Let me just start by saying I don't think I have any unique insights on this issue, so I'm not trying to antagonize anyone or accuse them of not being successful. I know this topic has probably been beat nearly to death, but I haven't really found much to go on yet. The question is, if you can consistently achieve returns that are high enough to make a living on a small account, then by simple compounding or managing others money why couldn't you quickly run that up to the billions? For example, a 40% annual return compounds to over 800 times the starting amount after twenty years. So your own money should build up really quickly, or you should be able to develop enough of a history that you could get other people to let you manage their money. After all, most actively managed mutual funds don't beat their indexes in the long-term, so if someone is consistently far exceeding them then they should be in high demand. And as a corollary, if the pros who can devote all their time and resources to investing can't, on average, beat the market, then what chance does an individual have who may be doing it in their part time? These are basically some of the tenets that I exposed to when I started investing by the bogleheads community. They preach passive investing in index funds and everything they said seems reasonable. I never really considered doing things any differently until a couple months ago when I found Interactive Brokers and the wide variety of investment products available and the low commissions. Long story short, but I jumped right in and started playing around with options and index futures, with crazy amounts of leverage and generating ridiculous swings. I started off great making lots of plays that worked out and making money almost every day. Most of my strategies, whether I knew it or not, were either aligned with swing trading or scalping. But for the most part I was flying by the seat of my pants, taking on too much risk and paying too much in commission by overtrading. Luckily this story doesn't end with me losing it all, because after a few crazy weeks I'm up around 10%. But I've been humbled by the experience, and I'm thinking I should give up the notion that I could ever be a professional trader unless I could get some satisfying answers to the basic question of "How could I possibly plan to beat the pros by investing in my spare time?" A few people that I've talked with about it said they can have an advantage over the pros by being nimble. Of course that sounds reasonable because let's say there was some single that indicated stocks had a high probability of dropping by .25% over the next five minutes. If you had 500k invested in various long positions you could simply short 16 contracts of ES (S&P emini) to in effect instantly flip your whole account from long to short. And you would have no trouble instantly getting filled at the going price because millions of contracts worth over $100b of this security alone are traded every day, so there is plenty of liquidity. Someone with $500m would need to sell 16,000 contracts though, and while it wouldn't take a huge amount of time, it would still take a few minutes and you might miss the move and would probably pay on average a tick or two more than the small investor. I'm sure this is a gross oversimplification of technical analysis, but from what I understand it boils down to predicting prices changes in the immediate future and the best way to take advantage of knowing where it will move would be to make yourself 100% long or 100% short that position. The two problems I have with this are, you still need to see a signal that stocks are going to fall which other people aren't seeing, otherwise no one would buy what you are selling. And secondly, even though you might not be able to scale up a strategy where you can instantly move in, out, or completely invert your position up to account values in the hundreds of millions, it would still work up to say around $25-$50m, which is probably 100 times what most people are actively trading. So if it's so easy why aren't more people making tens of millions by doing it? A lot of what I've seen are "systems" people will sell you and guarantee huge results when if it were possible they would just exploit it themselves to the maximum possible degree instead of letting others get in on it so the edge dries up. Another tactic I was testing out was scalping, mostly on ES again because each tick is worth $12.50, so if you could make the other guy pay the spread and always buy at the bid and sell at the ask, then you could make on average up to two ticks per trade minus commissions. Now I was thinking this was something good the little guy could do. It's not a ton of money so maybe it wouldn't attract the attention of some of the big shots, and there is a much smaller limit to the amount you could make while scalping. So it seems like you could make a very good return on your account size without the ability to extrapolate it to the point where you are making millions of dollars a day eventually. The problem I noticed with scalping though is you always seem to be behind the high frequency traders and market makers who can load up the order book in a microsecond after a price change. Let's say the current bid on an ES contract is 1250 and the ask is 1250.25. If you look at the order book there will probably be at least 500 bids and asks at each price, so if you put a bid in all the ones before you would have to fill before you do, or the price could move against you and then you end up paying the spread. The market makers seem to be able to cancel their orders before the tick changes so they never get caught out, but you don't have that luxury. Even if you have the same technology and can automate your process, latency would kill you because the 50 milliseconds it takes for an order to go from your computer to New York or Chicago is way too long and 500 other orders got there before you. There might be a little bit of money to be made when the order book is light, or when you are providing liquidity to other securities which don't have as many market makers, but in any case it doesn't seem like you could beat the pros and scalping, you just might be able to pick up some of their scraps. What are the refutations to these arguments, and what are some of the things I missed that do give the little guy an edge? Don't get me wrong, I really do want to believe I could make a living being a trader. It seems like the type of thing that, if it's possible, I would be very good at. I'm just worried about wasting a whole lot of my time to find out I was just dead money.
Just taking a break here. I enjoyed reading your commentary. It is often a good idea to read the earliest posts of any ET member. You probably are very typical of a potential trader who has not followed the market very much. Maybe you do believe what you posted. A good trader does not have to trade full time. What the market offers is huge compared to the needs of anyone and including people who are working on tough problems. Costs only accumulate so fast. There is no need to predict or run stats on market behavior. Markets are very orderly and you always have time to optimize taking the offer. The limiting factors on making money in markets are still foreign to you and that is a normal state for someone who will be "out of it" if you continue to think as the majority do. I suggest you write out a parthership agreement with the markets. At that time you may find out just what your job really is and just what the market's job really is. Money is made by compounding. As the world turns, you can move your money accordingly and take the market's full offer as each market has its RTH's. The price you trade in a market lags the signals given to you from many sources. Start over.
Sorry couldn't bring myself to read everything you wrote. But, in general you are asking "why can't one scale to being insanely rich" by trading. In fact, you can over several years --that is if you have an edge!! Most traders don't have an edge. They don't have a consistent way of making money in the markets. The success rate among the "successful" -- vendors, professionals, etc is much lower then you would imagine and it is often marginal. So, that's a large part of the answer. The other factor is that compounding isn't as a strong force that people make it out to be under even relatively long periods of time, i.e 3 to 5 years. Even those that have strategies that work, even then, 5 years is a long time. The other factor is that the utility value of money changes as we acquire more money wealth. Risking 50% on a 10k account is not nearly the same as risking 50% on a million dollars. To assume you can continue to grow an account at same rate implies that you'd just continue to risk the same amount. I know I wouldn't. Also the amount of starting capital even for a tiny to small account is non trivial, the account size requires is around 20k to 25k. The final limit is, of course, the extra frictions as the account grows and the limit to the amount of shares one could trade. However, it is not the primary reason that traders aren't rich -- the primary reason is that only a very few can trade profitably long term. As for why someone wouldn't trade a system to "full capacity" is again that matter of uncertainty. There aren't any methods that can be proven to work in the future.No method can be proven to work in the future. So, there is always a great deal of uncertainty in trading. And, most systems aren't traded to capacity anyway. They aren't traded to capacity because of the uncertainty factor. Your idea of "beating the pros" is misguided. Only a few people know where the market is going. It is not a competition if one is speculating. Your idea of pros beating the market is likewise misguided. It is not my goal to "beat the market" but to make what I want to make and meet my goals. I often have left 2x as much on the table because I met my goals. I'm a lot like my mentor Gary Smith, Gary would often sell at the tops but he wouldn't short even though he could have. He was probably leaving 50% on the table. It is not about taking everything but keeping what you take. Why do "us' professionals leave money on the table? Balance. Balance and humility. I had a principle for a long time that I'd never insta-reverse. However, my principles are always subject to review and I've started to insta-reverse more but if I'm wrong then i get out very quickly on an insta-reverse... very quickly
It is very hard to day trade over $10-$20 million when trading individual stocks. I find that $4-$6 million is my sweet spot, and even then i find it hard to close out everything at end of day. For example, day trading $20 million would be eight 50,000 share positions in a $50 stock. Try opening and closing 50,000 share positions intra day. That is quite large. $40 million would be eight 100,000 share positions of an avg $50 stock. The only stocks that would allow that would be the super mega caps for which the "edge" is much less if non existent. It is much easier to be nimble with 5,000 share position of a mid cap stock for which there might be an edge. So if you want to day trade over $50 million dollars intra day, that pretty much limits you for the most part to ETFs, index futures, treasuries and currencies for which there is much less edge. the fact that there aren't many if any that have made billion dollars from day trading or even swing trading there own money, shows you that there might not be a long term edge trading the deeper markets. the few successful big money earning traders that i know made trading mid cap stocks for the most part and sector ETFs with strategies that can't scale up to ever hope to hitting $10 million let alone $1 billion.
If everyone thought this there would be no Soros, SAC, Citadel, Marvin Schwartz, Warren Buffet, or Paul Tudor Jones.
To generate returns: As your account grows, your holding period has to grow, the liquidity in your underlying asset has to be better, or the breadth of assets you trade has to increase. And if you want to scalp ES, you could do it in a 50MM account. The question is if it is a pointless exercise if you aren't in the big's pit.
I don't have any answers, I just have my perceptions based on my limited background. A background that started under the presumption of you can't beat the market so don't try. It's a perception I would like to change, but I need evidence to do it. I agree, and I don't want to outright dismiss the chance that I could turn out to be some prodigy when it comes to investing, but the odds are clearly against it. Do you believe one can actually become insanely rich by day trading, or is there some upper limit where the system falls apart? I think that's a good point. While there are really deep markets where you can move $50 to $100m in an instant, they might be efficient markets where you don't have an edge. And then you would need to look to the smaller ones where there would be an upper limit to the amount of money you can move around without having too much of an effect. In that case I could see someone being able to outperform the market by a large percentage without the compounding issue. So realistically, on a risk adjusted basis, how much could a day trader outperform the market by? I had a number in my head of around 10% a year, which basically said to me don't bother thinking about it until you have at least $1m because the returns wouldn't be worth your time until then. Of course it would take most people until at least their forties until they could save up that kind of capital, and by then you would probably have such different priorities that you couldn't possibly decide to just start day trading with your life savings. I think ideally it would be something you work your way into in your spare time, but I just have that nagging doubt about how can an amateur beat the pros who are able to spend all their time watching the markets?
Sounds to me like your a really negative person and extremely greedy. Give up trying to trade! Those two things alone will make you lose all your money.