'Don't confuse day traders with serious investors'

'Don't confuse day traders with serious investors': Warren Buffett and Howard Marks will win over time, Princeton economist says

"I don't confuse day traders with serious investors," he said. "Don't be misled with false claims of easy profits from day trading."

The economist and author added that almost all individual traders suffer losses over time, highlighting three studies to support his claim:

• Active traders on Charles Schwab significantly underperformed a low-cost index fund over a six-year period.
• Less than 1% of Taiwanese traders consistently beat a low-cost ETF over a 15-year period, and 80% lost money.
• 97% of Brazilian day traders lost money, and just 1% earned more than the national minimum wage.

Malkiel also emphasized that savvy investors diversify and rebalance their holdings, manage their tax burdens, avoid trying to time the market, stick to their convictions, and use investment structures such as low-fee ETFs.

https://markets.businessinsider.com/news/stocks/warren-buffett-howard-marks-will-ultimately-beat-day-traders-malkiel-2020-6-1029321160

What is the difference between investing and trading?

Investing and trading are two very different methods of attempting to profit in the financial markets. The goal of investing is to gradually build wealth over an extended period of time through the buying and holding of a portfolio of stocks, baskets of stocks, mutual funds, bonds and other investment instruments. Investors often enhance their profits through compounding, or reinvesting any profits and dividends into additional shares of stock. Investments are often held for a period of years, or even decades, taking advantage of perks like interest, dividends and stock splits along the way. While markets inevitably fluctuate, investors will "ride out" the downtrends with the expectation that prices will rebound and any losses will eventually be recovered. Investors are typically more concerned with market fundamentals, such as price/earnings ratios and management forecasts.

Trading, on the other hand, involves the more frequent buying and selling of stock, commodities, currency pairs or other instruments, with the goal of generating returns that outperform buy-and-hold investing. While investors may be content with a 10 to 15% annual return, traders might seek a 10% return each month. Trading profits are generated through buying at a lower price and selling at a higher price within a relatively short period of time. The reverse is also true: trading profits are made by selling at a higher price and buying to cover at a lower price (known as "selling short") to profit in falling markets. Where buy-and-hold investors wait out less profitable positions, traders must make profits (or take losses) within a specified period of time, and often use a protective stop loss order to automatically close out losing positions at a predetermined price level. Traders often employ technical analysis tools, such as moving averages and stochastic oscillators, to find high-probability trading setups.

A trader's "style" refers to the timeframe or holding period in which stocks, commodities or other trading instruments are bought and sold. Traders generally fall into one of four categories:

Position Trader – positions are held from months to years
Swing Trader – positions are held from days to weeks
Day Trader – positions are held throughout the day only with no overnight positions
Scalp Trader – positions are held for seconds to minutes with no overnight positions

Traders often choose their trading style based on factors including: account size, amount of time that can be dedicated to trading, level of trading experience, personality and risk tolerance. Both investors and traders seek profits through market participation. In general, investors seek larger returns over an extended period through buying and holding. Traders, by contrast, take advantage of both rising and falling markets to enter and exit positions over a shorter timeframe, taking smaller, more frequent profits.


http://www.investopedia.com/ask/answers/12/difference-investing-trading.asp

Day trading: only two out of ten make money; fewer do so consistently

Conclusion

We analyze day traders in Taiwan.

1. Day trading is prevalent in Taiwan – accounting for more than 20 percent of total trading volume during our sample period.
- Individual investors account for virtually all day trading (over 97 percent).
- Day trading is heavily concentrated. About one percent of individual investors account for half of day
trading and one fourth of total individual investor trading volume.

2. Our analysis of performance indicates day trading is treacherous, but not entirely a fool’s game.
- Heavy day traders, as a group, earn gross profits (before transaction costs).
- Thus, heavy day traders do appear to have a trading advantage over other investors.
- The stocks bought by the most active day traders outperform those sold by 31 basis points per 21 day.
- Unfortunately, the gross profits of heavy day traders are not sufficiently large to cover reasonable estimates of transaction costs.
- Thus, as a group, they lose money.
- In contrast, occasional day traders experience both gross and net losses.
- The stocks bought by occasional day traders actually underperform those sold, even before considering
transaction costs.

3. There is considerable cross-sectional variation in the performance of day traders.
- Over the typical six month horizon, using lower range assumptions regarding transaction costs, less than 20 percent of day traders earn profits net of transaction costs.

4. These results paint a rather dim portrait of day traders. However, we do document a select few are able to consistently earn profits sufficient to cover transaction costs.
- We identify day traders who earn substantial profits over a six-month period and analyze the performance of their subsequent trades.
- These profitable day traders continue to earn stellar returns.
- The average day trader in this group earns a semi-annual income of over $NT 1 million from his day trading activity, though the group’s median income is a more modest $NT 126,000.
- The stocks they buy outperform those that they sell by 62 basis points per day.
- These profits survive transaction costs.
- In other words, there is strong evidence of persistence in the ability of day traders.

Our analysis makes clear the need for comprehensive risk disclosure.
Prospective day traders should be apprised of their likelihood of success: only two out of ten make money; fewer do so consistently.


http://faculty.haas.berkeley.edu/odean/papers/Day%20Traders/Day%20Trade%20040330.pdf

Most day traders, especially heavy day traders, lose money trading. Why do investors engage in such a wealth reducing activity?

Question:

There are more than 100 million people in the world engaging in trading everyday.
If trading do not work, why would there be so many people engaging in this activities everyday over long period of time?

WHY? I am puzzled too.


Most day traders, especially heavy day traders, lose money trading.
Why do investors engage in such a wealth reducing activity?

1. One possibility is that investors simply find day trading entertaining.
- Undoubtedly some investors do find day trading entertaining, but can entertainment account for the extent of day trading that we observe?
- Do day traders knowingly and willingly accept such large expected losses for fun?
- For all but the wealthiest investors, this would be a very expensive form of entertainment indeed.


2. Another reason why day trading might entice investors would be if it provided an appealing distribution of returns.
- People often display an attraction to highly skewed investments, such as lotteries, that have negative expected returns but a small probability of a large payoff.
- However, the day trading profits that we document are similar in magnitude to, and far less prevalent than, losses.
- Unlike lottery winners, day traders must succeed on repeated gambles in order to achieve overall success.
- Such repeated gambles do not tend to generate highly skewed distributions.


3. A final potential explanation for the prevalence of day trading is that most day traders are overconfident about their own chances of success.
- Several papers (e.g., Odean (1998, 1999), Barber and Odean (2000, 2001)) argue that overconfidence causes investors to trade more than is in their own best interest.
- Overconfident day traders may simply be bearing losses that they did not anticipate.
- While day traders undoubtedly realize that other day traders lose money, stories of successful day traders may circulate in non-representative proportions, thus giving the impression that success is more frequent that it is.
- Heavy day traders, who earn gross profits but net losses, may not fully consider trading costs when assessing their own ability.
- And, individual day traders may believe themselves more likely to succeed than the average day trader.
- We are unable to explicitly test whether day traders are motivated by overconfidence rather than the desire for entertainment.
- Our opinion is that the average losses incurred by day traders are more than most would willingly accept as the cost of entertainment and that, by and large, day traders must hold unrealistic beliefs about their chances of success.


http://faculty.haas.berkeley.edu/odean/papers/Day%20Traders/Day%20Trade%20040330.pdf

Currency Trading for DUMMIES (Getting Started Edition)

Currency Trading for DUMMIES


GETTING STARTED EDITION


by Mark Galant and Brian Dolan




https://secure.efxnow.com/forex2/eng/ct-dummies.pdf

A 5% return may end up being a better deal than a 20% return!!!!!

The time it takes to realise a gain, plays a huge part in determining our annual rate of return and the overall attractiveness of the investment.

If one is able to get a 5% return in a month, can we argue that it is a better investment than one that earns us a 20% return over a two-year period?

The Reasoning:
5% rate of return in a month
= yearly rate of return of 60% (0.05 x 12 months = 0.6).

20% return at the end of two years
= yearly rate of return of 10% (0.2 / 2 years = 0.1)

Premise:
The above argument is premised on being able to re-allocate the capital that you had out at 5% for a month, at attractive rates in the preceding months.

But in theory, if you could reallocate your capital five times over a two-year period and each time earn 5% a month, it would still produce better results than getting a 20% return at the end of a two-year period.

The year is the base time standard by which one compares different investment returns.

Rules to remember:
1. The time it takes to achieve the projected profit ultimately determines a great deal of the investment's attractiveness.
2. Always adjust the return to put it into a yearly perspective.

Is day trading for you?

It's no secret that stocks can earn phenomenal returns in the long term. Some of the shares in Warren Buffett's portfolio were picked up almost 20-25 years ago. But Jayesh Shah doesn't have so much patience. "I don't remain invested for more than 20-30 minutes," says the Ahmedabad-based bank manager. Shah dabbles in stocks and makes an average of 12,000 a month with his ultra shortterm trading strategy. Viral Nagori, who teaches computer science at a government college in the Gujarat capital, has a relatively longer investment horizon. He sells his stocks as soon as he is `800-1 ,000 in the green.

Welcome to the world of intra-day trading, where tens of thousands of small investors throng every day to make a fortune from the minute by minute change in stock prices. Small businessmen, retirees, salaried professionals, academicians, even students, are playing the intra-day market and making money from it. They buy stocks in the morning and sell them before the closing bell, pocketing profits from the trade. Of course, they often end up making losses, but this does not stop them from starting afresh the next day.

For the buyer, the biggest draw of intra-day trading is the instant gratification it offers. You can literally see your money grow as the stock price goes up. It also gives the buyer the feeling that he is in control of his finances. "When you invest in a mutual fund, you have to wait for the net asset value (NAV) to go up. Here, you can see your profits immediately," says Nagori.

Unfortunately, the lure of quick money has also sucked in people who should not be indulging in intra-day trading. Experts say that a day trader should be able to monitor the stock markets from opening bell at 9.00 a.m. till the trading session ends at 3.30 p.m. During those six and a half hours, the markets and your stock holdings need your undivided attention. "Day trading is not for someone who has a busy profession or holds a full-time job elsewhere," says Rohit Gadia, CEO of the Indore-based CapitalVia Global Research. Gadia runs a website that offers tips on stocks for intra-day trading.

It's a world where many of the established canons of stock investing are turned on their heads. "Day trading is a different game with different rules," says AK Auddy, executive director of intradaytrade.net. The website gives daily tips on stocks for day trading to its members . Here are 10 basic rules of intra-day trading that can help you make money. Follow these tenets to avoid losing your shirt in this highrisk arena.


Invest what you can afford to lose

Intra-day trading carries more risk than investing in stocks. Invest only the amount that you can afford to lose. An unexpected movement can wipe out your entire investment in a few minutes. In January 2009, the Satyam Computer scrip fell more than 80% from Rs 188 to Rs 31 in one day. If it is a leveraged position, you could lose more than you invested.

Choose highly liquid shares

Day traders must square their positions at the end of the trading session. This is easy if you are trading in large-cap , index-based stocks, which are very liquid and get traded in large volumes every day. Don't dabble in mid-cap and small-cap shares, where the traded volumes are not very large. You could end up holding shares that have no buyers at the end of the day.

Trade only in 2-3 scrips at a time

It's prudent to diversify your portfolio when you are investing in stocks, but when it comes to day trading, confine yourself to just 1-2 stocks. You can have up to 8-10 large-cap , indexbased stocks on your watch list, but don't trade in more than 2-3 stocks at a time. Stock movements need to be tracked closely by the day trader and you won't be able to monitor more than 2-3 stocks at a time.

Research watch list thoroughly

Read up on the 8-10 stocks on your day trading watch list. You should know about all corporate actions (stock splits, bonuses, dividends, result dates, mergers, etc) as well as technical levels of the stock. There are websites, such as khelostocks.com, where you can feed in the price (high, low and closing) to know the resistance and support levels.

Fix entry price and target levels

Before you buy, fix your entry price and target level. The psychology of the buyer changes after he has bought a stock, which could interfere with his judgement and nudge him into selling too quickly. This might cost him the opportunity to fully gain from the upside. If you set yourself a price target and adhere to it, your psychological frame will not change.

Use stop losses to contain impact

A stop loss is a trigger for selling shares if the price moves beyond a specified limit. It helps the buyer limit his losses in case the share belies his expectations and moves down (or up). Suppose you buy 20 shares of Reliance at 940 each and set a stop loss of 920. If the share falls to `920, your shares will be sold. In this manner, your losses will be curtailed even if the share drops to `900. A stop loss takes the emotions out of the decision to sell.

Don't be an investor

Day trading and investing are like chalk and cheese. Both involve buying shares but the factors considered are completely different. One takes into account technical data, while the other looks at its fundamentals. Don't mix the two. Often, if an intra-day bet goes wrong, the buyer does not book his loss, but takes delivery of the shares and then waits for the price to recover. This can be a mistake because the shares were bought with an ultra short-term horizon. They may not be worth investing in.

Book profits when targets are met

Greed and fear are the two biggest hurdles for the day trader. Just as he should not flinch from booking losses when the trade goes wrong, he should book his profits when the shares reach his target. If he feels that there is more upside to the stock, he should reset the stop loss. Suppose you invest at `100 for a target of 110 and set a stop loss of 95. If the price goes up to `110 but you are bullish, raise the stop loss to `108. This will reserve some profit.

Don't fight the market trend

Even the most sophisticated analysis cannot predict which way the market will move.
All technical factors may be bullish but the market may decline. Technical factors only point to the likely movement of the market, they don't guarantee it. If the movement is not as per your expectations, don't try and be a contrarian. You may end up losing more.

Small is beautiful

While stock investments can yield stupendous returns, be content with small gains from intra-day trading. Day traders get a leverage of almost 3-4 times their investment , so even if your stocks go up by 3%, you would have earned 9-12 % on your investment. In any case, it's rare for large-cap stocks to move by more than 5-6 % in a day. Even if you get a return of 10-12 % on your capital, it's not bad for a day's work.

Day Trading – Will You Succeed?

If you read too many websites about day trading, you might be lulled into believing that it’s all incredibly simple. Don’t make the mistake of plunging into any form of day trading without spending the time to learn what you’re doing. And certainly don’t start by investing every cent you posses, including next week’s mortgage payment. Pretend, or paper trade for a little while, make sure you’re earning profits consistently, and then you can start to think about using some of your real money – but only some!

As you practice trading, you’ll find you learn an enormous amount, and once you have a few dollars of your own on the line, you learn a lot more. It’s usually best to start by trading on a longer timeframe, too, so you can master the skills. Learning the technicalities of trading takes time but it’s possible to master it. The tough part is the psychology – how to deal with your own emotions and reactions in trading situations. If you can read up on the psychological side of trading, particularly day trading, you’ll be better equipped to handle situations as they arise.

If you’re serious about day trading, then you will need to find out how much money you need to get started. Different brokers will have different requirements for funding an account. Be aware, too, that it can be tough to make money trading a flat market. As a day trader, that’s even more relevant to you. You need enough movement in the market to provide profitable opportunities.

So what is day trading? Basically, it means online trading of stocks or indices, within a very short timeframe – in this case, for one day or less. Day trading requires you to make accurate assessments of trading situations very quickly, and act upon your decisions instantly. This is not a game for the indecisive or faint of heart. It’s important to know exactly what signals you’re looking for in order to enter a trade, and know your exit strategy even before you buy. Once your exit signals appear, you have to act immediately, not dither and try to second-guess the market.

If you haven’t already worked it out, day trading can be extremely stressful. If you can’t afford to lose all the money you’re investing, or more to the point, if you have a fear of losing any of the money, don’t do it. Your fear will paralyze your decision making at the times you most need to be quick and decisive. You also need to be very self confident, so that when you’ve done your analysis and seen the signals to enter or exit a trade, you’re confident that you’ve done sufficient research and have made the right decision.

Nerves of steel and a dash of raw cunning are part of a day trader’s personality, and so are discipline, determination and a high tolerance for stress. It can be great fun, but can always stress you to the max. Most successful day traders work for large institutions, not for themselves.

http://www.comador.com/day-trading-will-you-succeed/