Financial forecasting is all about the future. Any company of a certain size is going to do cash and income forecasts and the accountants are going to do that. Not to mention that the annual budget is all about what is assumed is “going to happen”.
There is a rather large group of people who daytrade on ‘technical analysis’ which is heavily based on the idea that you can extract probability of future pricing events based on cycles in historical data. It is very debatable whether such trading makes rational sense or whether it works only because of a delusional and shared self-fulfilling prophecy, but lots of non-crackpot people view it as a valid strategy.
Some thoughts:
- I suspect that the vast majority of ordinary folks who have tried daytrading* have been unsuccessful at it, if you factor in all costs and time spent. I have no hard proof of this, but anecdotally, it seems true, and from a commonsense standpoint, I am skeptical of the concept
- Daytrading in my usage means heavy intra-day trading of certain high-volume securities, hoping to capitalize primarily on technical analysis (trends, basically), rather than fundamental analysis.
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You have multiple things dragging on your returns:
a) Cost of commissions
b) Cost of spreads (if you buy at the ask and sell at the bid - if you use limit orders well you MIGHT do well on this aspect)
c) Cost of research/software
d) Cost of your time -
You are presumably competing against large firms with plenty of capital and the ability to amortize research costs, software, etc against a much larger volume of trades they do. Of course, most of these firms are presumably run by folks with many years of experience in this area.
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Do not be readily convinced by the assertion that a particular strategy or algorithm has generated enormous profits in backtesting. Backtesting is of course a sensible approach to help determine viable strategies (not only for day-trading), but it is very easy to manipulate in ways that fool the unsophisticated. There are a lot of ways in which backtesting can be abused, but among the more common is data-mining. Given a large amount of historical stock data and some variables that MIGHT logically have some impact on stock prices, it is fairly easy to find some formulas using those variables that will ‘beat the market’. But even a series of coin flips might do so. That doesn’t make coin flips a good strategy for timing the market, and you should be similarly skeptical of strategies that may have been successful in the past. I’m oversimplifying here, but a fuller discussion of the related issues would probably merit a thread of it’s own.
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- All of the above having been said, there are some sensible ways that the average investor could probably improve his/her expected performance, long term (often, but not necessarily exclusively, by lowering costs and/or improving tax efficiency). Again, it’s a big topic, and to some extent has been discussed in previous QT3 threads, I think. If you want to go down that discussion path, perhaps re-open one of the old threads or in some way indicate your interest.
You’ll take some intoductory level statistics courses, and maybe some mid level ones depending on your school and how long you actually have to be in it by the time you get to take the CPA exam but that’s only because they’re probably required for the general level of degree you get. Once you get the numbers where you want, ‘high school math’ is probably insulting to reasonably intellegent high-schoolers.
Of course, the how and why of getting the numbers to that point is the main point of Accounting as a profession. Or at least my friends that are accountants and CPA’s say after they’ve had a few drinks.
IME, Finance and Econ tend to be the most ‘math-heavy’ b-school courses.
Thanks everyone, you’ve all helped. FWIW, my definition of day trading is “trading in stocks that I know about in industries that I’m familiar with and that I’ve watched for a while, but for less time than the 1 year cutoff for the higher capital gains tax.” I completely agree that it’s the height of folly to imagine some pattern-seeking software is going to outguess a five-hour trend, the market is WAY too volatile and capricious for that to work. But right now there are quite a few stocks that, barring the US economy tanking (I know, I know) are very undervalued due to investor panic from the banking crisis. I’m generally looking to cash in if it fluctuates upward significantly, or hold if it rolls downward and wait for equity to return. I think it’s a fairly safe method at the moment, provided you absolutely don’t need the money and can wait for the stock to recover over a long period.
H.
Houngan - what you’re describing isn’t, IIUC, what most folks would call day-trading. Depending on who is defining the terms, it’s probably short-term trading.
You could always do currency trading, that’s even more fun and might be easier to hide too.
Actually, he was a pretty intelligent guy, he just thought that he could beat the game. Like any gambler, I guess. And he was unlucky enough to have some good days early on.
And I hear you on advanced calculus - I had YEARS of advanced calculus, diff e, etc. And in 25 years of working in the heavy sciences, I’ve not only never had to use any of that, I’ve never come CLOSE to needing it. When I think of all the time in undergrad and grad school I spent on that “stuff” when I could have been doing more important things (like trying new beers and playing darts…)
Thats short term trading (position and swing can go in there too). Its a lot of fun. The biggest risk is if you are playing with money you cannot afford to lose. You get scared and you sell too early, it really has a very large impact on how you trade.
If you can afford to lose every cent then I would say go for it, its a lot of fun.
Some advice: I wouldn’t buy for a few weeks. A few reasons a.) this is earnings season so there can be dramatic swings b.) this has been an amazing few weeks in the stock market so you can expect a nice downswing sometime soon, thats a good time to scoop up some bargains.
You can also do yourself a favour and read a book on the subject before diving in, it could save you a lot of dollars and they can be good reads (try anything by Alexander Elder as a solid no nonsense read).
Finally while you wait to trade for real (if you take my above advice) go and paper trade (simulated) a few days to see how it feels before using your own money (here is one which is simple to use http://simulator.investopedia.com/?viewed=1 )
Hope that helps and good luck!
After seeing otherwise great stock drop 20% based on no news, only a market maker deciding that it should open at a much lower price than it closed I decided not to fight those whose full time job was to try and take my money and never went ahead with my plans for heavy trading.
Read up on someone like Phil Grande and subscribe to his service. The amount you have to work with will what types of stocks you’re going to work with.
Some advice: I wouldn’t buy for a few weeks. A few reasons a.) this is earnings season so there can be dramatic swings b.) this has been an amazing few weeks in the stock market so you can expect a nice downswing sometime soon, thats a good time to scoop up some bargains.
Not to pick on Rod but this is market timing. Don’t do it. If you’re going to invest, go long and be consistent.
And don’t day trade. FFS.
Just working from what’s already in the thread, but, I’d say the obvious risk of daytrading is that you will lose money. The non-obvious risk is that you will make some nice money, quickly and easily, and that this will activate a little trigger in your brain that you had no way of knowing was there and you will become a problem gambler.
Look at it this way - if day trading was an awesome way to make money, wouldn’t more people be doing it?
As mentioned, day trading is a form of gambling. Plus the house has the better odds.
Not to reiterate this ad nauseum…given the turmoil in the industry right now daytrading firms have seen a bit of a resurgence with all of the people who are desperately trying to remain in a “wall street” job and think that daytrading is the life preserver they have been looking for. It’s actually quite sad in some cases, it’s usually someone who can’t or won’t face the reality that the career they had is gone forever so the desperately try to cling rather than face an uncertain future.
Back to the original point…the only people who make money daytrading are the people who won daytrading firms. Sure, there are some people who end up making money, and I would guess if you go into a daytrading firm the pitch they give you solely focuses on the few who make it and ignore the vast majority who lose everything they invest.
It’s gambling, you are better off taking the money to a casino. At least there you will know the odds and rules of the game.
Folks, we’ve covered the difference between what I want to do and actual “daytrading.”
Second, this isn’t gambling, for two very important reasons:
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When gambling, if you have an infinite amount of money, you are guaranteed that a win is coming. Not enough to offset losses unless you actually have an infinite amount of money and are using a progressive system, but the streak will end. Not so with the stock market, companies can fold.
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The stock market isn’t a guaranteed loss, like gambling. If a stock drops, you can hold until it rebounds.
So let’s stop comparing them, eh? I gamble for fun (I don’t have the gene/brain switch that makes gambling dangerous) and I invest in stocks for profit. My Roth is in VFINX, at my age that’s as risky as I want it. But I also have liquid cash that I don’t mind being a bit more risky with.
Anyway, thanks for the recommendations on books, I’ll pick them up.
H.
I have some Lehman Brothers stock you can hold until it rebounds.
FFS, see point 1. Why is everybody so impressed with themselves when they state the obvious?
H.
You’re confusing the differences between daytrading and investing.
Edit: NVM…I just reread you’re second post. For the record, what you’re talking about then is not daytrading. It’s short term investing. A vastly different beast then daytrading.