Day Trading: Good or Bad?

[disneysteve]

the gist of my post was that potential gains from day trading are based on chance, just as they are at a craps table.

Agreed. All those different variables that I mentioned, and more, smooth out over a period of time which is why over the long haul, stocks tend to have an upward trend. In the short term, especially the very short term, that may not be true at all and predicting what a stock will do a day or an hour from now is virtually impossible.

[Broken Arrow]

I understand the tendency to equate day-trading with gambling, but being a gambler, the analogy always annoys me.

Yeah, it bothers me too.

It bothers me, not so much that they don't have a point... because we know they do to some degree. But it's just that it's such a simple blanket statement for people to throw out without requiring much further thought.

Truly, trading is well beyond the point of diminishing returns, but that doesn't mean the hours upon hours of research that we put forth is all in vain. Quite the contrary, it indeed makes a difference. Even if we know we can not beat the market, the exercise will STILL help us become better, more survivable investors.

It's completely different when I sit down in front of a... slot machine. About the only thing I can do is drop my money in, pull the one-arm bandit, and let the colors mesmerize me.

Let's look at this from a different light: Forget stocks for a moment. Let's say someone's 401(k) or IRA is taking a nice 50% loss. Upon seeing that, they panic, cash out their entire portfolio, buy CDs instead, or better yet, stuff the money under the mattress.

Is that truly a good move? I don't think it is, but that's actually not even the point. The point is, they TOO have turned into traders! Yes! They've traded in one asset class for another. Trading isn't limited to just stocks or ETFs. The behavior can happen with any asset class. But the sad thing about a trade like this one is that it is largely based on fear....

Wouldn't it be better to replace that fear with something like... knowledge and insight instead? And how do we go about doing that? Well, I don't know about you, but the best first-hand learning experience I've had so far is.... trading! Certainly, it's not a requirement... and it's not without its risks... but the experience has been invaluable to me.

And that's the difference! Trading CAN make you into a better investor. Gambling will not. Trading CAN teach you the financial world around you. Gambling is just for entertainment.

Well, speaking as a swing trader with a penchant for fundamental analysis anyway. Day traders have a world all to their own.... But that's my soap box speech for the night.

[disneysteve]

Trading CAN make you into a better investor. Gambling will not.

Just as there are things you can do to become a better trader, there are also things you can do to become a better gambler, so there is some similarity there.

And I totally agree that with rare exception, gambling is for entertainment. It is not a plan for making money over time.

[rizzmo]

I see a fundamental difference between day trading and gambling. When you gamble it is strictly a win or lose proposition. You are not purchasing an asset, and the casino controls the timeframe in which you must win or lose. Day trading you are purchasing assets and you control the timeframe in which you win or lose.

For example if I sit at a roulette table and bet $10k on black, I know that I have a slightly less than a 50% of winning. If I win great double my money, if I lose all my money is gone. Not that it would help, but all the time I have to win is the time from when my bet is placed till the ball stops. I understand gambling as a form of entertainment, but aside from entertainment value it makes no sense to play a game that you are always more likely to lose than win. Bottom line each time you lose, you lose 100%.

Day trading is fundamentally different. Say I purchase 10k in stock on a timeframe of selling the same day for a profit. Opportunity for gains can range from a cent to more than double your investment (admittedly not all that common on the high end). Now when we talk opportunity for loss it can be as low a cent or as high as all of your initial investment (when a company files bankruptcy you can lose it all in a second). When you win, you take your gains off the table and put the principal back in … provided you see a good opportunity. When you lose you have several choices on how to deal with it. First, you can sell and take the loss. Second, you can hold on to the stock indefinitely until you win. Bottom line each time you lose, it is very rarely 100%.

As for time put in to research, it is my opinion that you could know everything about a particular company, their stock history and trends, about the general market, about government policies, etc. and it you still won’t be able to predict the rise and fall of stocks any better than the guy next to you who has no knowledge of any of these. That being said I invest very little time picking stocks above the actual process of submitting the trade. To be honest, I do not even understand 10% of the statistical information provided on the trading site I use.

[gambler2075]

As a trader, I felt like resurrecting this thread and chiming in.

First, I would generally agree that intra-day trading is close to gambling for the vast majority of traders. With the rise of HFT I have watched basically all of the scalpers I know give up... the markets have changed significantly since the days of the SOES bandits...

However, there are still profitable intra-day traders, who have long track records of being profitable... johnwelshphd on twitter is one example, so if tim sykes (although he basically shorts overpriced penny stocks). But as far as the dirty tricks available to make the vast majority lose money, it is basically unlimited... dark liquidity pools, subpennying, hunting for stops, false breakouts... all of these techniques and more I have seen...

this is part of the reason why I have stopped intraday trading.

However, I feel that swing trading can be profitable and that is in a totally different category than gambling. Looking at resistance/support/catalysts/emotions of other traders, all of that I feel can give me an edge... However, it takes years, and years to develop that skill, and it is not guaranteed. Most people I do believe would be better off ignoring individual stock trading and focusing on the rest of their lives.

g

[dczech09]

I guess I do not understand why people day trade, especially when they say that they aren't looking for profit; what other reason could there be? I understand that you think that you can afford the loss (financially and psychologically) but why would you want to take the loss? The first rule to investing is to not loose your money.

With that said, I see that once you max out for 401k and IRA contributions, the next step would be moving money into a variable annuity, putting money into college savings, or stashing money into an HSA. All of these things are much better than day trading. Another thing to do to guarantee return of principle is to pay off the mortgage as quickly as possible; the tax deduction is not worth holding the mortgage. If all of this is done, and there is still expendable money, open a brokerage account and invest for time, not day trade. Right now would be a good time to pile into the market and build up a portfolio of stocks. In a few years, your pile of stocks will be worth MUCH more.

Bottom line, there is ALWAYS something better to do with money than day trade. Even gambling in a casino is better; in a casino you can play games and have some sort of control over the outcome. The whole day-trading thing really takes control out of your hands, but does give you an illusion of control. Read the book "A Random Walk Down Wall Street."

[ramirezhenry55]

Great discussion. I am still at the buy and hold tactic, still learning to trade...

[gambler2075]

I would also like to add that, as a trader for 8 years, having traded thousands of trades, (over 30,000$ in commissions this year) that for the vast, vast majority of traders, intra-day trading is a losing proposition.

I do believe, however, that swing trading can be profitable, but only if you have specialized knowledge in a certain area... I have a fairly strong bio background, post-graduate level, and I bring that, along with my healthy dose of skepticism to bear upon each stock I research. Without going into details of how I pick stocks (as that would be foolish, given how profitable my strategy has been so far) I would say that if you were to try to 'learn how to trade' then I would focus on one area in which you have a knowledge advantage, while realizing that all the knowledge in the world isn't going to help you if you haven't developed trading skills...

g

[richrf]

I think day trading, like an form of gambling, takes time to master and you have to be willing to go bust many times before you master the game. You need to get to know psychological and monetary cycles that occur during the day (preferably from a seasoned professional who you might personally know), and change quite often. It really is like poker on a massive scale. At the beginning you are just another "fish" providing fresh money for the pros. Personally, I think it is an unhealthy way to spend a life, but to each his/her own.

[gambler2075]

I think day trading, like an form of gambling, takes time to master and you have to be willing to go bust many times before you master the game. You need to get to know psychological and monetary cycles that occur during the day (preferably from a seasoned professional who you might personally know), and change quite often. It really is like poker on a massive scale. At the beginning you are just another "fish" providing fresh money for the pros. Personally, I think it is an unhealthy way to spend a life, but to each his/her own.

I cannot agree more...

first of all, daytrading is a terrible prospect for most people, for several reasons...

1) There is no guarantee of success... even after many booms and busts you are one more bust away from losing it all, depending on your money management. I do regret trying intraday trading, and I admit I monitor the markets way too much.

2) It IS an unhealthy way to spend a life... monitoring the markets 24-7, the stress, and monitoring your positions isn't worth it for most people... even if you are successful, imo.
There is a great world out there and I have seen many, MANY daytraders get swallowed into the abyss of focusing on the markets 24-7, to the detriment of the rest of their lives.

I do think there is a happy medium, however, and that is to be a swing trader. After trading for quite a few years, I took a close look at my trades and realized that my daytrades were, on aggregate, losing money, and it was my swing trading that was keeping me in the green... As a result, I realized that the most logical thing to do was to focus JUST on the swing trades, which had two advantages... first that they were the more profitable trades, and second that I could monitor the markets just in the mornings (when most news happens, for swing traders) and then forget about stocks for the rest of the day...

g

p.s. I would also add that I DO know daytraders who are profitable, with their intraday trades, although I feel that I am not one of them. I would also add that most non-traders have no idea what goes into trading, risk management, the setups, etc etc... and to them it seems like a bunch of degenerate gamblers but in reality it is far more complex than that. I will also add that I picked the username "gambler" not because I approach the stock market as a gambler, but so as not to forget that nothing is guaranteed in the stock market, and there is risk everywhere.

[richrf]

I do think there is a happy medium, however, and that is to be a swing trader. After trading for quite a few years, I took a close look at my trades and realized that my daytrades were, on aggregate, losing money, and it was my swing trading that was keeping me in the green... As a result, I realized that the most logical thing to do was to focus JUST on the swing trades, which had two advantages... first that they were the more profitable trades, and second that I could monitor the markets just in the mornings (when most news happens, for swing traders) and then forget about stocks for the rest of the day...

I even trade (I guess it would be called trading) even longer cycles. I would say those that last about 1.5 years or so. What I do is guess (it is a guess) at the general trend of a market and try to play the extremes of that cycle looking for a reversal that might last 1 - 2 years. It actually has been quite profitable and much less stressful since I am not looking for short term reversals but longer term trends looking out for extremes.

Rich

[gambler2075]

I even trade (I guess it would be called trading) even longer cycles. I would say those that last about 1.5 years or so. What I do is guess (it is a guess) at the general trend of a market and try to play the extremes of that cycle looking for a reversal that might last 1 - 2 years. It actually has been quite profitable and much less stressful since I am not looking for short term reversals but longer term trends looking out for extremes.

Rich

Sounds like value investing to me

I tend to trade on periods of weeks to months, which I feel is my time frame... As I had said in other threads, the advantage of trading on a week to two week time frame is that you are pretty much immune to the market forces... if the market is tanking, you pretty much can pick your stocks to resist those forces, on a short term basis. The idea is to find a stock with a catalyst that is impending that is coming soon enough where the fact that the market is tanking is overpowered by the greed of those traders who are waiting for that event.

g

p.s. I find it somewhat refreshing to come to a board of essentially non-traders... after spending so much time surrounded by daytraders, scalpers, momo players/etc etc... it is nice to see things from the point of view of people who probably have no idea of daytrading concepts like "subpennying"

fyi, good explanation on subpennying and flash trading...
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[ramirezhenry55]

The market is said to be picking up here in my country and 2011 is said to manifest a bull market, do you think guys I should buy a lot and hold it until the second quarter of 2011? It is my first time to invest in stocks if ever and I have a low risk appetite.Would appreciate any input.

[richrf]

The market is said to be picking up here in my country and 2011 is said to manifest a bull market, do you think guys I should buy a lot and hold it until the second quarter of 2011? It is my first time to invest in stocks if ever and I have a low risk appetite.Would appreciate any input.

Ultimately, it is all a guess because there are so many economic and psychological variables. I am short the market because I don't see where the fuel (money) is going to come from to push the market up now that the multi-trillion dollar government stimulus is over and it doesn't appear there is much of an appetite for trillions of dollars of more government debt spending (including the trillions that the Federal Reserve threw into the market).

But this is all a guess.

Rich