Is Daytrading equities something that is totally random and the outcome totally a function of luck? When we put on a "daytrade" are we just guessing that it's going higher or lower (if short)? Or does our edge take the randomness out of the equation? Is the outcome of our trades just a matter of luck or randomness? Basically is daytrading something that can be quantified and an edge gained to produce substantial profits? Now that the bubble has bursed and times are tough many are probably wondering this??? Leland
This might be a bit off topic, but I'l offer it up. I think the best trades are definitely quantifiable to a large degree even if we can't put an exact number to it. As an example almost every stock out there has a stock that it correlates to, too some extent. The more stocks that you are familure with the greater edge you will have intraday because some always lead others. For example if NOK suddendly rips higher because of some presentation or an intraday upgrade, etc, etc you might not be able to grab it fast enough, but knowing that say RFMD gets 40% of their revenues from them gives you an edge, IF NOK just bumped up 6% on expectations of increased orders and you know that rfmd supplies the rf chips for the phones and hasn't moved much then start hitting offers IMO. i.e. you can often go buy the related stock which should move in sympathy as soon as everyone else figures it out. Often this lag is substantial (meaning several seconds... ;-) A few weeks ago, someone downgraded sebl minutes before the open. It immediately dropped a buck but the naz futures were still up 9. I quickly started flipping through the software stocks...sure enough someone had left bids out on island for merq up 20 cents from the prev days close. (right in line with the where the futures were). Obviously the sebl downgrade which everyone saw on the DJ newswire had not been fully dissemnated yet. I hit the bid and sure enough within a minute there were offers 70 cents lower than the bids I had just hit. So from the above standpoint, I think you can find trades almost everyday that are definitely not random. However as a caveat, it helps greatly to trade from an office or have access to some analytics (sp?) to help you spot these trades which are occuring every day only most of the time we many not see them because our knowledge base is too small. When you are trading on a floor with 15-20 guys around you that know what they are doing. All day long your are getting information flow. Things like, "Goldman has been holding the offer for the last 10 minutes if he lifts here this thing is going.....hey he just lifted"....or some guy yelling. Watch the banks, they are crushing BAC here", or the guy across the room yelling over, hey that spread I have been trading for the last three months, it just got really wide because there is a huge buyer in "xyz" but "abc" hasn't moved yet. You might want to buy abc here, it probably plays catch up. I cannot tell you how much money that type of information flow made me. The other thing which really helps me atleast quantify things on some level is if you can use stoplimit orders. Because then you can get two things going in your favor. For example the other day atvi had some good news and the other software stocks didn't move much in sympathy and even though they all make games for the x box, play station, etc, I didn't know for sure if atvi's good news would move erts and ttwo. On the open the two didn't move up much. But atvi continued to move up and thinking that TTWO might follow later that day if you put in a buystop above the current price it meant that the stocks moved obviously seemed to be confirming your thesis. In the above case the stock ripped pretty hard. It certainly could have been random....but futures were sliding lower when it took off, TTWO had pretty much been in a 25 cent range before it bolted a dollar. So for me atleast it was not random. I couldn't assign a probablity to it lifting, but I would feel confident that it was greater than 50%. Cheers. Oh and it may not be quantifable either but I have noticted that when that guy on the squawk box says that a paper just walked into the pit and is trying to buy 100 contracts and you know it's been locals only for the last few minutes and we have been drifting down. Buy just about anything you can, cause you are non-randomly about to rip like hell.
Each trade, whether daytrade or long term has a random outcome. If you trade with a method that conforms to the nature of the market then you should be able to make $$$ over the long run. If your method is random then your long-term success will also be random. If you use a systematic approach, whether profitable or not your results over the long run should be anything but random.
it may be random to some and logical to others, if you understand and can see the patterns that occur, and you can make money from predicting their outcomes, then it's logical. but to everyone else, it's random
The existence of profitable daytraders answers the question. Also, random series run in streaks, and so it is possible to profit on them. Who knows, the entire history of the Dow might be one, long, streak in a random process. It's not worth worrying about. To my knowledge, the definition of randomness does not include a statute of limitations on how long a streak may last.
Thanks for the great insights. Basically trading is all about probabilities and positive expectancy, etc. One must gain an edge and be able to put the odds in your favor. How does one gain an edge? Well thats a whole different thread (LOL) Leland
This a great philisophical question. It's a question that I've thought alot about . Not only could you ask, is day trading random, but is the market in general "random"? Because there are profitable day traders, clearly it isn't as "random" as flipping a coin and picking heads or tails. You'd never make money in the long run betting on such a 50/50 proposition (the very long run). My contention is that: Human emotions drive stock prices. Human emotions don't change. Therefore, stock price patterns don't change. To me, that kind of reasoning gives me confidence in trading and in knowing that I'm not just guessing when it comes to stock trades. I can't tell you exactly where the DOW will close tomorrow, whether it'll be at 9571.61 or 9745.20. But I can tell you that the market will have up days and down days in the month of June, 2002. I'm certain of that.
No trends can really emerge in a daytrade. You need to be a sharpshooter which is not possible. To predict the movement of a stock in a 1 day period is not possible, that is why you see the percentages so high in failure.
Leland..... Here's the answers (in appropriate order) to your question. (And I'll be brief.) #1: Sometimes. #2: No. Hope this clears things up for everyone. BSAM