Hi all. This is my first post. There seems to be a fair amount of evidence that intraday stock prices move (mostly) randomly on short time scales. My question then is what if you were a day trader and you randomly picked a buy point, and then a sell point every day, for a given stock. What would your long term average be (ignoring commissions) after many years? If stock prices move randomly, it would seem that you would win and lose about the same amount on average, except for the long term trend in the stock price. Therefore, it seems like this strategy would simply follow the long term price movement of the stock. However, I also read that most day traders LOSE money. Does that mean that most day traders do WORSE than random? That is, they are actually surprisingly skilled at doing poorly. If this is true, why? Seems like it can't just be the commissions, which I ignored above. Would be curious to hear your thoughts on any of the above. Thanks.
It's a negative sum game. Every time you trade, you realize an immediate and guaranteed loss because of the bid/ask spread and commissions. To overcome this effect, you have to be way better than "average" to break even.
Thanks for the reply. I am mainly curious about the silly, academic strategy I outlined above above, under the conditions of perfect liquidity, market price buy and sell orders, and no commissions. I'm not sure if the bid/ask spread comes into play here. On average, whatever the trade executes at should ALSO be random (recall I buy randomly and sell randomly each day). I'm asking because even though this random buy/sell strategy is absurd, I think understanding its consequences would provide a lot of insight into how prices fluctuate, and how more (or less) intelligent strategies differ. It would be easy to back test this "strategy", which I might do later this week.
Direct me to any 3- or 5-minute chart of a stock with decent volume (1,000,000 shares a day or more) and I will show you textbook price action patterns that demonstrate the intraday patterns are no more random than 90 days of price bars on a daily chart.
Think of commission and slipage as the Zero in the roulette game, if you go in and play a thousand time on black or red, what is the chance you will win? An edge in trading is aka you either become the house, or you find a way to "change" the wheel such that you have more black or red in the wheel, and you bid on that majority number
I'm absolutely just guessing, but I would estimate that a "random" bet on a stock will probably yield a 45% win rate, 55% lose rate. In a sideways market, I guess trading is a zero-sum game and the winners would be the Goldmans, BofA, Raj Rajaratnams of the world. Basically insiders trading on illegal info, banks with porous walls between investment banking and trading departments, the ability to pump stocks with upgrades, insight into order flow. Maybe some more legitimate trading edges such as unlimited capital, better research, etc. Basically trading is like swimming upstream for the little guy.
A person walking into a casino is at a serious disadvantage and consistently loses money. The House/casino has an unfair advantage. Same for wallstreet firms vs. traders. Works the same way. Same result.