? Best simple reference to dissuade a day trader

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Lafder
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? Best simple reference to dissuade a day trader

Post by Lafder »

No it is not me!!

But I know someone who is convinced he is smart enough to make a few hundred dollars- couple thousand dollars a day trading individual stocks.

The idea is so clearly and inherently a terrible idea to me that I do not know where to begin to give him something to read to convince him he is wrong about the benefits of his stock trading. Just me telling him gets a "but you don't know as much as I do, I have a method."

About 10 years ago he was basically addicted to day trading and lost more $ than he has now. He has convinced himself he is using a different method of assessing value and buying and holding this time.

What would be the best and shortest convincing book, article, or webpage that might persuade him asset allocation then sitting tight is pretty guaranteed to leave him with more $ in the next few years than pursuing daytrading again?

Thank you for any tips on references that may help. I want the most convincing information possible in one place in case I can only get him to look at one thing.

Thank you for your help.
lafder
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Watty
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Re: ? Best simple reference to dissuade a day trader

Post by Watty »

A quick Google found this.

http://www.gamblersanonymous.org/ga/content/about-us

http://www.gamblersanonymous.org/ga/con ... -anonymous

In the fine print of their web sites many state lotteries also fund programs for people with gambling problems.
gtmn
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Re: ? Best simple reference to dissuade a day trader

Post by gtmn »

The best reference will probably be his actual track record.

It sounds like he's convinced he's smarter than the market, so he should hold himself accountable and track his portfolio and compare it to an appropriate benchmark, such as VFINX or VTSMX. If he includes commissions and taxes and still beats the market, then my next question would be how much time did he spend to earn that extra return? How much did he get paid per hour to trade? Would he do better by focusing on increasing his earnings through professional development or by saving more money while he invests in broad index funds?

Most of the people I knew who got hooked on trading never compared their actual results to the market return. In a bull market their gains made them feel brilliant and only when they lost a boat load did they reconsider their strategy.

One of my favorite games to play with active investors is after they brag about their return, I pull up the CAGR Calculator on MoneyChimp to show them what they would've earned over the same time period invested in the S&P500 fund. http://www.moneychimp.com/features/market_cagr.htm
It's usually a very humbling experience. (I only do this with people who urge me to follow them down non-BH paths.)
lawman3966
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Re: ? Best simple reference to dissuade a day trader

Post by lawman3966 »

Your post stole my thunder.

About a year ago, a friend of mine lost a job that will now be very difficult to replace. (He's about 50 now, which doesn't help).

He also day trades, using programs that show fancy colorful charts showing what he should or shouldn't bet on.

He recently told me that the "trading action" was shifting from one stock market sector to another, and that he therefore had to go where the action was.

Thus, it seems that the traders are a giant poker party that can only operate where the party is at any given moment, and that they only win or lose money from/to each other, rather than from a broader pool of longer term investors.

Seems to me that mathematical inherency is the best indicator that they can't all win. (Reminiscent of Bogle's "Relentless rules of humble arithmetic"). (And, of course, trading costs and taxes tend to move all of them toward losing money in the long run). Even assuming that some skill is involved, the more experienced the entire trading pool becomes, the more difficult it will therefore be to outfox the average investor in the pool. So far, my friend is unpersuaded that it's a losing proposition, but perhaps your friend will see this differently.
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ResearchMed
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Re: ? Best simple reference to dissuade a day trader

Post by ResearchMed »

Does the Day Trader WANT to be dissuaded or even entertain any alternate "strategies"?

Reminds me of the old light bulb joke:

"How many Martians does it take to change a light bulb?"


"It doesn't matter unless the light bulb WANTS to change."

RM
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riptide
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Re: ? Best simple reference to dissuade a day trader

Post by riptide »

Buy "intelligent investor" by Graham for him, or lend it to him. I had a (I believe spiritual experience) experience when stopping at a barnes & noble bookstore while traveling up I-95 for a break. I went in just to take a break and walk around, stopped at the finance section and looked at "the intelligent investor" and in 30 secs I bought it. I had traded and bought individual stocks several times a week, lost about $2000.00 in a year doing so. I was very excited about it, and checked the market everyday ( I still do this). I had inherited the stocks (individual stocks) and was very attached to them and still did not know much about what I was doing. I luckily sold some shares in 2013 and made a down payment on a new home, and paid off a car. I luckily made money and it has now grown back to before I sold the shares in value! But, I have been wanting to adopt Graham's theory of investing for months now. I just couldn't do it. I loved individual stocks and etf's! I then found boggleheads through a local advisor that told me "he could tell I wanted to manage my own investments". My father used transfer agents with his individual companies that I inherited and I did this as well. Well, I finally did it! I sold all the individual stocks exept keeping 5% of the total portfolio in these stocks :shock: I am a little sad (sorry Dad) as these companies came down from my grandparents to my parents to me and my sister. But now, I am investing in Vanguard Total market index fund, Total world vanguard fund, Vanguard Reit, Vanguard small cap Index, Vanguard Bonds(I already have U.S. Savings Bonds EE that were given to me.
So, Graham's book changed my life, so I suggest this for your friend.
Brokerage account-100% stocks | VG total Market 55% | VG small cap value 20% | VG Reit index 25% | | TSP Account 75C/25S | C Fund75%, S25%, | | Bonds: U.S. Treasury 5 year Note, 1 year T Bill
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prudent
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Re: ? Best simple reference to dissuade a day trader

Post by prudent »

In my experience, you can't argue with a gambler who is iron-clad certain he/she has a "system". Put the shoe on the other foot - if he tried to convince you that YOUR "system" didn't work, you wouldn't listen, because you are convinced it does.

If Warren Buffett himself told your friend he was wrong, he still wouldn't listen because he knows Warren doesn't know anything about day trading. That's why he won't listen to you or any resources you recommend.

If he does poorly, he will blame it on his poor execution of the foolproof system. He's a gambler, not an investor. You live in two different worlds.
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cheese_breath
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Re: ? Best simple reference to dissuade a day trader

Post by cheese_breath »

Say you convince him to change. Are you ready to handle the abuse when he tells you of stocks jumping 50% - 100% that he would have bought if he wasn't stuck in that stupid index fund?
The surest way to know the future is when it becomes the past.
dbr
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Re: ? Best simple reference to dissuade a day trader

Post by dbr »

Everyone I know who has engaged in day trading has been so convinced that they are smart enough and have a system that is good enough that they are immune to suggestions otherwise.
YttriumNitrate
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Re: ? Best simple reference to dissuade a day trader

Post by YttriumNitrate »

As others have pointed out, you won't succeed in convincing someone that thinks they have a winning system. The best you can hope for is to convince them to take some of their winnings off the table as they are on the way up, and hope they don't raid those funds on the way down. Something with a high hassle factor for selling would be ideal for the off the table money.
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Taylor Larimore
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Day Trading Quote

Post by Taylor Larimore »

Lafder wrote:.
What would be the best and shortest convincing book, article, or webpage that might persuade him asset allocation then sitting tight is pretty guaranteed to leave him with more $ in the next few years than pursuing daytrading again?
Lafder:

Show him this quote from our Bogleheads' Guide to Investing:
Terry Odean and Brad Barber, two professors at the University of California, did a study of 66,400 investors between the years 1991 and 1997 to learn how trading affected those investors' returns. They found that buy-and-hold investors outperformed the most active traders by a whopping 7.1% a year (before taxes).
Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
RadAudit
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Re: ? Best simple reference to dissuade a day trader

Post by RadAudit »

Google "Day Trader" and then - you may want to provide him ample space after this - you might want to google "Day Trader shoots"
FI is the best revenge. LBYM. Invest the rest. Stay the course. Die anyway. - PS: The cavalry isn't coming, kids. You are on your own.
Tanelorn
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Re: ? Best simple reference to dissuade a day trader

Post by Tanelorn »

Some people really do make that kind of money. It doesn't sound like your friend is one of them. I would suggest telling him to start with a moderate amount of money and not to add any more to the account. Then it will be clear from the account value whether he's making or losing money.
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CABob
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Re: Day Trading Quote

Post by CABob »

[quote="Taylor Larimore]Show him this quote from our Bogleheads' Guide to Investing:
Terry Odean and Brad Barber, two professors at the University of California, did a study of 66,400 investors between the years 1991 and 1997 to learn how trading affected those investors' returns. They found that buy-and-hold investors outperformed the most active traders by a whopping 7.1% a year (before taxes).
While I agree that that study is very informative, I am afraid that the OPs friend would have the comeback that he believes that he is one that will outperform the B&H investors.
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Re: ? Best simple reference to dissuade a day trader

Post by technovelist »

If people believed statistics on opening a small business, they wouldn't do it: they all think they are the exception who will succeed.
The same applies here.

Unfortunately, I have an acquaintance who is doing the same thing, but with his wife's life savings. She wouldn't listen when my wife (her best friend) warned her how dangerous this is.

I hope it works out for them but I know how unlikely that is...
In theory, theory and practice are identical. In practice, they often differ.
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Re: ? Best simple reference to dissuade a day trader

Post by texasdiver »

I have various friends and family who have done all manner of ridiculous, stupid, and risky things with their money: multi-level marketing schemes, strange precious metals mining schemes, highly-leveraged house flipping schemes at the peak of the bubble, expensive and worthless online degrees from fly by night for profit colleges, selling everything to prepare for doomsday, and so forth.

At some point you just have to step back The more you try to convince them otherwise the more defensive they get. Weigh in with your opinion if asked, or if it is appropriate. After that you pretty much have to just shrug and say "That's not what I would do but more power to you...hope you can make it work"
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JoMoney
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Re: ? Best simple reference to dissuade a day trader

Post by JoMoney »

Lafder wrote:...What would be the best and shortest convincing book, article, or webpage that might persuade him asset allocation then sitting tight is pretty guaranteed to leave him with more $ in the next few years than pursuing daytrading again?...
I'm quite fond of Warren Buffett's Gotrocks Family "Parable"
http://johncbogle.com/wordpress/wp-cont ... %20one.pdf
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
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LowER
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Re: ? Best simple reference to dissuade a day trader

Post by LowER »

Stock gambling for an individual is mostly faith based. The closest analogy to faith-based decision making is religion. Can you convince someone to change their religion? Should you try? Arguing faith-based assumptions is usually akin to losing a battle before it's fought, and frequently ends in a worse position than where you started. It's a bit like supplements too. Could you have convinced someone 10 years ago that they weren't going to live to 150, all the while vibrant and fertile, and that that prediction may not be reasonable? I doubt it, but 10 years later and $10,000 worth of supplements later, you're a genius, but the facts haven't changed, nor has their individual longevity, but a lot of sharks are mourning their loss of cartilage.

My point: arguing against faith-based anything usually results in heels dug in further than they were before your well-meaning intervention.

I do admire your intentions though.
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Re: ? Best simple reference to dissuade a day trader

Post by Johno »

technovelist wrote:If people believed statistics on opening a small business, they wouldn't do it: they all think they are the exception who will succeed.
The same applies here.
I think that's a good example because it illustrates the other side of the coin. Obviously some small businesses do succeed, many in absolute number, and not all by random chance. Luck helps in a small business, but a viable plan, adequate capital and liquidity, and general competence have a large influence as well. However when it comes to individual trading, some people appear convinced that *nobody* succeeds, or only purely by luck.

If you have to give simple unequivocal advice to a broad cross section of individual investors whether to trade or not, then the clear answer is: don't. That's the right advice for most people, and it's doubtful that it's outright harmful advice for anybody likely to listen.

But the statement or implication that nothing but buy and hold can possibly work for individual investors except by random chance is much more ambitious, and not obvious IMO. Although granted, it's not as obviously wrong as saying nobody can succeed in a small business expect by random chance.
jackpullo997
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Re: ? Best simple reference to dissuade a day trader

Post by jackpullo997 »

Some people make $10,000,000 a year running restaurants.
Others just get by. Others lose money.

This is an index investing forum, and you will never get truly objective advice here.
Most people here probably don't even know what real daytrading entails.

What do you think HF trading is about?
When there is an institutional block on the bid for 50,000 shares, there is virtually zero downside for the next minute.
You just do this a few times a day.
Some of my seasoned daytrader friends just trade a few hours a day,
and the rest is spent on hobbies and time raising their children.

If you know what you're doing, daytrading is a viable way to make a living.
If you're just a gambler, well, that will become a problem.

I personally know several people who have daytraded for a living since the late 1990s.
That's 15 years of grinding out a living.
They make great income and provide their families with a very nice upper middle class lifestyle.
Others retired with millions in profits before tiring of the grind and moving onto other pursuits.

You don't dissuade anyone from doing what they plan to do.
Your friend already knows the risks.
The answer to this thread is "Wish him well and stay out of his business."
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meowcat
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Re: ? Best simple reference to dissuade a day trader

Post by meowcat »

The bottom of the ocean is littered with sunken day trading ships. Very few remain afloat even after a very short period of time. I do not believe there are many long term day trading ships afloat.
Last edited by meowcat on Sat Aug 02, 2014 12:14 pm, edited 1 time in total.
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ginmqi
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Re: ? Best simple reference to dissuade a day trader

Post by ginmqi »

gtmn wrote:The best reference will probably be his actual track record.
Exactly.

Unfortunately the greatest argument against his delusion is his own time....as years pass by and he underperforms the market he would have lost valuable time that should've been invested in the market...not his own illusion of knowing something the market doesn't.

Give him a 5 year challenge. Track how your index fund performs vs how he performs. And then hopefully he'll see the light. :sharebeer
jackpullo997
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Re: ? Best simple reference to dissuade a day trader

Post by jackpullo997 »

meowcat wrote:The bottom of the ocean is littered with sunken day trading ships. Very few remain afloat even after a very short period of time. I do not believe there are many long term day trading ships afloat.
Do you have actual evidence for this, or are you just parroting what you heard everyone else say ?
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ginmqi
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Re: ? Best simple reference to dissuade a day trader

Post by ginmqi »

jackpullo997 wrote:Do you have actual evidence for this, or are you just parroting what you heard everyone else say ?
A certainly interesting question to bring up in response to a most certainly emotional statement that appeals to the philosophy of Bogleheads, who naturally would despise anything to do with "day trading." It is no doubt that day traders do and are making a living. I've seen a nice documentary about the life of a trader whose living is dependent upon that.

Through my cursory search, there appears to be some papers regarding analyzing the profitability of day traders...

http://www.iassa.co.za/wp-content/uploa ... -final.pdf
Although we use minimum transaction costs to measure the net profitability of day trading, the empirical results suggest that day trading is generally not profitable and that day traders engaging in frequent and large day trades are more likely to face losses.
Interesting paper/commentary on how the rise of discount, internet trading websites affecting investors and the market:
http://faculty.haas.berkeley.edu/odean/ ... vestor.pdf
By one account, every on-line investor has access to over three billion pieces of financial data; those who are willing to pay have access to over 280 billion pieces.

However, when people are given more information on which to base a forecast or assessment, their confidence in the accuracy of their forecasts tends to increase much more quickly than the accuracy of those forecasts (Oskamp, 1965; Hoge, 1970; Slovic, 1973; Peterson and Pitz, 1988). In fact, at some point, actual predictive skill may decline as information rises, due to information overload (Stewart, Heideman, Moniger and Reagan-Cirincione, 1992; Keller and Staelin, 1987). Thus, additional information can lead to an illusion of knowledge.
In our research,we find that investors who trade more actively tend to earn lower returns (Barber and Odean, 2000b; Barber and Odean, 2001). For example, a subsample of active traders at one nationwide discount broker lagged the return on the market by 6 percent annually from 1991 to 1996 (Barber and Odean, 2000b).
But this is not knocking day trading. I think this means that it's a bit misleading to use the SP500 market returns to measure the performance of individual traders if that individual trader's goal is not retirement savings in 35 years BUT...if that individual trader is doing it as a living. There's a big difference.

One has to be aware of the fact that if I was a day to day trader and I need to pay the bills and make that car payment...I would not neccessarily care if I under-perform the market by a certain % points. If at the end of the month and I made enough nominal money on the trades and I can pay the mortgage and cars and food and then put some away in savings and then go out to eat or watch some movies....hey I'm good. And if at the end of the year SP500 returned 15% but I only got 10% myself...I would not care too much because if I made money then that's my job and that's my career and I've got an income stream...just like the guy next door whose making a salary making however much each month.

So the question really has to be if someone is really into day trading as a job or if that's what they want to do with their retirement savings....if the latter is the case then that person has to be very careful to not gamble in the Wall Street Casino. If they are day trading as a career then that's different story.

So you can either put it into an index fund and then just set it and forget so you can devote time to other things.....OR you should really devote time into studying day trading and get into it. Half-assed efforts by overconfident "jocks" who THINK they know what they are doing are probably going to be whooped pretty badly.

But with respect to how many people enter day trading and then quit/die...that would be a more sociological study. I haven't come across that but it'll be very interesting to see.

While I can feel myself being biased against day trading, I am also a man of evidence, science and facts. And if there are evidence to suggest that if, on average, people who take up day trading and "learn" the trade and execute the trade properly....that this is a viable career option (such as going to college to get a MD/JD/MS/etc.) and a steady income stream overall then that would be interesting to see.

Maybe if there's a prospective cohort study where you can round up a large group of beginner day traders and then follow them forward in time to see how they fare in the next 10-20+ years.

And then can do another study where they round up all the current and existing traders and see how long they've been successful at day trading and how many people they knew got in/out of day trading.
Last edited by ginmqi on Sat Aug 02, 2014 1:47 pm, edited 2 times in total.
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Taylor Larimore
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Advice to day-traders: Don't do it.

Post by Taylor Larimore »

Bogleheads:

The United States is populated with millions of people who like to gamble and think they can beat the casinos, their state lottery, or the stock market. This is part of a warning for attorneys by the State of New Jersey Lawyer's Assistance Program:
Betting on the Market

One of the most common areas that affects lawyers and other professionals is the Internet. In addition to thousands of online gambling sites that offer traditional games such as blackjack and poker, the Internet allows for many other forms of gambling. Today, it is just as easy to place a bet on the New York Stock Exchange as it is on the New York Yankees. Unfortunately, some people "play" the stock market and approach the financial marketplace with the mentality of a gambler. All forms of investing involve risk to some degree. The problem gambler (mainly action-seeking gamblers) can find this risk as addictive as a game of high-stakes poker.

Online access has made market gambling easier, faster, and ultimately cheaper. According to experts, day trading is the prime example. Day trading is when investors buy and sell stocks dozens or even hundreds of times daily, closing out their positions at the end of the day. Day traders usually have no knowledge of the companies behind the stocks they trade, nor do they care to. Their only concern is the fluctuation in the companies' stock prices, which keeps them glued to their computer screens. The vast majority of day traders lose money, with some even losing their homes, financial assets, and lives. (underline mine)
My advice to day-traders: Don't do it.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
TravelerMSY
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Re: ? Best simple reference to dissuade a day trader

Post by TravelerMSY »

If you can't talk him out if it, at least try to convince him to trade in a fashion where he can't blow up his entire net worth. Put up a small fraction of his net worth in a trading account and agree to stop when it's gone,
jackpullo997
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Re: ? Best simple reference to dissuade a day trader

Post by jackpullo997 »

What does gambling have to do with daytrading? Do you think they are they playing stock bingo?
They just pick a random stock, close their eyes, set a timer for 5 minutes to sell, and and cross their fingers it goes up in that time?
To be blunt, I have a distinct impression most people here don't even know what daytrading actually is.

Do you realize that "prop trader" at Goldman Sachs (who undisputedly make billions) is no different than "day trader" (who undisputedly always loses everything and ends up homeless)
Yes, they do the same thing. They watch the market and take on short term positions.
Why is one GUARANTEED to be profitable, while the other is GUARANTEED to lose (like it's common sense!)

Correct, many people are bad traders. They buy high, and sell low.
Likewise, most people are bad at marriage.
However, to say that ALL people who marry will be divorced is nonsense.
There are tons of people who have made a consistent stable living at daytrading for the last 100 years.
Just b/c you don't know any, does not mean they don't exist.

Image
Johno
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Re: ? Best simple reference to dissuade a day trader

Post by Johno »

ginmqi wrote:
jackpullo997 wrote:Do you have actual evidence for this, or are you just parroting what you heard everyone else say ?
A certainly interesting question to bring up in response to a most certainly emotional statement that appeals to the philosophy of Bogleheads, who naturally would despise anything to do with "day trading."

One has to be aware of the fact that if I was a day to day trader and I need to pay the bills and make that car payment...I would not neccessarily care if I under-perform the market by a certain % points. If at the end of the month and I made enough nominal money on the trades and I can pay the mortgage and cars and food and then put some away in savings and then go out to eat or watch some movies....hey I'm good. And if at the end of the year SP500 returned 15% but I only got 10% myself...I would not care too much...
On the first point I agree. This topic brings out from Bogleheads both reasonable statements IMO ('don't trade is good advice for most people') but sometimes exaggerated reactions which go beyond the evidence ('virtually nobody can add to returns by doing anything but buy and hold').

However on the second point I quoted, though qualitatively I see your point, quantitatively I don't agree. If a person has enough capital to live on the likely market return on that capital they are better off, financially, sitting on their behinds and doing so than actively trading and making the same return -5%. Somebody who 'day trades'* for a real living probably doesn't have the capital to live off buy-and-hold returns but needs higher returns in compensation for their effort and expertise in trading.

It's just to even out the burden of proof to a fair middle ground. I agree with you there are sometimes unsupported statements about what 'overwhelming %' of people who try fail at 'day trading'*. But OTOH the reasonable argument in favor of supporting oneself primarily by day trading must IMO claim that some, albeit relatively small, % of people can earn far above market returns (through leverage, particularly) on a consistent enough basis. But surely there are also people in the middle, who trade partly as the cover story for the classic first question of all too much (IMO) modern American social interaction: 'what do you do?', but actually are supporting themselves mainly on wealth accumulated in previous work, perhaps as professional traders, or family money, etc. One often doesn't know the real financial situation of others.

*the other accurate point made earlier was about the vagueness of this term and how various people who have and haven't been involved in trading imagine different things when they hear it.
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Re: ? Best simple reference to dissuade a day trader

Post by Awsi Dooger »

jackpullo997 wrote:What does gambling have to do with daytrading? Do you think they are they playing stock bingo?
They just pick a random stock, close their eyes, set a timer for 5 minutes to sell, and and cross their fingers it goes up in that time?
To be blunt, I have a distinct impression most people here don't even know what daytrading actually is.

Do you realize that "prop trader" at Goldman Sachs (who undisputedly make billions) is no different than "day trader" (who undisputedly always loses everything and ends up homeless)
Yes, they do the same thing. They watch the market and take on short term positions.
Why is one GUARANTEED to be profitable, while the other is GUARANTEED to lose (like it's common sense!)

Correct, many people are bad traders. They buy high, and sell low.
Likewise, most people are bad at marriage.
However, to say that ALL people who marry will be divorced is nonsense.
There are tons of people who have made a consistent stable living at daytrading for the last 100 years.
Just b/c you don't know any, does not mean they don't exist.

Image
Exactly. Your posts in this thread have been excellent. There's so such thing as truly objective advice on this forum when applied to topics like this. It's pure scare tactics and a desperation to believe that all atypical speculators fail. The advice here is proper as what works best for most people most of the time. That's fine, as long as you understand that Jim Furyk has a bizarre golf swing that fortunately was never adjusted to standard, and likewise countless day traders and gamblers have instincts and systems and money management skills that allow them to consistently beat their markets.

It's indeed a case of never meeting anyone like that, so I'll prefer to believe they don't exist. And if there is evidence, we'll define it differently to creatively exclude that block.

In particular I had to laugh at the mocking of systems. Systems put up a force field against the typical faults of a speculator, the second guessing and overreacting. Systems are like the index funds of that craft. I've made tens of thousands of bets that I fully expected to lose but since they are part of a well researched block of systems I didn't hesitate at all. It's actually quite amusing when the system dominates and your subjectivity would have flopped. "Well, I'll be damned..."

I only know one guy in Las Vegas who mixes sports betting and day trading in near equal balance. His name is Jack from Minnesota. Penny stock specialist. He keeps a low profile by occasionally laughing at the stocks he purchased that plummeted to zero or near zero. But occasionally he shows me his printout of every purchase and the bottom line can be staggering. In that town it's important not to share your success with the wrong people.

For more than a decade Jack has tried to push me toward day trading, because I have very good instincts toward line movement in sports. There are a few ticket writers who write down every bet I make. One of them at Terrible's finally explained it: "You don't always win, but the line always moves in your direction." Jack insists day trading is right up my alley but I've always emphasized to him that I can anticipate line movement in sports for the simple reason that I am interested in the teams, players and variables involved. None of that transfers to investing. I encountered so many crooked back room practices while working at the Horseshoe that I soured of corporations in general.
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Taylor Larimore
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Best simple reference to dissuade a day trader

Post by Taylor Larimore »

Lafder:

As excellent reference for studies and research about Day Trading is Investors Home. This is their conclusion:

For the typical retail investor, day trading isn't investing, it's gambling. If you want to gamble, go to Las Vegas; the food is better.

Do Day Traders Make Money?

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
jackpullo997
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Re: Best simple reference to dissuade a day trader

Post by jackpullo997 »

Taylor Larimore wrote:Lafder:

For the typical retail investor, day trading isn't investing, it's gambling. If you want to gamble, go to Las Vegas; the food is better.
The following would be more accurate, based on the professional traders I know.
For the typical professional trader, trading isn't gambling, it's trading. When they want to gamble, they go to Las Vegas

Again, the Boglehead naivete towards what professional day traders even do for a living is amusing.
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Re: Best simple reference to dissuade a day trader

Post by jackpullo997 »

Taylor Larimore wrote:Lafder:

Do Day Traders Make Money?

Best wishes.
Taylor
That link is about 15 years old, and totally outdated. They are discussing SOES trading in the days before decimlization.
SOES market making was the advent of the first wave of electronic day traders. Yes, day traders were market makers.
Let's pretend it is still 1998, and that's what a day trader does.
Isn't it funny how a "market marker" will make money hand over fist, day in and day out....yet a "day trader" is somehow a degenerate gambler who ends up homeless. LOL!

That said, did you notice this part? (Of course, you didn't) Richard Dennis described an experiment where 40 of 1000 applicants where chosen and 23 were eventually trained. According to Dennis "It’s frightening how well it worked." 3 dropped out, but the successful 20 (known by many as the "turtles") averaged 100% profits per year.

We can close this thread b/c no one here apparently knows what a day trader actually does.
Last edited by jackpullo997 on Sun Aug 03, 2014 1:37 pm, edited 4 times in total.
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nedsaid
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Re: ? Best simple reference to dissuade a day trader

Post by nedsaid »

I don't know you can dissuade your friend, it often takes hard experiences in the markets to teach such people a lesson. The problem is that your brain will see random data and want to find order in it. One will fool himself into seeing patterns that don't really exist.

That being said, there are people who are good at this. There are people who are professional traders. But they are in a very small minority of the population. Investment firms hire people with Math PhDs to try to find patterns in the market. An amateur day trader is up against very smart people who do this full-time and people who have more powerful computers and more powerful software.

It is hard enough to be a buy and hold stock picker, much harder still to be a successful trader. Reading about Peter Lynch, Warren Buffett, Chris Davis, John Templeton probably improved me as an investor but my account balances show that I never achieved their level of skill. I am probably an average investor with good behavioral characteristics.

Another reason to not do this is that short term thinking inflames the worst passions and emotions in an investor. Emotion is hard enough to deal with for a long term buy and hold investor. Day trading is a way of compressing human emotion and passion into shorter and shorter time periods. Investing based on adrenaline rushes is not a good idea. You need time and perspective to deal with the darker impulses of human nature, a short term time horizon does not give you enough time to deal with raw emotion and to look at things in perspective. In other words, this feeds a gambler's mentality.

The idea that an average investor is going to out think extremely bright people on Wall Street and out-compute Wall Street's computers with your PC at home is ridiculous. Your best shot at beating the averages is taking advantage of the extreme swings in human emotion or as Warren Buffett says, "Be greedy when others are fearful and fearful when others are greedy." But to do this, you have to not be swayed by emotional forces that are sweeping the rest of the market away. Much easier said than done.
A fool and his money are good for business.
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Re: ? Best simple reference to dissuade a day trader

Post by jackpullo997 »

Let me give you a very simple example of what sort of trading a day traders does.

While you're at work with your index ETFs invested in the general SPY, a professional day trader is watching a real time news feed.
Actually, he's not, b/c today, his feeds are automated.

Now, let's say the CEO of XYZ corp gets arrested.
Do you think the stock is going to skyrocket? No, within seconds, trader is shorting the stock.
He makes a quick 5% in the matter of 30 mins.
It's guaranteed money, and 1000x safer than investing blindly with buy and hold.
Look at the Sharpe Ratio of a day traders bankroll and your head will explode.

He does these types of trades all year long, while you're at work.
While you get 5% a YEAR on a stock, he gets 5% in an hour, while you're at work.
He does this 100's of times a year. Do the math.
Day traders can have returns of over 100% to 200% a year b/c he is not trading scale like a mutual fund or hedge fund or ETF.
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Re: ? Best simple reference to dissuade a day trader

Post by nedsaid »

I am skeptical that day trading is as easy as described above, there are Wall Street firms and professional traders doing the same exact thing. The trouble with this type of reasoning is that stocks sometimes go UP on bad news or go DOWN on good news. If the bad news wasn't as bad as the market players expected, this could cause the stock to go up!! Conversely, if the good news wasn't as good as anticipated, the stock could go down! A Wall Street saying that applies here is "buy on the rumor and sell on the news." Easy to say but harder to execute in real life. Then there is the flash trading. By the time an amateur day trading hits the "short" button upon getting the news, others with faster computers and perhaps faster fingers have beaten him to it.

This would work better in the less followed and more thinly traded stocks. One could be like the teenage kid some years back who did the "pump and dump" scheme and did great until the SEC caught up with him. The kid would tout a stock on line and as buyers showed interest, he would be in there selling. Jim Cramer admitted on a show to spreading false rumors about certain companies to aid his trading strategies.

There are people who are good traders and people who day trade for a living. But they aren't many. Plus people will brag about their successes and mysteriously forget about their losses. The only way to really know if a person is doing as well as he or she brags is to look at the actual record of the trades. Many people have selective memories. Most people trying this will get outgunned by smarter and more experienced market professionals and outgunned by better computers and better software. I am not saying this can't be done, clearly people do this but the odds for success are not great.
A fool and his money are good for business.
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Re: ? Best simple reference to dissuade a day trader

Post by prudent »

Where are the day traders' yachts?

Heck, parade those winners in front of the typical audience that attends the typical get-rich-quick seminar and you couldn't keep the DVDs and books in stock. Seems crazy that hucksters are pushing "get rich in real estate" or MLM programs when they can be showing people how to be rich doing day trading and you don't even have to buy any inventory.
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Lafder
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Re: ? Best simple reference to dissuade a day trader

Post by Lafder »

Wow,thank you for the thought provoking comments.

I liked the analogy of many marriages fail, doesn't mean don't get married, since some marriages succeed. Some daytraders do succeed. It is the majority that give me the bad impression. And of those that are losing over time, I would say none are true professionals even though they think they know more than I think they do.

This guy is not in even a semipro investing category. He has a history of previously daytrading in a gambling style down to near zero the college accounts for his kids set up by the grandparents (this makes me sad for the kids that this opportunity for them was not preserved). Actually, I believe some casino gambling plus daytrading was involved in blowing through the kids college $. He is not financially responsible and has been supported by family for years. He would admit he is not good with money and has a spending problem. This guy is not bogleheadish with his money. He is on his 3rd new car in the past 3 years, repeatedly trading in at huge losses for various reasons. ((He is a really nice guy and does love his kids. But he is also unrealistic about his ability to "make money" and truly thought he would end up with larger college accounts after he invested. And then got stuck chasing his losses and did not stop in time to save much at all. 6 figures ended up low 5 figure. This was all before I knew him))

Of the handful of people I have met who "daytraded" = frequently bought and sold stocks and watched the market daily, they either spent down to nothing, decided they were losing afterall and quit, or like this guy is in the early stages of still having money and thinking he will succeed.

I had sent him an email with some quotes from here in the first days I posted, and he agreed to pause the daytrading for now. He is still holding a chunk of stocks that are his main holding to be sold this year per parameters he has set. He doesn't call that day trading since he plans to hold it for months.

I was not the only person he trusts telling him it was a bad idea, so he has slowed down for now. I also told him the car buying and trading in was a bad $$ idea and that has not slowed him down on cars as far as I can tell.

I have a hard time not speaking up when I see something so bad/risky from my perspective.

Believe it or not I do back off eventually. I figure the time for me to speak up is when he still has savings to fall back on if he stops. It is too late if after he spends/loses it all I tell him I thought it was a bad idea.

I know some of you think it may be best not to offer any suggestions or opinions to other adults. I get that. But, I also believe there is a selection process and anyone who does not want my feedback can just stay farther away or not tell me their personal information in the first place :)

Thank you for the thoughtful replies to each and every one of you! I read each post in detail.
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Re: ? Best simple reference to dissuade a day trader

Post by Lafder »

Jackpullo997,
I am very interested in hearing your definition of daytrader. I absolutely may be using it wrong.

In fact when I told this guy I was concerned about his daytrading he assured me he was no longer daytrading since he was holding for more than a day.

I admit I do not understand fully what it means. I was taking it to mean people who think they can watch the market and buy and sell the same stocks within a few days time and think they are making money. And it usually includes leveraging the money they have. So they can end up in more debt than what they started with.

I am sure this description would make a professional daytrader cringe.

Can you explain what a professional daytrader does, and also what most people mean by "daytrading" which I am guessing is quite different.

Thank you for your time to post and efforts to explain if done right, daytrading can be successful.

lafder
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Re: ? Best simple reference to dissuade a day trader

Post by fourwedge »

Daytraders always sell within a day and never hold overnight. SwingTraders hold for more then a day up to several weeks or a month.
Max out your tax sheltered retirement accounts with inexpensive, well diversified, index funds and you will beat 90% of all investors.
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Mr. Bogle's most important words of wisdom.

Post by Taylor Larimore »

Bogleheads:

It will benefit us to remember these exact words (in Common Sense on Mutual Funds) from a gentleman who knows more about investing than we do:
Stay the course. No matter what happens, stick to your program. I've said "Stay the course" a thousand times, and I meant it every time. It is the most important single piece of investment wisdom I can give to you.
Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
jackpullo997
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Re: ? Best simple reference to dissuade a day trader

Post by jackpullo997 »

nedsaid wrote:I am skeptical that day trading is as easy as described above, there are Wall Street firms and professional traders doing the same exact thing. The trouble with this type of reasoning is that stocks sometimes go UP on bad news or go DOWN on good news. If the bad news wasn't as bad as the market players expected, this could cause the stock to go up!! Conversely, if the good news wasn't as good as anticipated, the stock could go down! A Wall Street saying that applies here is "buy on the rumor and sell on the news." Easy to say but harder to execute in real life. Then there is the flash trading. By the time an amateur day trading hits the "short" button upon getting the news, others with faster computers and perhaps faster fingers have beaten him to it.

This would work better in the less followed and more thinly traded stocks. One could be like the teenage kid some years back who did the "pump and dump" scheme and did great until the SEC caught up with him. The kid would tout a stock on line and as buyers showed interest, he would be in there selling. Jim Cramer admitted on a show to spreading false rumors about certain companies to aid his trading strategies.

There are people who are good traders and people who day trade for a living. But they aren't many. Plus people will brag about their successes and mysteriously forget about their losses. The only way to really know if a person is doing as well as he or she brags is to look at the actual record of the trades. Many people have selective memories. Most people trying this will get outgunned by smarter and more experienced market professionals and outgunned by better computers and better software. I am not saying this can't be done, clearly people do this but the odds for success are not great.
You people seem to keep saying a day trader is no match for "the big boys".
What exactly do you think the big boys have that a day trader has no chance of beating?
Do you have some outdated 1980s notion of a room full of WOPR computers? LOL.
A day trader is not doing HFT. "The big boys" are no different than day traders.

Again, you know very little about the subject you speak of, and are just parroting what you read in some efficient market indexing book.
Efficient market has long been debunked, and this is a form of brainwashing.
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Re: ? Best simple reference to dissuade a day trader

Post by jackpullo997 »

prudent wrote:Where are the day traders' yachts?
I know quite a few day traders who have been trading since the mid 90s SOES days.
They live a very comfortable $500k caliber lifestyle, and their kids attend the best school districts.
And yes, some even own boats and planes.
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Re: ? Best simple reference to dissuade a day trader

Post by jackpullo997 »

Lafder wrote:This guy is not in even a semipro investing category. He has a history of previously daytrading in a gambling style down to near zero the college accounts for his kids set up by the grandparents (this makes me sad for the kids that this opportunity for them was not preserved). Actually, I believe some casino gambling plus daytrading was involved in blowing through the kids college $. He is not financially responsible and has been supported by family for years. He would admit he is not good with money and has a spending problem. This guy is not bogleheadish with his money. He is on his 3rd new car in the past 3 years, repeatedly trading in at huge losses for various reasons. ((He is a really nice guy and does love his kids. But he is also unrealistic about his ability to "make money" and truly thought he would end up with larger college accounts after he invested. And then got stuck chasing his losses and did not stop in time to save much at all. 6 figures ended up low 5 figure. This was all before I knew him))
lafder
[OT comments removed by admin LadyGeek]

He is not cut out for day trading, which is a very disciplined style of trading.
A professional day traders is a emotionless robot executing a few algorithms all day long, not a fist pumping chump in the movies.

If he wants to day trade, tell him this.
Take $25k and trade every day for 3 months.
He goes flat before close each day.
By the 3rd month, he should at the most have 1 or 2 losing days.

The pro day traders I know would go MONTHS before having a single down day.
That is not low risk and Sharpe real day trading is.
They consistently make 1% a day, all year long.
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Re: ? Best simple reference to dissuade a day trader

Post by crake »

jackpullo997 wrote:
Lafder wrote:This guy is not in even a semipro investing category. He has a history of previously daytrading in a gambling style down to near zero the college accounts for his kids set up by the grandparents (this makes me sad for the kids that this opportunity for them was not preserved). Actually, I believe some casino gambling plus daytrading was involved in blowing through the kids college $. He is not financially responsible and has been supported by family for years. He would admit he is not good with money and has a spending problem. This guy is not bogleheadish with his money. He is on his 3rd new car in the past 3 years, repeatedly trading in at huge losses for various reasons. ((He is a really nice guy and does love his kids. But he is also unrealistic about his ability to "make money" and truly thought he would end up with larger college accounts after he invested. And then got stuck chasing his losses and did not stop in time to save much at all. 6 figures ended up low 5 figure. This was all before I knew him))
lafder
This guy sounds like a degenerate gambler, not a trader.
He is also stupid with basic finances with his car buying.

He is not cut out for day trading, which is a very disciplined style of trading.
A professional day traders is a emotionless robot executing a few algorithms all day long, not a fist pumping chump in the movies.

If he wants to day trade, tell him this.
Take $25k and trade every day for 3 months.
He goes flat before close each day.
By the 3rd month, he should at the most have 1 or 2 losing days.

The pro day traders I know would go MONTHS before having a single down day.
That is not low risk and Sharpe real day trading is.
They consistently make 1% a day, all year long.
Jack,

You claim your friends consistently make 1% per day. This is 250% per year. The highest paid hedge fund manager is David Tepper of Appaloosa Management. He took home 3.5 billion dollars in salary in 2013. Here is a summary of the returns of the Palamino Fund "The Palomino Fund from its inception in 1995 to 1998 had a 25 percent return. After Russia defaulted, the fund lost 49 percent of its value between February to September 1998.[3] The fund returned –26.7% percent in 2008 and 117.3 percent in 2009."

Why do your friends choose to live a paltry 500k per year lifestyle when it seems evident that they are worth at a minimum twice as much as David Tepper or 7 billion dollars per year? If they are not fond of the work-life balance at a hedge fund perhaps they could only work half the days the market is open and return 125% instead of 250% and receive a 3.5 billion dollar salary.
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Re: ? Best simple reference to dissuade a day trader

Post by postingname »

OP, how about a quote from Jesse Livermore? From Reminiscences of a Stock Operator:

“After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight!”

He's arguing against day-trading and for longer-term trading, which may not be the message you're trying to convey, but if the most famous trader of all times recommends against day-trading, maybe your friend will listen. (Just don't tell your friend that Livermore eventually ended up killing himself with a gun. ;) But to be fair, that wasn't necessarily tied to his trading life.)
Tanelorn
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Re: ? Best simple reference to dissuade a day trader

Post by Tanelorn »

crake wrote:You claim your friends consistently make 1% per day. This is 250% per year.

Why do your friends choose to live a paltry 500k per year lifestyle...
It's a lot more than 250% if you compound it (more like 1100%), but therein lies the problem. Most shorter term trading isn't scalable so you can't compound the gains. If you assume someone can make $500k/year and 1%/day per Jack's comments, with 250 trading days that's $2000/day. That means that you only need $200k in capital to invest, and less if you count leverage. What do you do with the remains of that $500k after taxes and living expenses? Presumably you invest it in something else, maybe index funds or whatever else.
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Re: ? Best simple reference to dissuade a day trader

Post by gtmn »

Two of the most valuable lessons I've learned from Bogle and this forum are:

1. Investing is about meeting long term goals, not about beating the market or making fast money. The trader OP is talking about doesn't seem to have a clearly defined long-term goal, just a short term desire to make money. Where will he end up when he meets life's major milestones like paying for college or retirement? He seems set up for a binary outcome: his system wins and he makes it big, or his system fails and he loses big. Nothing increases your odds of meeting long-term goals like BH investing while also minimizing your odds of eating dog food in retirement.

2. You have to know who you are as an investor. Most traders I've known have a distorted self-concept. They are ensnared in many of the behavioral traps of short-term investing and trading. (I suggest reading Jason Zweig's book about this.) Long ago I figured out that I'm not smart enough to trade the market and that my odds of meeting my goals significantly increase if I follow a BH plan and stay the course. (Does anyone remember that scene from Cheers where Coach is trying to express his feelings to Irene? "Irene, I'm not a rich man, I'm not a young man, I'm not a handsome man, I'm not a tall man, I'm not a strong man, I'm not a talented man, I'm not a well travelled man, I'm not a smart man, I'm not a milk man, I'm not a fat man, I'm not a gingerbread man, I'm not a... " Well, I'm not quite that unsophisticated as an investor, but I've done much better by keeping it simple.)

We all have our favorite quotes about buy and hold versus trading. One of mine is from Charles Ellis, who says in his book "Winning the Loser's Game", "Day Trading is the worst of all: A sucker's game. Don't do it - ever."
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Re: ? Best simple reference to dissuade a day trader

Post by crake »

jackpullo997 wrote:Let me give you a very simple example of what sort of trading a day traders does.

While you're at work with your index ETFs invested in the general SPY, a professional day trader is watching a real time news feed.
Actually, he's not, b/c today, his feeds are automated.

Now, let's say the CEO of XYZ corp gets arrested.
Do you think the stock is going to skyrocket? No, within seconds, trader is shorting the stock.
He makes a quick 5% in the matter of 30 mins.
It's guaranteed money, and 1000x safer than investing blindly with buy and hold.
Look at the Sharpe Ratio of a day traders bankroll and your head will explode.

He does these types of trades all year long, while you're at work.
While you get 5% a YEAR on a stock, he gets 5% in an hour, while you're at work.
He does this 100's of times a year. Do the math.
Day traders can have returns of over 100% to 200% a year b/c he is not trading scale like a mutual fund or hedge fund or ETF.
This is your example of how a day trader can make 200% per year? Wall street firms pay exorbitant amounts of money to get direct feeds from news companies http://online.wsj.com/news/articles/SB1 ... 0946606562? After the news comes in it is passed through a computer algorithm and trades are automatically executed. Your claim is that your friend sitting at home on his laptop reading news can somehow outperform the professionals?
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Re: ? Best simple reference to dissuade a day trader

Post by postingname »

crake wrote:
jackpullo997 wrote:Let me give you a very simple example of what sort of trading a day traders does.

While you're at work with your index ETFs invested in the general SPY, a professional day trader is watching a real time news feed.
Actually, he's not, b/c today, his feeds are automated.

Now, let's say the CEO of XYZ corp gets arrested.
Do you think the stock is going to skyrocket? No, within seconds, trader is shorting the stock.
He makes a quick 5% in the matter of 30 mins.
It's guaranteed money, and 1000x safer than investing blindly with buy and hold.
Look at the Sharpe Ratio of a day traders bankroll and your head will explode.

He does these types of trades all year long, while you're at work.
While you get 5% a YEAR on a stock, he gets 5% in an hour, while you're at work.
He does this 100's of times a year. Do the math.
Day traders can have returns of over 100% to 200% a year b/c he is not trading scale like a mutual fund or hedge fund or ETF.
This is your example of how a day trader can make 200% per year? Wall street firms pay exorbitant amounts of money to get direct feeds from news companies http://online.wsj.com/news/articles/SB1 ... 0946606562? After the news comes in it is arithmetically analyzed by software and trades are automatically executed. Your claim is that your friend sitting at home on his laptop reading news can somehow outperform the professionals?
I'm not the one you're addressing, but many day-traders simply trade the indices. Specifically, the e-mini, which is a small version of the S&P futures contract. With indices, they are less dependent on news than the ones who trade individual stocks. Not defending day-traders - just pointing out the instrument of choice of the ones who do it for a living.

Also, their goal is not to have success on every trade, but to have more winning trades than losing trades. So it's a different mind-set than with an investor who expects never to realize paper losses. Traders realize paper losses all the time. Or more accurately, traders with disicipline realize paper losses before they become too big. Again, a different mindset.

But the most successful e-mini traders hold for days or weeks, not a single day. Of all the trading types, day-trading is probably the most dangerous and least profitable for the average trader, and I'm guessing, even for the professional traders.
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Re: ? Best simple reference to dissuade a day trader

Post by Tanelorn »

crake wrote:This is your example of how a day trader can make 200% per year? Wall street firms pay exorbitant amounts of money to get direct feeds from news companies http://online.wsj.com/news/articles/SB1 ... 0946606562? After the news comes in it is passed through a computer algorithm and trades are automatically executed. Your claim is that your friend sitting at home on his laptop reading news can somehow outperform the professionals?
Your WSJ article says that firms were paying "thousands per month" for faster news feeds, which might add up to $50-100k/year in fees. That doesn't sound exorbitant even for this supposed trader making $500k/year.
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