Effect of Decimalization

Discussion in 'Trading' started by mama, Dec 24, 2001.

  1. mama


    By reading the posts on ET, one may conclude that everyone believes that current (unfriendly) trading environment is not going to last for long, and that "significantly better" trading environment is in store for us. In that "significantly better" environment, we shall again make great money, have lots of fun and live ever happily after.

    In my humble opinion, there's lots of hope in that belief, and we all know that hope in trading brings dangers and nasty surprises.

    I believe that the present trading environment is here to stay, it may improve from time to time, but not as much as we all would like. But why so bleak forecast? The answer is simple - decimalization. As you are all intimately familiar, before decimalization, when a trader saw a set up with high probability, entered the trade, the stock would typically go 1/8, 1/4, 3/8 in his favor, and in matter of seconds, 3/8=37.5 cents on 1,000 shares would bring quick $375 before commissions. Today the IDENTICAL TRADE would bring in 1, 2,3, 4, 5 or perhaps 8 cents
    on 1,000 shares = $80 before commissions.

    So even if we get the market that would resemble 1999 (which might occur in the next 50 to 100 years), still the same trade would yield approximately 4 to 5 times less post decimalization than prior. So, if scalping was your business (which if you daytrade, typically is), instead of making $500,000 you would make $100,000.

    Thus, I belive this "daytrading business" is losing appeal primarily due to decimalization and not due to "bad" market or any other reasons. I still trade, I love trading, and I'm still profitable, but I'm getting doubts. Any comments on this topic would be welcome. Enjoy the Holidays and Happy New Year to all of you!
  2. Private


    Decimalizaton has indeed played an important role in lessening the opportunities for traders. The extent of its effects might not be completely known for years. However, it is correct to assume that the golden age of day trading has passed. Improved market efficiency ended many careers. It amazes me every time I read another story regarding a trader who made a living by reading Christopher Farrell's first book and then trading listed stocks back in the pre-decimalization days.

    Back during the Internet stock momentum era I remember trading fast moving stocks that had a spread of a full point or more. Decimalization would have had little or no effect due to the magnitude of the moves. Unfortunately, those days of sky high stock valuations will not return soon.
  3. mama



    Even if we get into the era of high stock valuations, decimalization will still greatly effect our profits simply because decimalization by default greatly lessens volatility.

    Furthermore, daytrading business is experiencing the same faith as computers (DELL stock for example) due to "commoditization."

    Again, if decimalization was never introduced, daytrading would still be an attractive proposition and a great place to start a career.

    It seems that position trading, with stringent risk management in place, offers much better chance of success. Unfortunately, it requires lots of capital.
  4. What you say is reasonable, but daytrading is till a lucrative proposition. For an example, see Hitman's "Tading Journal" thread series. His 2nd year of daytrading listed stocks, he damm near turned six figures profit with little size.
  5. mama



    Hitman is an exception, I would say, compared to his peers at Worldco, who according to some posts at ET, are mostly gross negative. Still this year he made around 75K, last year he was not profitable, so overall he made about 40K per year since he started trading NYSE.

    Given the fact that he's exceptional, this only supports the premise that daytrading is not an attractive proposition. With much less stress and hassle, he would be able to earn the same money elsewhere, given his abilities and determination.
  6. mama,

    Interesting topic. Level compression would seem to make scalping less profitable, although it should be easier to exit losers. However, I'm not sure it would lead to lower ranges over the course of a day.
  7. rhoffman


    I respectfully disagree with the idea that deci. has killed daytrading. What it has killed (if that's the right word) is a particular strategy. It's time to invent some new strategies. In particular, if one person can do something repeatedly (for example, what Hitman is doing), then it is absolutely possible for anyone to do it. If....you precisely duplicate that person's strategy, their beliefs about what they do, and their personal phycology. There is a process in neuro-linguistic programming ( a wild subject with the means to create anything you want) known as strategy illicitation. If anyone is interested, you can e-mail me for more details. If you duplicate EVERYTHING, it has to work for you. It can't not (please excuse the grammar).
  8. mama


    What new strategy do you have in mind that would eliminate the drawbacks of decimalization? if you could kindly share it with us, it would help everyone enormously.

    NLP is a psychological concept that can be employed for example in learning a foreign language, however trading is not all "learning" - no one can teach you how to be disciplined and have patience which is essential in trading. Plain and simple.
  9. Decimalization is THE BEST thing to happen to the stock market since mayday 25 years ago. I can't imagine anyone not liking it. The few people who used to scalp nyse stocks for 1/16 at a time need to just find new strategies. The day of scalping spreads are over. IT is time to use some thought and find new strategies. I find that I am not holding much longer. From 1 hour to 3 days on the average trade. I trade almost exclusively NYSE stocks. I find that decimalization gives me an almost perfect view of what the specialist is doing and thinking. It also lets me lean on him at times. Finally it makes the average spreads much smaller. Whereas before, it would normally be 1/8 wide, now it's usually just a nickle or so wide. I honestly think I would be just as profitable in fractions, but I think that decimalization is here to stay, and a benefit for the retail trader.
    As for profitability, I made over 200% this year, and am in the 6-figure category for profits.
  10. praetorian,

    great year, well done. I agree with you. Decimals have caused change but on balance are a big improvement.
    #10     Dec 25, 2001