Are there people who make a good living day trading-Is
there any way to find out? If it were possible for the average guy to
make a living this way, almost everyone would be doing it. You would
have millions of people quitting their jobs and selling their houses,
cashing in their 401(K)'s to do it.
I know there was a lot of day trading in the late 90s and most of them probably got wiped out when the bubble burst in 2000.
What about now though?
I know there was a lot of day trading in the late 90s and most of them probably got wiped out when the bubble burst in 2000.
What about now though?
Best Answer:
The State of Georgia pulled 100% of the brokerage account statements of
its citizens to analyze that question. 90% of their daytraders lost
100% of their money, while 1% were profitable on a consistent basis.
The answer is yes you can make a good living doing it, but the average guy cannot do it. They may get lucky from time to time, but the average person is fighting the mathematics of the situation.
Let me describe an example. You decide to trade XYZ stock and it has a bid of 9.95 and an ask of 10.05. You buy at 10.05 giving .10 to the market maker. The next bid is 9.97 and 10.06. You still are not profitable. Then someone sells at 9.97 and the new bid is 9.94 and 10.03. You are now at a loss, and so forth. Overcoming just 10 cents is hard in a short time period. To make day trading profitable, because you are depending on small change, you have to borrow a lot. So instead of having 10.50 at risk you 105.00 at risk of which 10.50 is yours. So, over the next several minutes, the price rises because of a series of buys to 10.06 and 10.11. You try and sell out, but the bid is only for 100 shares. You sell the 100 shares and the price falls to 10.04 and 10.11. You made a 1 cent profit and you are still on the hook for the rest. The market maker, in the mean time, has made 1.05 in spread commissions plus any per unit commisions you may pay to your broker. You have made a penny, you are nearly $100 in debt and someone else got the dollar you were trying to make.
Now, lets imagine you picked well and it turns into a hot stock and six months later it is selling for 19.99 and 20.00. The maker is now only making a penny. Why?
That is the dirty trick. By the time you have made it to 20, you will probably have paid $20 in commisions, had a 10 increase in value and made another dollar or two in bonus money, you are up $12 on a ten dollar gain, if you were careful and did a very good job. The maker is really happy though because they are up $10 on their inventory, you gave them another $20.
However, lets get back to the why question, why is the spread only one cent.
When stocks go hot, they get overvalued and the market maker whose job is to hold inventory knows this and reduces inventory. Traders take up the inventory risk buy you carrying the inventory for the market. The risk is higher, but the market maker is carrying only a fraction of the inventory having sold it to day traders at a profit. So while you have $10 in profits held in an over valued stock, the maker actually is holding a lot of cash. They actually cashed out of the stock, down to a point they can still perform their function. They are basically now a notary, verifying who the buyers and sellers are. They are collecting a notary fee.
Now that the market has lost systematic support by the market maker, it depends upon you actually being online and willing to buy or sell as needed. This means supply will come available of either dollars or shares, only as people provide it. So the stock becomes very volatile. Whereas it may have only moved a penny per trade before, it may move six or seven cents per trade now,..maybe even ten cents. But that is less per dollar exposed than the market maker was pocketing in spreads, and the maker keeps the penny.
So the stock is at 19.99 and 20.00, one minute later it is at 20.06 and 20.07. You are actually exposed at 200.00 and so you pocket .70 on the trade. However, since you plow it back in again, it is sort of invisible.
Now for the nasty part. The stock climbs to 25 over the next few weeks and day traders are selling back and forth, mostly to each other. Someone gets nervous and leaves, taking their money to another stock, then someone else finds they cannot make money today, so they leave. When there was a market maker for the stock, that maker would absorb those sells, but now the maker is gone, unwilling to be anything other than a notary. These sells pressure the stock downward, putting other leveraged traders in a bind and it begins unwinding quickly, all the while the market maker is watching and collecting wider and wider notary spreads, but not stepping in to support the market. The market reaches 23.10 and 23.25. Now day traders have such a large spread to overcome they cannot do it, so they all try and leave. The price begins collapsing and some day traders try to buy into it figuring it will go up and they stabilize the price at $18.10 18.25. The price trades sidways for a few days and the spreads narrow, but the old day traders were burned and the ones who stepped in find themselves in a losing postion. Some exit taking their losses and some try to expand their position to gamble to make the money back. Again, the market maker is not providing much support because the volume has fell with all the day traders gone, so the inventory is about the same, but the maker will step in to stabilize the market at about a 7 cent spread. This is too much for the day traders that are left because the volume is now too low to make money quickly and another sell off occurs to fifteen. Now, the market maker is upping inventory as the stock becomes more valuable (a drop in price is an increase in future return as returns are inversely related to prices) and normalcy is beginning to occur or worse, short sellers are entering the market to force the stock to say, $5, and the maker needs inventory to support their shorting operations. These are hedge funds however, small traders need not apply and supply of shares to short will be unavailable to the little guy.
So, over that time period, an ordinary buy and hold investor is up $5. You, on the other hand, are down 80% because you borrowed money to day trade. Worse, you can only deduct $2000 in investment losses on your taxes, so you may owe taxes on prior period gains, but not be able to fully offset the losses, making you borrow money to pay the IRS, depending upon the tax timing.
I have been a professional investor for years. STAY AWAY!
If you have to ask these questions, you are not prepared to operate in these markets.
I strongly recommend buying "The Intelligent Investor," by Benjamin Graham. Last published in 1972, it is still in publication and will be in publication in2072. Be the guy who made the $5 the easy way, not the guy who fights for each penny.
The answer is yes you can make a good living doing it, but the average guy cannot do it. They may get lucky from time to time, but the average person is fighting the mathematics of the situation.
Let me describe an example. You decide to trade XYZ stock and it has a bid of 9.95 and an ask of 10.05. You buy at 10.05 giving .10 to the market maker. The next bid is 9.97 and 10.06. You still are not profitable. Then someone sells at 9.97 and the new bid is 9.94 and 10.03. You are now at a loss, and so forth. Overcoming just 10 cents is hard in a short time period. To make day trading profitable, because you are depending on small change, you have to borrow a lot. So instead of having 10.50 at risk you 105.00 at risk of which 10.50 is yours. So, over the next several minutes, the price rises because of a series of buys to 10.06 and 10.11. You try and sell out, but the bid is only for 100 shares. You sell the 100 shares and the price falls to 10.04 and 10.11. You made a 1 cent profit and you are still on the hook for the rest. The market maker, in the mean time, has made 1.05 in spread commissions plus any per unit commisions you may pay to your broker. You have made a penny, you are nearly $100 in debt and someone else got the dollar you were trying to make.
Now, lets imagine you picked well and it turns into a hot stock and six months later it is selling for 19.99 and 20.00. The maker is now only making a penny. Why?
That is the dirty trick. By the time you have made it to 20, you will probably have paid $20 in commisions, had a 10 increase in value and made another dollar or two in bonus money, you are up $12 on a ten dollar gain, if you were careful and did a very good job. The maker is really happy though because they are up $10 on their inventory, you gave them another $20.
However, lets get back to the why question, why is the spread only one cent.
When stocks go hot, they get overvalued and the market maker whose job is to hold inventory knows this and reduces inventory. Traders take up the inventory risk buy you carrying the inventory for the market. The risk is higher, but the market maker is carrying only a fraction of the inventory having sold it to day traders at a profit. So while you have $10 in profits held in an over valued stock, the maker actually is holding a lot of cash. They actually cashed out of the stock, down to a point they can still perform their function. They are basically now a notary, verifying who the buyers and sellers are. They are collecting a notary fee.
Now that the market has lost systematic support by the market maker, it depends upon you actually being online and willing to buy or sell as needed. This means supply will come available of either dollars or shares, only as people provide it. So the stock becomes very volatile. Whereas it may have only moved a penny per trade before, it may move six or seven cents per trade now,..maybe even ten cents. But that is less per dollar exposed than the market maker was pocketing in spreads, and the maker keeps the penny.
So the stock is at 19.99 and 20.00, one minute later it is at 20.06 and 20.07. You are actually exposed at 200.00 and so you pocket .70 on the trade. However, since you plow it back in again, it is sort of invisible.
Now for the nasty part. The stock climbs to 25 over the next few weeks and day traders are selling back and forth, mostly to each other. Someone gets nervous and leaves, taking their money to another stock, then someone else finds they cannot make money today, so they leave. When there was a market maker for the stock, that maker would absorb those sells, but now the maker is gone, unwilling to be anything other than a notary. These sells pressure the stock downward, putting other leveraged traders in a bind and it begins unwinding quickly, all the while the market maker is watching and collecting wider and wider notary spreads, but not stepping in to support the market. The market reaches 23.10 and 23.25. Now day traders have such a large spread to overcome they cannot do it, so they all try and leave. The price begins collapsing and some day traders try to buy into it figuring it will go up and they stabilize the price at $18.10 18.25. The price trades sidways for a few days and the spreads narrow, but the old day traders were burned and the ones who stepped in find themselves in a losing postion. Some exit taking their losses and some try to expand their position to gamble to make the money back. Again, the market maker is not providing much support because the volume has fell with all the day traders gone, so the inventory is about the same, but the maker will step in to stabilize the market at about a 7 cent spread. This is too much for the day traders that are left because the volume is now too low to make money quickly and another sell off occurs to fifteen. Now, the market maker is upping inventory as the stock becomes more valuable (a drop in price is an increase in future return as returns are inversely related to prices) and normalcy is beginning to occur or worse, short sellers are entering the market to force the stock to say, $5, and the maker needs inventory to support their shorting operations. These are hedge funds however, small traders need not apply and supply of shares to short will be unavailable to the little guy.
So, over that time period, an ordinary buy and hold investor is up $5. You, on the other hand, are down 80% because you borrowed money to day trade. Worse, you can only deduct $2000 in investment losses on your taxes, so you may owe taxes on prior period gains, but not be able to fully offset the losses, making you borrow money to pay the IRS, depending upon the tax timing.
I have been a professional investor for years. STAY AWAY!
If you have to ask these questions, you are not prepared to operate in these markets.
I strongly recommend buying "The Intelligent Investor," by Benjamin Graham. Last published in 1972, it is still in publication and will be in publication in2072. Be the guy who made the $5 the easy way, not the guy who fights for each penny.
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