pick something and go with it. In uncertain times, it becomes nearly the same gamble as roulette or craps. And as mentioned above, it takes utter 100% concentration at all times to avoid massive losses and to maximize the gains. If you miss the top 5 gain days over a year, your ability to make a good return dwindles down to nearly nil.

All of the grissly portfolio managers at Rydex, even while managing the daily trading funds, all said the same thing. There is no substiture for buying good quality invesments and holding them for the long term. 5% annually is miles better than 50% one day, -50% the next, and 50% up the third day, etc.

[LookoutBelow]

I did just like Chris Johnston did….I was winning everywhere I traded….it got scary, too scary…I couldn't lose…So I bailed and went into cash positions that seemed safe, until it played out…..with me on the sidelines watching…

My life doesn't work that way…I have never been one who someone else would say that my life was "Charmed"… most of the time the "other shoe drops" and I don't see it coming and get creamed by it…… I am mature enough to admit it now.

For example:… I can PERSONALLY take down an NFL team's ENTIRE season …..All I have to do is "want" them to win. As soon as I take a personal interest in their hoped for successful season, then they are doomed…I scientifically pick em too…Something inane like, "I liked the color of their uniforms" or "I liked a specific player"….and then POOF!!…their season grinds to a halt, riddled with key player injuries, team players being shot by cops and or gang members, players getting arrested for drug deals gone bad….etc..etc…I take personal responsibility for the Raiders collapse a few years ago…I just know it was my "high hopes for them" that took em down….I even bought and wore a Raiders baseball cap…..That was probably what really did em in right there….Sorry Oakland, I didn't know the extent of my powers back then

So back in 99 and winter 00… when I saw my stock picks taking off like meteors…I knew it was too good to last..I just remembered back to what I did to the Miami Dolphins in 97 ….and got scared….I apologize to you Dolphin fans…I am still sorry for doing that

Daytrading was doing too good" for my tastes, I am REALLY glad I got out when I did….So as I get older, in some things, I also get a little wiser !

Obtaining wisdom is not really a fair trade for the body falling apart,…gawd !..theres got to be SOME upside of getting older huh ?…but I do like the "Old Guy 15 minute catnaps" which I can take now though….

[LookoutBelow]

I did just like Chris Johnston did….I was winning everywhere I traded….it got scary, too scary…I couldn't lose…So I bailed and went into cash positions that seemed safe, until it played out…..with me on the sidelines watching…

My life doesn't work that way…I have never been one who someone else would say that my life was "Charmed"… most of the time the "other shoe drops" and I don't see it coming and get creamed by it…… I am mature enough to admit it now.

For example:… I can PERSONALLY take down an NFL team's ENTIRE season …..All I have to do is "want" them to win. As soon as I take a personal interest in their hoped for successful season, then they are doomed…I scientifically pick em too…Something inane like, "I liked the color of their uniforms" or "I liked a specific player"….and then POOF!!…their season grinds to a halt, riddled with key player injuries, team players being shot by cops and or gang members, players getting arrested for drug deals gone bad….etc..etc…I take personal responsibility for the Raiders collapse a few years ago…I just know it was my "high hopes for them" that took em down….I even bought and wore a Raiders baseball cap…..That was probably what really did em in right there….Sorry Oakland, I didn't know the extent of my powers back then

So back in 99 and winter 00… when I saw my stock picks taking off like meteors…I knew it was too good to last..I just remembered back to what I did to the Miami Dolphins in 97 ….and got scared….I apologize to you Dolphin fans…I am still sorry for doing that

Daytrading was doing too good" for my tastes, I am REALLY glad I got out when I did….So as I get older, in some things, I also get a little wiser !

Obtaining wisdom is not really a fair trade for the body falling apart,…gawd !..theres got to be SOME upside of getting older huh ?…but I do like the "Old Guy 15 minute catnaps" which I can take now though….

[sdduuuude]

Think of 2 scenarios in which you start out with $50,000 to trade.

In scenario A you work and make $100K/yr, pay $30K in taxes, put $10K into your trading fund and trade once per year to adjust your portfolio.

In scenario B, you don’t work, you just trade, trying to turn the $50,000 into $70,000 in after-tax profits that you have to live on, pay taxes on, and use to increase the value of your trading fund, AND earn profits in excess of the growth achieved by the 50K of investments. Good luck with that.

The scenario changes dramatically if you are only employable as a $20K/year worker and you have $1,000,000 in your fund. Even then, can you really do better than the market by 20K with the time you spend?

Remember – you don’t have to earn SOME money with your trades. You have to earn more than you could earning a salary plus what you can earn with the investment funds in a less time-consuming investment plan.

[sdduuuude]

Think of 2 scenarios in which you start out with $50,000 to trade.

In scenario A you work and make $100K/yr, pay $30K in taxes, put $10K into your trading fund and trade once per year to adjust your portfolio.

In scenario B, you don’t work, you just trade, trying to turn the $50,000 into $70,000 in after-tax profits that you have to live on, pay taxes on, and use to increase the value of your trading fund, AND earn profits in excess of the growth achieved by the 50K of investments. Good luck with that.

The scenario changes dramatically if you are only employable as a $20K/year worker and you have $1,000,000 in your fund. Even then, can you really do better than the market by 20K with the time you spend?

Remember – you don’t have to earn SOME money with your trades. You have to earn more than you could earning a salary plus what you can earn with the investment funds in a less time-consuming investment plan.

[rseiser]

Thanks to everyone for their insight on this thread. I joined a monthly meetup group about trading, and I am always a little curious about what strategies are out there. In general my findings are similar to my experience in the energy sector. I have looked at 100 “new” alternative energy schemes, and 100 didn’t work.
At the same time you will find thousands of people telling you how much money they make in trading, and that their software really works, bla bla… But the only pattern I found is that when you ask for their track record, then they all of a sudden get offended.

Most of the time it’s clear mathematics. First, let’s say I am a happy investor ala Buffet, and got to a 20% annual return on my investments. Since I hardly trade, I pay about 25% tax on my capital gains and dividends (15% federal + 10% state tax). It’s actually not applied every year, since I can defer tax payment until I sell. On day trading (stocks) I will be taxed 45% (35% federal and 10% state tax). So that alone shows that I would have to make at least 30% annual return to be even with my investment return. But wait there is more. Now I also have to pay some serious money for software, tools, data feeds, and of course the time that I am tying up. Depending on one’s wealth, let’s just call that another 10% extra that I have to make, meaning 40% annual return. Now that’s unleveraged for an apple-to-apple comparison to my investments. Well, I haven’t found the strategy yet that makes me 40%, but I will report when I find it…

Next is risk. That’s a difficult one. Some trading schemes could be safer than a tied up investment, since you could get out quickly, have stops in place, etc. But others could be riskier, if you have a few losses in a row, or something happens to the position you are concentrated in.

Now add leverage, the magic word of the trader. In general, I would say that this just increases your return at the expense of higher risk. Yes, you can leverage different amounts in different assets, but even in some investments you can leverage quite a lot (think real estate). So let’s keep talking in terms of the unleveraged return.

A lot of strategies are skewed to the nature of the market. There are some shallow and wide strategies that attempt to make an average of say 0.2% per day which would give you your >40% annual return. But then you notice that they are mostly long strategies, and in an up year most days might be indeed up a little. But this might not work in a down year (what I am more interested in).

Last, higher inflation is slightly in favor of the investor. If we enter a time like the 70s, or even worse, where the value of the dollar drops every year, trading in and out of cash will have you more exposed to the losses in the dollar. Right now prices have probably doubled in ten years, despite the productivity gains. If that gets worse, trading back and forth might make you a return just to keep even with the price of eggs or milk, while every investment might perform equally.

I met a few people that do trading as a full-time job, so they must do something right. But maybe they made their money on their house or just inherited a few million and are really just treading along. I will report if I meet someone really trading himself from the bottom up (like Chris J?).

For myself I would consider putting 10% of my capital into a trading strategy if I think it gets close to the above criteria (return/leverage/risk), and if it makes sort of fundamental sense with some statistical evidence. At least it diversifies me a little which could be great in a down year.

[Author]

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