Registered: Sep 2003
07-05-12 11:51 AM
I see these threads from time to time saying trading is a losers game or perhaps just the opposite - that it can be a highly profitable occupation.
I think (day) trading is like selling potatoes on the market. It is not a losers game, I think if you are above average you can get just enough to cover your costs (commissions) and get a little extra to cover your risk that you are participating in this activity. But can you make a shit load of money and get a huge return on your capital? Of course not. Can you make just enough return to live by? Sure, that will be the norm. The stock market and the day trading time frame in particular, are a perfectly competitive market just like the potato selling market - nothing sets you apart from the competition, I mean perhaps even your potatoes are somewhat better than the competition because you are using a special method for production and a better shop location, but in the stock market you don't even have that - we are all working from the same place, with the same information, especially if that is price and volume which is available to any one at the same time. And don't think leverage will make any difference, it only magnifies returns (positive or negative), but it doesn't change the game.
So can you make some return on your capital day trading - sure, may be enough to live by depending on the size you are trading and only if you are not from the bottom half of the traders. What if you think you are genius and way above average - extremely smart, great reactions, no emotions and very disciplined? Well, what if you are a genius who is selling potatoes? May be you can extract another percentage or two of return (adjusted for risk).
A place for a genius is not in a perfectly competitive market, where he has to compete with everybody and has no advantage. I think the place for a smart person is in a highly imperfect market - a new, or non-existing market, or just anything that he can apply his superior intelligence, nervous system or imagination, where he can create new value, and build around it a business where he can create real advantages - being first, or largest, or fastest. Just don't try to sell a better potato
My theory is that risk adjusted return is always the same across every market. There is no way around that. You want more profit - you have to take a proportionately bigger risk. It doesn't matter if you are selling a commodity (low risk, low return), or you are a startup (extremely high risk for a chance to be the next big thing), so the average is the same. But not the distribution. In the perfectly competitive market all returns are centered around the average, so no matter how good you are, that's what you gonna get. But in a high-risk environment, your skills and brains start to count - returns are skewed and it is a winner takes all market. If you think you can be a winner, you actually have a chance to grab the big returns. If you think you are average - stick to the low risk/low return commodity business, and save yourself from almost a certain failure.