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Guest Post: Here’s the Proof Day Trading is Dead
Submitted by Elliot Turner of Wall St Cheat Sheet
Here’s the Proof Day Trading is DEAD
Lately I’ve heard a lot of heated conversation about the day trading
industry. There’s an intriguing debate with opinions ranging from “it’s
a great way to make a living” to “it never worked in the first place”
to “we’re now in the midst of the great shakeout.” But the bottom line
is: day trading is DEAD.
Two-thirds of the rhetoric focuses on the idea that day trading is a
firmly entrenched part of markets with a somewhat stable future ahead. I
disagree. More realistically, a much larger change is taking place with
market structure. Like the extinction of human beings roaming the floor
of the NYSE, this evolution presents a bleak picture for the day
trading community moving forward.
The Best in the Business Exited the Business
I’ve been itching to discuss this topic ever since Schonfeld fired a
significant chunk of their trading desk. Schonfeld is an interesting
case study in the “prop shop” day trading space. They had been a
successful day trading firm which more recently transitioned into the
“hedge fund” model.
In a letter expressing their intent to lay off many daytraders, the firm stated bluntly that “unfortunately,
our vision of the future of trading has changed. It is getting much
tougher for traders to make a living or get by.” Therein lies the cold, hard reality facing many daytraders and their firms.
The Insurmountable Challenges
The challenges for daytraders are twofold. First, computer trading
(e.g. high frequency trading) has significantly eroded much of the edge
daytraders require to garner a profit. Second, and perhaps of equal
import, has been a court’s decision in the case SEC v. Tuco which is causing proprietary firms to completely recreate their business model.
This landmark case requires firms to either take on more of the
day-to-day trading risk themselves or become registered Broker/Dealers.
If they choose to become registered Broker/Dealers, firms must
transition into a completely different regulatory structure.
The significance of this is not to be overlooked. Many firms have
either opted to fully follow the transparent route of becoming a B/D or
entered the less regulated and more opaque hedge fund industry.
The Scary Shape-Shifting from Trading Firms to Training Firms
The largest fallout from Tuco stems from the fact that it
became much harder for firms to take in deposits from traders right at a
time when day trading lost its competitive edge. In order to compensate
for the increased risk and diminished profit margins, many day trading
firms have started “selling” their trading expertise to pupils wanting
to trade with the firm.
I am troubled that at the time these firms were exploring ways to
find a new competitive edge in a dynamic playing field, they started
selling what they themselves knew to be a market strategy declining in
efficacy. As a result, rather than continuing to explore new edges,
these training programs necessitated firms stick with their archaic
strategies in order to convince paying students the day trading model
was worth buying.
The Industry and Its Future
Many will outwardly critique my premise that the day trading edge has
diminished. In order to stay objective, I ask those people to simply
open their books and prove they still have their edge. (Apparently,
Schonfeld is one of the few willing to be honest.) Until then, let’s
take a closer look at the primary strategies deployed by daytraders over
the past decade. This will provide a little clearer picture of the
history of the industry and its future.
In my interview with Justin Fox,
we had an interesting conversation about “efficiency” in the market.
Justin quantified “efficiency” in a totally new way for me: he made the
distinction between “price” and “value” efficiency. This got me thinking
about the way in which market participants make money.
More generally, this is a gross oversimplification, but our market
participants (other than the market maker) are either value investors,
growth investors, technical traders, or arbitrageurs. There is
certainly some overlap between the four, and there are some strategies
which don’t fit any of these labels. However, in terms of
investment/trading strategies, the predominant number of market
participants fit into one of these four cookie-cutter labels.
Daytraders are arbitrageurs who rely on some kind of price inefficiency to make an intraday profit. I’m
not sure many daytraders understand their place in the market to the
point where they would subscribe to the arbitrageur label; however, at
its essence, day trading is the attempt to make money off the market’s
intraday fluctuations.
Historically, there have been
several ways in which daytraders were able to accomplish this task and
below is a summary the most widespread of these methods:
- Speed Trading. This was one of the
earliest ways in which “daytraders” profited. When markets traded with
fractions, there were abundant opportunities for traders to capitalize
on the spread between the bid and offer price. This approach fit nicely
with the maturing “video game generation” as the skill-set for success
in speed trading is very similar to what makes for a successful gamer.
As markets transitioned from fractions to decimals and more volume
shifted to Electronic Communication Network Exchanges (ECNs), spreads
narrowed substantially. In some ways, the success of daytraders at
executing this strategy generated its own demise. It was still
practical to trade spreads even after the transition to the decimal
system, yet as more traders enjoyed success, even more traders adopted
the approach. This increased the abundance of daytraders and further
compressed spreads. Moreover it awakened larger institutions to the
immense amount of money being chiseled away from their larger
transactions to the point where some developed their own, faster
electronic trading programs, and others began fragmenting orders into
smaller pieces. - Order-Flow Traders. Traders were able to
gauge an imbalance in order-flow based on access to level II quotes.
This allowed traders to read “the book” in order to seek out large bids
or offers. For years, and particularly during the volatile times of the
financial crisis, this afforded immense opportunity with minimal risk.
Some traders used this strategy to follow a stock’s momentum, while
others used it to identify tops and bottoms based on different readable
metrics in the book of orders. At its essence, order-flow recognition
relied on front-running much larger orders, and in the end, much like
with “speed trading” the larger institutions recognized this fact. This
provided one more reason for institutions to fragment their large
orders into much smaller pieces that are far more difficult for
daytraders to identify. Moreover, with an abundance of computer volume
that is infinitely quicker than the human variety, it’s more difficult
than ever to identify what liquidity within the market is real and what
is fake, thus making the strategy of order-flow recognition a riskier
one with less of an edge. - Sector Relative Strength/Weakness. This
was by far my personal favorite. On my first day of training, my
trainer told us to memorize 5 names in 10 sectors. I took the leap to
familiarize myself with 10 names in 20 sectors. I also inherited a
comprehensive set of “baskets” which sorted stocks by their
relationships to one another. Over time I built these up to be even more
thorough. The key to this strategy relied on recognizing leaders and
laggards within sectors (for example, when the agriculture stocks were
strong and POT and AGU traded higher, one could just buy MOS) and also
recognizing interrelationships between sectors (like when the steel
stocks were running, the metallurgic coal stocks would follow shortly
thereafter). The rise of ETFs and programmed trading killed this edge.
Now programmers have created trading algorithms to buy and sell ETFs
and their components off of relevant and related market fluctuations.
Computers are far quicker than humans, and as such, there is simply
little edge in the relative strength/weakness trade anymore. - Intermarket Price Discrepancies. This
strategy is similar to the relative/strength weakness outlined above.
However, instead of trading stocks off of one another, this looks at
price fluctuations across markets. For example, if oil runs, traders
could just buy the OIH, or one of its many component stocks. Or, if
copper drops, traders could simply short FCX, a copper miner, in time to
make a nice profit. In some stretches, the relationship between the
dollar and equities, or Treasuries and equities, offered opportunity as
well. Yet once again, computers replaced humans in exploiting this
edge, thus rendering the strategy ineffective. - Technical Analysis. This is perhaps the proverbial
“last man standing” in the day trading world and is the only one that
has any sort of edge at the moment. Technical analysis worked
particularly well in 2007-09 as markets were heading lower and moving in
an emotional frenzy of panic. The emotions prevalent in downmoves tend
to lead to far more emotional price recognition and a reliance on
historical levels that is somewhat muted when markets move to the
upside. Although technical analysis continues to be relevant in some
contexts, it is far more suited as a tool in a trader’s arsenal than a
stand-alone trading strategy. Moreover, computers started recognizing
intraday technical patterns and in doing so, programmers began clouding
the importance of intraday levels. Stocks that once moved rather
smoothly from point A to point B now move in a more jagged and less
predictable manner. This required technical traders to “step up a
timeframe” and rather than trade on 1 or 5 minute charts, to focus on 15
minute, hourly and even daily charts. Trading higher timeframes
requires a completely different approach to risk management. Both the
risk and reward are greater, and as such selectivity is necessary,
experience and feel are far more relevant, and information is power. In
the bigger picture, a “bear flag” at 52-week lows could easily turn
into a takeover target at 52-week highs (Look at MFE for one such
example) and a breakout to highs on volume could easily turn into the
next earnings collapse. In order to survive, it’s essential to have a
much more complex understanding of the companies you trade and the
macroclimate.
As you can see with the popular strategies above, a fundamental shift
has taken place in the profession. In today’s market, traders now have
to be both right about direction and have conviction in the direction at
the same time. Traders must spend increasing amounts of time
familiarizing themselves with the fundamentals of the economy and
individual equities.
Perhaps most importantly, the surviving daytraders no longer trade
solely on an intraday basis. With 24/7 markets and massive overnight
moves, it has become not just profitable but necessary to survive
through longer term trades. The day traders left standing are more
analogous to hedge fund traders, and successful new daytraders are much
harder to come by (i.e., a lot more Average Joe’s are going to lose
their money in a business where 90+% of the participants are already
losing).
Often times when something becomes conventional wisdom in the market
is exactly when that something quickly loses its prestige. For the past
few years we have heard over and again that “buy and hold investing is
dead” and that “trading” is the way of the future. Personally, I believe
we are in the midst of the classic example of reversion to the mean.
Over the past ten years, trading was wildly successful relative to
buy and hold investing. The pronouncement that this relationship will
continue into the future seems to be coming from those who are now
trying to train more than trade, or those who missed the boat and are
attempting to play catchup.
The evidence proves computers now own the short-term, but humans still own the long-term. Getting
back to my conversation with Justin Fox, over the past decade “price
efficiency” ruled in creating a substantial opportunity for traders. In
today’s market, earnings multiples are so compressed that “value
efficiency” creates an equally great opportunity for buy and hold
investors.
The Proof is Everywhere
My evidence for the demise of day trading is the hoards of people I
know leaving the game, the shift of profits to HFT books, and the
transition trading firms are making to become training firms. If all of
this is an illusion and day trading still lives, simply open the books
to your discretionary trading desks and state your case below …
»
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Day trading?
Isn't that like a cover for drug dealing?
Hey wait a second, I know a bunch of day traders and ..oh wait they are all dealers.
day traders are no better than HFTs !!
It is not drug dealing, but more like calculated gambling.
HFT, screws with the capital flows of institutional investors.
If it is a shit market, then trading it will be as shitty. THe Rem of stock operator book, states it as a "no win" game, nearly a hundred years ago.
During a true bull market, most win. During this shit, only the goldfucks, can profit.
It is one of the hardest careers to choose. You need capital and balls of steel.
If you don't read these blogs, with the truth and trade what you see, you can survive, but it is very lean. THe current point is, if you don't truly see a good trade, you have to sit on your hands and get bored out of your fucking skull. Then you read these blogs and bitch and whine that you missed a good trade and blame the wife, kick the dog.
If it was that easy, then everyone would be doing it.
Ha ha. Where is everyone?
I agree. It has been dead since 2008 when the FED became the biggest trader. Then HFT's took over. Plus, the Computer can keep track of all of your trades and trade against you. Too many Shorts and they ramp the stock. Too many Buyers and the computer pushes the stock down.
I think this was the plan. By eliminating all of the Day Traders the Computers have greater control of the Market. No peskie Retail or even Hedge Funds screwing up their pre programed daily price. No matter what the Market does or the data the program gets the price for a stock to the price already set by the programers.
Lets face it Bernankie is the Biggest Trader of them all. He is determined to get his personal portfolio up as high as possible before his term expires. If it caused a World Collapse so be it.
Participating in this is like going to Vegas,except you have better odds there.
And you get free drinks, and if you are big enough get comp'ed and perhaps even some of your losses refunded...
Yep... 2008, the year the markets died and were put on life support by the Administration/Fed. But they are waking a thin line, because without healthy variability of investors in the market, it is extremely vulnerable to major crashes.
http://peakcomplexity.blogspot.com/2010/10/fingerprint-of-instability-in-biology.html
So we have arrived at communism by a different means, then.
Day traders exited long ago when the market went from being semi-corrupt to entirely corrupt. Wall Street's days are numbered.
RIP.
Awesome article. The death of day trading can probably (as the article points out) be tracked directly to the HFT story. I think JW in FL said somewhere, no way a Day Trader can buy the kind of access any big entity has.
India, not as computerized, is still a day trader heaven.
Lot's of people losing money hand over fist as the market moves take them by surprise, but they trade on, regardless. And in the last ten years, the number of "brokerage" houses has exploded, supporting the day traders way of life.
Brokerage houses..... we promise to leave you broker as you age!
ORI
http://aadivaahan.wordpress.com
I'm so intrigued by your India stories.
ORI... I do not think you are correct. HFTs have their claws all over the world.
http://www.onemint.com/2010/02/22/program-trading-picking-up-in-india/
HFT algos account for 70% of daily volume and "day trading is dead"? I would say that daytrading is more profitable than ever.
The Problem is:
Daytraders are a herd. The herd is getting slaughtered. Their sub-industry (CheatSheets, etc...), hearing the shrill screams as the slaughter gains momentum pulls out the stops and tries to appeal to the survivors to diversify strategies with our new product line. Membership to our website will save you.
The slaughter continues. No one cares. Time to get a real job. Or go back to the old job, slip-fall practitioner.
70% of trades held for 11 seconds:
http://www.sott.net/articles/show/216842-70-of-all-Stock-Market-Trades-are-held-for-an-average-11-SECONDS
7 pc of volume
Sure, day trading "stocks". Trading futures is alive and well. But it's a harder game to play. More leverage can equal greater losses if you don't know what you're doing.
While this article focuses on equity day traders you should see what has happened to the Chicago proprietary trading firms specializing in futures trading. They have been absolutely decimated by a combination of things but the biggest thing has been the rise of algo trading.
It's all become an arms race. Firms can go ahead and invest in new trading technology but you can all but gurantee that if they do find something that works it will not be working in a year or two, if at all. Once the big money moved to a shorter time frame the game was up for these shops. All the money has been driven into the hands of a smaller and smaller group of people and the exchanges don't care that their customer base gets smaller and smaller.
How bout the fact that you cant fucking daytrade without 25k equity...I bet there are tons of retail who whould like to give it a shot with there 5- 20k but wont do it because you can't daytrade effectively with the limitations. I bet if they abolished this stupid fucking rules they might find some of their missing liquidity.
yes like the pro poker players who drop down in limits cause the competition is so much softer. let the idots who cant put together $25k in risk captial have a shot at beating the most sophisticated game in the world. dude, honestley if you arent resourceful enough to get $25k together or find some way around it like a prop firm, you have not shot. donate that money to a charity or start a small business.
I do think the 25k limitation has definitely dampened daytrading. If people could daytrade with any amount of money, you'd have a lot more people with $10k in their accounts triple leveraged trading every second. And of course losing everything.
OH right thats probably it...just not enough mom and pops can access daytrading and get liquified immediately by a robot...if only they could plunk down bigger money to lose in 1.2 seconds, they'd JUMP IN IT.
Well then put up or shut up Harry...
15k and you're off to the races with your very own HFT platform: http://www.platinumtradingsolutions.com
Gemini is up 88% YTD.
Another ponzi?
Yah, that's what it is...
Ass-hat.
Keep the little guy out has been the mantra since the start.
To add insult to injury, they tell you it is for your own sake, since you don't understand risk.
It's that whole accredited investor scam. So only the rich get richer. If your smart grandpa leaves you a million dollars, suddenly you understand risk better than me? Bah!
Shitty, biased, corrupt system.
Watching it's death throes is fascinating.
ORI
http://aadivaahan.wordpress.com
this is a tired old phrase typically used as an excuse.
However, this can only take place with the existence of the Welfare State, fiat (paper) money, fractional reserve counterfeiting, and centralized money planning. Because these frauds exist, "rich" people get free money (leverage) to which others do not have access and then justify these systems of counterfeiting as necessary to "help the poor". Of course, this is "The Greatest Lie Ever Told".
Eliminate the aforementioned and those with merit at the bottom will win, and those without merit at the top will lose.
Absolutely true... but there are just too many dots there for the average joe to connect.
But...
However, this can only take place with the existence of the Welfare State, fiat (paper) money, fractional reserve counterfeiting, and centralized money planning
Seriously Chopper, you are talking about unwinding the whole criminal complex to bring the bottom to the top. We agree. Your "solution" however is actually the current problem, is all.
ORI
http://aadivaahan.wordpress.com
the practices of fractional reserve counterfeiting, fiat money, and centralized money planning, along with the Welfare State that these enable, are the problem. Because these frauds exist, "rich" people gain access to free money (leverage) to which others do not have access, all under the guise of "helping the poor". Of course, this is "The Greatest Lie Ever Told". If we eliminate these fraudulent practices, then open up regional economies to competing currencies including gold and silver, we will restore liberty in America. If we do this, over time, those WITH merit at the bottom will win, and those WITHOUT merit at the top will lose.
if Trillions of $USDs were not tied up in U.S. Treasury Bonds supporting the Welfare State, this capital would be in the private sector because it would have no other place to go. The Dow Jones Industrial Average would be at 100,000 and everyone would have a helicopter in their back yard. Hurricane Katrina victims, for example, would not need to rely on central planners who currently have a monopoly on both "force" and incompetence. The abundance of wealth would increase the generousity of fellow Americans to unseen levels, and dwarf financial outpourings towards Haiti's hurricane victims and Bali's tsunami victims by comparison.
instead, we are paying ever-expanding interest payments on nearly $15 Trillion with approximately $160 Trillion in unfunded liabilities to the further enrichment of The Federal Reserve and extended members of the International Banking Cartel.
The Welfare State cannot exist without keynesian money printing. keynesian money printing is dependent upon infinite amounts of loans expanding exponentially. obviously, this is not sustainable. this is a sick, twisted system of fraud, with the promise of "free lunches" all around and a "chicken in every pot". Obviously, these promises are on the eve of being broken and leading us ever-closer to economic collapse by the moment.
Consider this: without a Welfare State, for example, unproductive individuals will not procreate because they will not be able to feed their children; and if they do, their children will starve (barring any philanthropic intervention). This fact will discourage unproductive, anti-social behavior, and encourage productive behavior. Productive individuals will be paid in the finite amount of gold/silver and move up the socioeconomic ladder.
conversely, productive individuals will have many children, and their gold/silver will be divided among those children. If the individual children are not productive themselves, then eventually (perhaps over several generations) they will exhaust their inheritence and move down the socioeconomic ladder. The trajectory will continue until they demonstrate productive behaviour again so that they may be rewarded with gold/silver.
Of course, rewards can come in the form of other barter assets and services as well (besides gold/silver), but the outcome is the same.
Importantly, those productive individuals with gold/silver can make individual value judgements as they relate to helping their neighbors in need. Unlike the Welfare State, they can descriminate between the widow/orphan versus the drug addict.
A spirit of neighbors rewarding neighbors for that productive behaviour, which perpetuates mankind, and neighbors punishing neighbors for that bad behaviour, which burdens our progress, is the closet we can come to perfecting the organic efficiency and stability of both peaceful free trade and the advancement of civilization within the boundries of earth and beyond.
Opening up our regional economies to competing currencies, including gold and silver, and eliminating the fraudulent practices aforementioned, will be the greatest step towards restoring liberty in America again where it once flourished.
Mostly excellent points. But utopian in comparison to the current reality, yes?
Ergo, the current system must die.
Only then shall the meek inherit the earth.
ORI
http://aadivaahan.wordpress.com
its good to have goals. ;)
"There is no there, there." - words once uttered about Oakland CA, now apply to the NYSE.
Cramer says: STOP TRADING.
Does he mean, stop day trading?
November looks like the perfect setup for a "trading interruption".
"Market's" worst case scenario..
Republicans win back majority followed by populist austerity measures, higher interest rates and end of all QE.
Ben B. will quietly disappear or have an accident.
Hmmm not uninteresting. Maybe HFT will, in the long term, lead to a revaluation of investing in fundamentals. There's no point in competing with a computer in arbitraging simple discrepancies. For the foreseeable future, a computer will never be able to learn the trade of scuttlebutt and the many heuristics required to truly grok a company.
HFT is transforming the stock market into lotto max.
You buy a stock and hope to win! At least if you don't win, you don't loose it all!
More and more, it becomes clear to me that this market is not tradable. It is too corrupt and random. The rug of expectations is pulled out and shaken every week. The press colludes to manipulate truth, and it is often invovled in rumors started to cause some deep in the money option to pay...causing real capital to be trashed.
Add market wide correlation and a dabbling Federal Reserve crook with an endless printing press...and I don't need any more evidence that it simply is not tradable...any more than a poker game is.
And I'm pissed about this fact....
Could it be because machines are easier to control and they don't have a conscience?
...........
Day traders = Pee Wee Football
HFT/FED = NFL
NFL vs. Pee Wee Football = no contest
It's been this way for quite sometime. Just because machines run the show doesn't mean you can't trade with them. If you're looking to skim .0001 on a zillion shares, the machines will kill you. But if you follow the machine as it pumps up NFLX, you can certainly do well daytrading.
The game moves fast but that truly only affects the machines looking for pennies on constant trades. I look for direction. If it's moving up, follow it with tight stops. Same for short side. I could argue that the machines have made it somewhat easier for the independent daytrader.
Well, the general direction is up and the trend is up. More corruption and manipulation than ever doesn't allow for any serious contraction, drop or correction.. until.. the game changes.
I'm very leary about November. The much anticipated Fed meeting, any hints of QE or not and of course the elections.
We could be in for a big surprise either way.
What I dread most is the prospect of a "lost decade" going forever like Japan.
Rest assured. Timmy has expressly stated that, "We are not Japan!"
http://fora.tv/2010/10/18/The_State_of_the_Economy_Timothy_Geithner#full...
Thank you so much Mr. Treasury Secretary in the nice gray suit. Wheew...I was worried there for a second.
NFL players aren't born that way. Once the traders leave, the volume dies and nobody cares to participate, the Fed or whoever holds the most and hottest potatoes are fucked.
Very good article. I was on the street mid 90, got out in 98. Decided to trade in dec 08thinking i could make some money with the volatility...got my face ripped off from jan 09-march 09 LOl had wrong timeframes on the technicals
got back in march 10...no complaints so far. I just try to think like a robot and try to find the daily thesis or corelation. my average hold time in 15 minutes or so, looking for 10-40 cents and i only trade high beta 3 stocks; fcx, x, & cat, use the sso/sds too....tell you though, its a really tough market
Cancer/criminalgentics wins a glorious victory won at all cost,
buy writing the final chapter in murderous betrayal and killing the host.
It was a terrific source of income for people who knew what they were doing or who got trained. Who knows how many "jobs" day trading created and how many have been lost becuase of all the corruption.
Some are still playing, but when you see news that should cut a stock in half and instead it goes up 10%, you know the other side of that trade is someone with far more firepower.
Everyone knows it's rigged. The Fed is to blame for saving those who failed.
Like the scamsters still selling DVD’s for $29.99 on how to get rich flipping real estate with no money down. They’re the only ones getting rich, and they never buy or sell a single property.
Here are some other interesting facts which probably relate to any faulty belief that day trading will survive: The fastest growing group of compulsive gamblers is 17-22 year old people who frequent online casinos. A high percentage of these losers actually believe they have made a career choice, that what they are doing is a real job.
Do you blame these kids? What are their prospects? Working min. wage jobs, maybe 2 jobs to make any money? Cost of living going up, real jobs outsourced to China. I mean what is their upside in working shitty jobs for a few bucks a day after taxes and expenses? Sure, they could buy themselves some overpriced and overhyped piece of garbage education and after they graduate, they can fight with the other dogs for better paying jobs and hope to get ahead.
There is no upside for the coming generations. They are doing what they know best and that's using the internet for research, for trading and their social life. It's the cheapest way to work and live.
And when you think about it, the rich guys don't do anything different. They don't work, their money works for them. They don't contribute other than what their accountants suggest to give in order to save (on taxes). They haven't created real employment in the US because their bottom line improves when they outsource jobs to China and create credit out of thin air for the folks here. When the credit bubble implodes as it has, the risk for the rich gets absorbed by the Fed and the taxpayer.
That's it in a nutshell. What needs to happen is that all us who are plain and simple just the serfs of the rich guys, we don't pay our bills. We don't pay our mortgages or any of our debts. That will get their attention and it will hurt them. Maybe we get lucky and they leave. Nobody needs these parasites in a society. They should live in China where they've created the jobs and where they've made the investments. Good riddance. Let China feed and serve these guys.
Something is terribly wrong in this country and at some point in history this country was infested by the parasite of the rich and useless.
+1. The feudalism implemented was too successful. The younger generations are happy being serfs.
-Why go to $35k/yr university for a LAS degree when you can learn from Millions of "adjunct" professors online? Who are not concerned with tenure.
- Why go into debt for a $350k McMansion? The Idea that the cost it is not about the house per se, but is really just a price of admission to live in a community of hardworking neighbors has been completely debunked by the liar loans and bailouts of the clusterfucked mortgage industry. Chances are, the people in your "american dream" community are worse thieves and hedonists than those in the "poor" neighborhoods where the "bad people" play their stereos too loud and cut their grass every 2 weeks instead of the HOA/Golf Course lawn service showing up every week.
-Why commute into a 60 hour a week job to get a sense of "accomplishment" and "responsibility" when 80% of the economy is "servicing" each other. Stay at home, become a gamer and watch porn like the SEC has done for the last 10 years. As you mentioned, you can social network online with far more interesting people than the lord of flies tribes at most workplaces.
-The old engine of the economy was male pride and female virtue/allure. Households formed early in life. Men brought flowers home. Women had supper ready. saved and made plans to upgrade the house or car judiciously. Now people plan on divorce settlements when inventorying the wedding gifts. Kids are raised by hillaries' village, so the smart play is to get a "starter" mother/father for your first kids. Then a different starter spouse. And then find yourself and then find several soul mates later in life (f-buddies) -- Just like you did in your early teens and twenties. Thats pretty much what the MSM, role models, and Sex education taught the younger generations starting at age 10 or so.
The Central bankers have been talking about the chronically unemployed "Can't get those years back on the spending path of life" like they are athletes who need a certain amount of cumulative stats to stay in their shedenfreuden fantasy football league. They don't talk about skill atrophy. They talk about deviation from the consumption model for a human life.
Everybody wants a George Washington, Andrew Jackson, Ghandi, bigger than life hero type to emerge. I think we just need that guy from Mike Judges' Movie "Idiocracy" to show up.
I agree on most of these issues. In 2008 most daytraders had their best year ever in the business. The market bottomed in March 09 and has been a buy and hold dream, across all sectors. But what happened in 2008 and will happen again in these markets ... FEAR. Sorry but Algos get crushed when fear grips the market, and the superior human traders will again have record profits. Its been a cycle for a long time, lean times followed by great times in new sectors and markets. From a daytrading perspective, I can tell you that it was just as hard to make money in early 2007, probably harder.
It all comes down to who is playing the game right now, yes HFTs are here and so are some elite human traders, but the Institutional order flow is tiny. If these big funds are trading and not leaving any footprint on the market that would be more impressive than HFT taking money from everyone.
Also would like to mention that atleast 3 big houses Bear, Lehman and Merrill are gone. The consolidation of power in the market has never been greater. So yeah trading is tough, until the liquidations begin or the dollar collapses or WW3 breaks out.
Here is what the author has missed....
Price....even today...does indeed have a bid ask....and does move up/down every day....
One has to know "how to trade" in the current environment...
There is nothing as certain as change....but change can be traded ....and only a few ...will know how to do it.....
This is not a game for the masses....
Also the future of daytrading....will shift from deposits to proving what one can do first....
Thus the new steps....
1) Find your edge
2) Prove that you have an edge in live simulation...
3) Next small funding
4) Further live proof of the edge
5) Higher funding level
This is already happening....
And is the future....
Not pay then try to play....
But prove it ....before you play...
Watch it unfold...
It already has started....
And makes far more sense than the old stagnate churn/burn models....
Other countries simply banned shorting. This country made sure shorting is virtually impossible by outright manipulation by the Fed. If the SEC came out and said "shorting is banned", there are people here who would start invoking the founding fathers and throw a hissy fit. So what better way than to directly manipulate the market to make it always goes up, until the Fed hits a road block in bond sales. Brilliant !
Senator Kaufman on Mad Money last night talking about the death of markets, and thus America, if confidence and investors are lost:
http://www.cnbc.com/id/15840232/?video=1624915916
It's funny, the support and resistance seems to work a treat intraday - are the bots trading that? Just trade the same way as them.
Day trading only resides on technical analysis. The idea of technical analysis has been fishy since the beginning, and is now completely dead.
I've followed the French "amateur trading community" for almost 3 years. I have seen many gurus, worshipped by forums. They all disappeared without a trace six months after their sacrament, or publicly admitted their ruin.
To be honest, I've never seen any man who has become rich through trading. Stock picking, yes, but trading, never.
If you're not an insider in a big bank, you can't make money. And if you make money, you'll lose it sooner or later.
Former Schonfeld prop trader here. Sometime in 2007, I believe, they switched the format of the firm from prop trading to a hedge fund, presumably to reduce regulatory requirements. All of a sudden, we did not need our 7s and 63s but everything else remained exactle the same.
Another thing that changed in my mind was NYSE hybrid trading. When I first started (2005) the open book was at least somewhat close to what was really on the books and you could see the specialist stopping stock, short or get long ahead of big orders, or try to buy the last print of a big order on a breakout. Now, since a lot of the NYSE orders have shifted to arca, inet, directedge, bats, sigmax, etc. it is very hard to tell what the real mkt is because you can refresh orders on so many different exchanges. Combine that with the fact that you can get sub-pennied on bid and offers (a form of tightened spreads) and computers that can automatically find technical/arb/pair/etc. setups and execute the trades faster than you can look at your filter screen and it is a lot harder to daytrade than it was even a few years ago. As the article mentions, technical trading rules have worked well but scalping or picking off the only remaining orders when the rest cancel has gone to the robots.
As for Schonfeld, they were a fantastic place to work. They let their traders do what they want (with limits on overnights, etc.). Most guys in my office traded from 7 a.m. til 10 a.m. and would leave with a few grand (after taxes, commissions, take create). If you were good then they increased your buying power or taught you how to trade futures. Not crazy money but you were free to do what you wanted and had no desk fees, no software fees, traded on Redi Plus, and had free bloombergs. Payout was weird, but that was the only negative thing about it.
day trading will never die; it just moved to asia.
This article reminds us of a post we first wrote and posted on ZH in August 2009, and then again in February 2010. It is worth reposting for some who didn't see it back then. A "major structural shift" was an understatement at the time:
by AR
on Mon, 02/22/2010 - 16:35
#240616
It's slow today, so I'll add to your comment. I've repeated this story over the last 6 months from time to time, and I'll do so again here. Back in June 2009, a colleague of ours (a $5+ Billion dollar hedge fund) traveled to Europe on a meet-n-greet, money raising campaign. At the time, he returned and said "there is 50% LESS MONEY out there to invest." I presumed his observation was due to lost investments, the meltdown, margin calls, etc.. Then, a month later (keep in mind they are large) he told us, "...there is no market..." I said, what do you mean there is "no market?" He literally said, there is no market. What he meant was, they could not find market participants to take the other side of their trades -- literally. Bid/Ask spreads were huge, and there was no liquidity anymore for them initiate trades as they’ve done in the past (or, much less).
Since then (the last 4-6 months) all of us, have now discovered, exactly what he was talking about. There is NO MARKET (period). Volume is gone. Government, computers, quants, algos, HFT's -- whatever you want to label them – now are said to dominate 70% of all volume today. Thus, keep in mind too, that they dominate 70% of "today's volume" (which on the above premise, is 50% LESS than the real volume the market traded before the credit crisis).
So, think about all this. One, there is 50% less real volume. 70% of the existing (50%) volume is computer led. Thus leaving, theoretically, only 15% of the actual volume in today's markets being "true or real volume" (when compared to volume prior to the crisis). Only 15%. So... now we see the problem with the market's today. This is a huge structural shift (and problem). We don't see it getting better in the short-term. Interesting dilemma. Good luck everyone...
Are you comparing it to the boom days of the tech bubble when clicking BUY at 9:30 was all it took??
Daytrading will never be dead.
do you want to actually provide some statistics and definable evidence, instead of just pointing out some strategies and effectively inferring that because you main point is that day trading no longer works, then these strategies themselves don't much the same.
70% of ALL VOLUME in the market today is high frequency day trading. This is documented and complained about on sites like this weekly. Day trading has evolved. The new players are HFT firms with algo's, independent daytraders with algos, etc.
For the rest of us we have moved into slightly longer time horizons and trade market neutral strategies to hedge the extra risk of leveraged overnight positions.
Well....
Another caveat being...
SP500 at 5000
Just might be a few more skeletons around....
And those that are successful...
Hat tip due ...indeed....
Started to read this particular thread only as a voyeur, but a stinky little insight materialized...
Most of those here really shouldn't be lamenting too much in any other thread about the state of the economy, or the ongoing fraud.
Just saying, I keep lice in my bed too.
Agreed. Rather than being a one-trick pony, intellingent traders evolve and adapt to the change. Market is cynical and ovewhelmingly powerful, is has never been a fair game, and neither does it owe any apologies to those who are not cautious enough. That's been said so many times, the problem is not the market but people who jump in for easy money with unrealistic expectations. Earlier the scapegoat was insider trading, now it's co-located computers. Algo trading? It leaves its footprint, learn to recognize it and trade against it. Embrace the storm or you shouldn't be sailing in the first place.
DOW weekly chart shows the rising wedge contained within the megaphone pattern. This remains a very bearish picture and we should
get a breakout soon.
http://stockmarket618.wordpress.com
It is getting harder because ll the money is held by a few people who can trigger technical events and set prices. It has become completely a rigged casino. There is no "market". It is like a grocery store where the clerk keeps changing the prices on his stock every 2 minutes.
As a prop trader myself, I must admit these are challenging times to navigate. However, after 10 years as a trader, I have survived through various cycles and at each cross road there have been proclamations of the "death of trading". I have even convinced myself on many occasions that it’s all over. The truth is, as long as there is a market there will be trades to take and opportunities to generate returns. Without question, discretionary trading edge has been eviscerated at the microstructure level. The human mind just can't calculate risk/reward in philoseconds or capture market moving news while still in transmission to the trading platform. That being said, I still have seen that there are a few talented individuals that can consistently generate good risk adjusted returns and are surviving this cycle. As Harry Wanger mentioned above, if you are open minded and adapt then algorithmic trading can be to your advantage. Did anybody trade 2003-2004? We used to aim to make 15-25c in a trade in the most liquid stocks because there was hardly any movement. In today’s markets, stocks regularly move more than 2% in a day and the index range tends to be wide - most likely to HFT influencing price. From a trader’s perspective, you can't ask for much more. You just have to be open minded and change with the times. Fight like a mercenary - on the winning side! The author is correct in outlining the 5 strategies that traders relied upon and each one of them marks a specific cycle in the last decade as technology opened access to non-institutional traders. To me, opening time frames is the next step into a swing style where you have to combine technicals and fundamentals to gain an edge. Those that survive will be similar to hedge fund traders in a sense - which I can see across our trading floor now. Slowly but surely the less talented have been thinning out over the months and the core trading group is growing stronger. There is more risk assumed in this strategy but that can be compensated for by adjusting capital allocations per idea and/or hedging with correlated securities to reduce risk. It will be interesting to see how this transpires. If ZH is correct, the markets will see another episode of derisking/panic which will favor the human traders that can capture emotion and fear in a declining market vs. complacency and grind in a rising market. Should that happen, the traders who survived will once again build their coffers before progressing into the never-ending evolution of trading.
That is from a "trading" approach which I do not believe will die. After all traders can always move to another asset class that is in play or foreign markets where there is still edge. From a business model perspective, the prop/day trading firms are definitely in a bind. The one point the author did not touch on is that many of these firms existed purely on earning the spread between the commission charged to the trader and what they are charged by the clearing firm. With trading volumes dropping by the month, margins in this business model have been suffering damage since March of 2009. Couple this with increased regulation, balance sheet capital at risk, and you have an industry in decline, possibly soon to meet its end. No question about that in my mind and I do agree that selling of training courses to neophytes is an unprincipled way to stay afloat when your own bottom line growth from trading has done nothing but compressed over the years.
+1, nice of you to share your viewpoints.
no one is bigger than the market when it wants to go where it wants to go. great traders seek out these moves and position themselves accordingly in anticipation of areas of price discovery where herds are likely to perpetuate continuation of the trend.
Dead my ass. You can make money in all markets if you know what you are doing.
The further you go out on the chart, the more reasonable your odds because you are closer to fundamentals (such as they are) and further from noise.
Trading shmucks like me are no more than krill seeking scraps of meat from the battles of thresher sharks. Scavengers of volatility. So, know your place on the food chain and act accordingly.
I started making money when I ignored individual stocks and focussed on ETFs, particularly the leveraged. You wait for something to sell steeply, on politics, emotion or bullshit news. Buy it. Wait it out a few days if need be. You better be right on the timing but that is always necessary.
Sell it on the bounce. Wait, rinse and repeat. Works for me. But then, trading is not my sole means. If it was, I would need to take more risks.
"In today’s market, traders now have to be both right about direction and have conviction in the direction at the same time. Traders must spend increasing amounts of time familiarizing themselves with the fundamentals of the economy." Was there ever a time that you did NOT need to know what was going on in the economy? Trading at a bank or trading for your own account, you need to trade on fundamentals or momentum. That's all you need to do. And with cross-asset correlations being where they are now, you should just stick to futures or FX.
xxxxx
Tyler,
If you read this, is there a way to poll the commenters to find out how many day trade or have day traded? How many, if they did or do, were consistently profitable?
I day trade futures (ES, Ags) for a living and have done so for a number of years.
I'll admit that I have cut my volume way back because POMO's and HFT/algo narrow range trading has made it neigh on impossible to make money any more... Thanks to ZH and the comments, I've figured out how to make money on POMO days... Today was a very good day. Not all days are like today.
I've seen the writing on the wall though and my partners and I will be transitioning fully algo based trading over the next month or so... It's the future... Just like the pits have and are are going the way of the dodo, so are the discretionary traders.
We've been developing and backtesting our algorithmic approach for about a year, since I noticed that the markets were behaving strangely (really began to notice in May/June of 2009), and got a jump on the research, analysis and implementation.
I just don't know if we'll ever get back to uncontaminated or even minimally contaminated markets to make or livings, what with the feckless CFTC and SEC asleep at the wheel.
OMFG, instead of one LTCM, we're going to have thousands of them!
Tip of the iceberg, Aero, tip of the iceberg.
Does this guy writing the article day trade? Probably not...what a load of tosh.
This blog is a sign of the market top.
I used to day trade out of a scottrade account with very little money. It isn't impossble, you just can be a pig. When I didn't have enough to daytrade as i pleased, I developed a style of trading that mixed day-trading with swing trading. Short time frames but not super short, unless it just worked out for me so well that I cashed the trade out as a day trade. The biggest risk usually ended up being gap risk.
Day trading volumes will eventually be replaced by the home-gamer, who is currently sitting out this charade. Only, this time it's for real...
He will return far, far more educated than any retail investor in the history of trading. He will be wary of fast-talking schlick-meisters who used to turn his type like tricks in a back-room, 24-hour magazine store.
She will see through their ways and master the 4X universe while remaining benevolent, forthright and respectful. It is the turning of the worm.
Our time to shine.
Orly
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Here is a response to this article from a professional day trader as posted on the T3Live blog.
Q: Any opinion on the article (recently seen on ZeroHedge that says day trading is dead)?
A: Jen, I am glad you posted that link so I can get a chance to comment. First of all, I am living proof that that statement is incorrect. Let me critique each point made in the article.
The Best in the Business Exited the Business: The author highlights the Schonfeld letter to its traders, calling it evidence that the ‘best in the business’ have moved away from day trading. Actually, the letter from Schonfeld says the exact opposite. From the Schonfeld letter: “Sadly, however, we are re-thinking the notion that less skilled and less successful traders can be here forever without producing sufficiently for themselves and the firm.” I agree with that statement, that less skilled traders should probably move on from the business in its current state. Schonfeld was not saying that the company is leaving the day trading space, but that there was no room for mediocrity in its ranks. Day trading has its ebbs and flows, and right now, in general terms, it has been more difficult for less skilled individuals to make consistent money. This will lead to a retrenchment within the industry, and the traders that survive will be those that adapt and become more sophisticated.
The Insurmountable Challenges: In regards to computer trading, black boxes have made day trading more difficult, especially for those strategies relying on the level 2. I only use the level 2 to identify areas of concentration I can potentially get out of a trade that goes against me, and that has continued to work for me. In terms of firms being exposed to a greater deal of risk due to SEC v. Tuco, all I will is that, more than ever, firms need to be diligent. You need to educate your traders in regards to risk management and get rid of delusions of grandeur that plague new traders’ minds. As a firm you need to exercise tighter risk controls. Poor market structure is an issue, but that is an issue for everyone. You could hold a company for a year and watch the price appreciate, and then watch all those gains get washed out due to a flash crash, for example.
The Scary Shape-Shifting from Trading Firms to Training Firms: I think that when you explore getting a formal trading or market education, you need to look closely at what you’re buying. The day trading industry is full of shady characters who make unrealistic promises of instant success and easy profits. That is your first red flag. Someone who over promises success or guarantees anything should not be taken seriously. At this point, almost all firms out there that make those promises or operate under that false premise are out of business, plain and simple.
Success as a day trader is not probable and it is not easy. It takes a certain kind of person to have success in the stock market, and even then it takes a great deal of time to develop the ‘feel’ that drives the success of the top traders in the industry. At T3, I periodically teach a trading course along with Steve Levay that I wholeheartedly believe in. That being said, it is not for everyone; our style of trading is not for everyone. We try to teach all of the concepts that make us successful and consistent in the markets, and then try to guide students through the execution process. Trading is a performance skill, and you learn by doing. Nothing happens quickly, if at all, and you have to be realistic with yourself. ‘Day-trading’ has a certain connotation that is unfair; there are still certain intraday strategies that work.
The Industry and Its Future: My general response to the questions raised in this section is that you have to be in the right stocks at the right time. You can’t come in and trade AAPL, GOOG, BIDU and GS everyday and hope to gain any sort of edge. You have to do your homework, find emerging sectors, stocks with news that drives volatility, and look for opportunities, based on technical analysis, to jump on board those stocks early in keeping with the prevailing trend.
Speed Trading and Order Flow: Pure speed trading, certainly, is dead. That would have been a more accurate article. Due to computers, spreads have tightened and it is no longer feasible to try and capture them. Tell me something I don’t know.
Order-Flow Traders: In the same vein, strategies based completely on order flow and the level 2 box no longer work because computers are better than you at your own game. They are in and out of trades in a shorter time frame than it takes the synapses in your eye to communicate what you see to your brain. Thanks for the insights, groundbreaking stuff again. Next.
Relative Strength/Weakness: I agree, the cave-man style use of relative strength/weakness principles does not work. Computers have erased any ‘lag’ time that existed. The only way I look at stocks in the same sector as another is based on volatility and volume. Generally, if a solar stock, for example, sees a volume spike, others in the sector will see more action, too. We recently found REE after noticing MCP in the rare earth space, and while we did not trade them off each other in a primitive sense, we traded each alone using momentum and technical principles.
Intermarket Price Discrepancies: Same idea, don’t try to do something that computers are better than you at doing, which is exploiting short term ‘inefficiencies’. The markets are manipulated by computers, don’t fall victim to that manipulation. Trade stocks where you have an edge, and use good money management to hold onto profits when they come.
Technical Analysis: I’m glad the author at least acknowledges technical analysis as the “last man standing” because it will always have a place in the markets, in the same way that psychology will always have its place it medicine. TA is based on the effects on price of human emotion, so as long as humans still have a place in the market it should still be a part of any investment strategy. And if humans no longer have any place in the market, then every type of investing is dead; the markets could be utter, random chaos. That is not to say you buy every bull flag or short every overbought reading. TA is a timing mechanism, and a way to identify stocks that will have heightened volatility and, thus, opportunity to make money intraday. I always trade with the overall trend, and use technical analysis to quantify risk. TA is not a be-all end-all, but nor is any strategy. It is simply another tool, and it will always have significance because of human nature.
Call me a small timer, call me a dying breed, but I am alive and well. To say day trading is dead would be to deny my existence and my success. I have had my best month in a while, and it is because I have focused on trading the rare earth stocks, which fits the bill in terms of the types of stocks that still allow me to apply my skill-set. This article was a gross generalization, and the author chose to have a sensational title so he could get picked up on sensationalist blogs like ZeroHedge. Effective blogging PR, mind you, but ineffective analysis. The truth is that day trading is becoming more difficult, and it takes a higher degree of education and skill to succeed. I don’t think anybody can deny that. It is the same thing as saying ‘buy and hold is dead’ because the DOW is flat over the last decade, a premise that fails to take into account the idea of being a prudent stock picker and trend analyst.
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