Daytrading leads to Inevitable Failure? Is Swing Trading the only Viable Path?
- Thread starter heynow
- Start date
I've had an opportunity over the years to profile hundreds of different traders and methods. I traded futures on both Chicago exchanges, I was a bank trader in New York, traded at a prop firm and now I interact with a few dozen independent retail traders. I'll share a few conclusions.
Day traders in equities have a far better percentage of success than day traders in futures. Forex forget about it.
If I were to break down the stocks vs. futures/forex argument it would be this.
Stock traders follow multiple markets.
If XYZ isn't happening today than perhaps ABC is. Good stock traders will spread, they'll buy the strongest stock not the weakest, they can read order flow on the tape-impossible in ES because of programs-they know how to game the price improvement system etc.
Futures traders have zero to no ST transaction edge. That's not to say you can't be profitable but you're giving up an edge in your quest for profitability. Forex-get real. You're playing against the house. If you think Gain or whoever is going to allow you to scale up and pick them off on size all day you're delusional.
From this point on I'm speaking ONLY about futures and less about spreaders than outright traders:
Day trading isn't as much a losing method as much as day traders are losing participants. Not the paradox it seems. The "good" day traders in futures-and they are VERY rare-don't wake up thinking "I'm going to trade today because I should be averaging X." Instead they wake up thinking maybe just maybe I'll see something so compelling that I'll take a shot.
I wrote an article last year that talked a little about the problems I see with day trading exclusively. A few of thoughts have evolved since then and maybe it's not the best written or ground breaking article but alas I'll share it in a new post below:
Day traders in equities have a far better percentage of success than day traders in futures. Forex forget about it.
If I were to break down the stocks vs. futures/forex argument it would be this.
Stock traders follow multiple markets.
If XYZ isn't happening today than perhaps ABC is. Good stock traders will spread, they'll buy the strongest stock not the weakest, they can read order flow on the tape-impossible in ES because of programs-they know how to game the price improvement system etc.
Futures traders have zero to no ST transaction edge. That's not to say you can't be profitable but you're giving up an edge in your quest for profitability. Forex-get real. You're playing against the house. If you think Gain or whoever is going to allow you to scale up and pick them off on size all day you're delusional.
From this point on I'm speaking ONLY about futures and less about spreaders than outright traders:
Day trading isn't as much a losing method as much as day traders are losing participants. Not the paradox it seems. The "good" day traders in futures-and they are VERY rare-don't wake up thinking "I'm going to trade today because I should be averaging X." Instead they wake up thinking maybe just maybe I'll see something so compelling that I'll take a shot.
I wrote an article last year that talked a little about the problems I see with day trading exclusively. A few of thoughts have evolved since then and maybe it's not the best written or ground breaking article but alas I'll share it in a new post below:
Tips to Help You Trade Like the Pros
By Kurt Eckhardt | TradingMarkets.com | April 21, 2008
Few other fields have more published rules and guidelines than trading. After all, there's no Idiots Guide To Trial Defense. We've been inundated for decades with the old saws about cutting losses quickly and letting winners run. Still we see little improvement in the trading performance of most participants. Futures trading is truly a zero sum game.
Each night the Clearing House pays out the same amount of money it collects. Toss in commissions, charts, research and the endeavor quickly reaches negative expectancy. Since I began trading on the CBOT floor in 1982 much has changed. Electronic access, FIFO and lower commissions have vastly leveled the playing field between professionals and the rest of us. While technological advancements have made trading short term more appealing than a generation ago, in my view retail traders should consider trading less. In fact rather than enhancing returns and cutting risk most short term strategies only accentuate the losses associated with futures trading. Allow me to share with you some cautionary aspects and a bit of advice that could help you clear some preliminary hurdles.
Commissions:
One of the least talked about advantages of being an Exchange member are ultra low commissions. I'll let you in on a dirty secret. The most legendary floor traders would have been net losers if they'd been paying the same commission schedule as you. In the larger financial products it was very typical for a floor trader to trade 1000 contracts a day in hopes of making just $1000 a day in profits. Superstar traders like Tom Baldwin would trade 20,000 lots on a busy day. I'd wager that many of you who've suffered grave drawdowns in your futures account are gross positive! Think about the paradox. Profitable trading yet net losses.
If your trading style is of a scalping nature I have a couple of suggestions. If you're trading more than several hundred contracts a day then lease an exchange membership. I won't go into the details here but for larger traders a seat will cut your costs dramatically. If you choose to remain at the retail level then try trading an exchange or product with low fees. Eurex charges far less than U.S. Exchanges. If you must scalp in America then look at low fee products like Treasuries. Or if you want to scalp a non-fixed income product choose a market with a larger minimum tick size. Paying $4-5 a r/t to scalp markets with $5 tick size is nonsensical. Cutting transaction costs is one of your most viable edges.
Short Term Technical Trading: I'm going to be both emphatic and controversial. There's is no system based on short term indicators generating anything other than real time random performance. It's utterly naive to believe the next few ticks can be handicapped by a stale set of variable equations. Now I know some of you are thinking I'm out of touch. That's because you've just successfully back tested some esoteric system with divergences, crossovers and filters.
You're sure this new optimized system is gold.
Think again. First the obvious. The Goldman's, Morgan's and big bucks CTA's with their vast computing power and impeccable tick data have already tested every conceivable indicator under the sun. Even if you're onto something remotely consistent you'll be subject to all the problems of high frequency short term trading such as commission costs, unable price orders and slippage. Now here's the rub. There's many signals derived from longer term strategies that will produce quality short term trades. Which signal has a more reliable chance of generating short term follow through? A new 5 minute high or a new monthly high? As a technician doesn't it make better sense to monitor a wider array of markets and spot higher percentage opportunities then to "specialize" in a single market and take a series of weak signals derived from noise?
Trade The News:
One of the pretexts of technical analysis is the theory that news is already reflected in price. Nonsense. Markets are organic. Market moving institutional participants are constantly reevaluating their positions based on evolving perceptions of fundamental information. Think of the market as a basketball game. We're watching a half court offense methodically passing the ball around the perimeter in search of a high percentage shot. Suddenly an athletic defender intercepts the pass and runs down the court uncontested for a slam dunk. That defender's name is News and he can spoil even your most conservative plans. News often comes unannounced. News can be as subtle as a dry Sunday in July when perceptive traders figure out there's a potential drought and push futures to an up limit open on Monday. No matter how mechanical and detached your approach you'll be frequently confronted by decidingly anti-technical factors.
Position Sizing:
It only matters how much you bet. Too many times we've all made historic market calls only to take a small profit much too soon and then watch the market explode for weeks on end in the direction we anticipated Then the next time we try to milk a winning trade for a bit more and see our open profit evaporate. It seems that picking the markets direction is seemingly easier than extracting consistent profits. I preach two approaches. For folks who're reasonably well off and seeking more modest returns I suggest you vastly under trade. Practice with scaling out of winners along with a hard protective stops. Larger accounts should risk no more than 1-2% their equity on each trade. One can always save up an additional $5000 in trading capital but refunding an account with an extra million isn't as simple as moonlighting at your day job.
For smaller accounts I advocate a more wide open strategy. You're probably not going to double your account 12 consecutive times trading for 1 tick at a time. None of us are that good. What you can do however is hit an occasional home run. I'm not saying just let it rip without an uncle point but you must intelligently look for opportunities that'll give you a quantum leap in return. Unless you're still a teenager, compounding $5000 by 20% a year isn't going to be a life changing experience.
Learn About Options: Like futures themselves, options are increasingly traded electronically and have enjoyed tremendous surges in volume and liquidity. For small traders the ability to over leverage with a defined stop loss on equity is a boon to your big play potential. I'll give you a pertinent example. This past December I had strong resistance on the March e-mini S&P at 1511. I decided I wanted to risk $10,000 on a short position. Index futures margins would have allowed me to short just 2 futures.
A 100 point down move would in turn have resulted in a $10,000 profit ($50 per point x 2 contracts). Instead I bought $10,000 worth of put spreads with an expected 8-1 payoff if futures closed below 1400 at January expiration. Fortunately the trade worked and my 10k turned into a minor windfall of $80,000. Another advantage to long premium options trades is the ability to trade futures contrary to your options position. If you're long calls you can then be a natural seller of futures.
Often if you're in a rhythm you'll quickly pay the cost of your options with the proceeds from your gamma hedging. Accept Your Psychological Shortcomings: We're all flawed in one way or another. Discretionary traders in particular are subject to the pitfalls of poor trade selection, over trading, undefined risk tolerance and revenge trading. A movie actor can vacillate between bi-polar feelings of arrogance and guilt but what makes his foibles different than a traders is the simple fact that he gets paid no matter what. We will never trade perfectly but must attempt to at least minimize our natural self destructive impulses. Keep a journal of your trades.
Don't just mimic the information contained in your brokerage statement. Instead keep a log of you felt emotionally about each trade. Like me you'll find there's commonalities with many of your losses. For instance if I fail to take a signal that would've resulted in a big winner I'll invariably next act on a weak signal and often over trade it to boot. Doing nothing more than eliminating your "trouble spots" will save you money that can be dedicated to the next good setup you perceive.
Hopefully I'll have an opportunity to expand on these points in subsequent articles. Till then, best of trading and good health to all.
Kurt J. Eckhardt began his trading career in 1982 as an active floor trader in the Treasury Bond pit at the Chicago Board of Trade. Today Kurt is president of Eckhardt Research and Trading which offers the first ever futures pool to trade live on line while educating clients. Please go to Ecktrade.com for details and contact information.
By Kurt Eckhardt | TradingMarkets.com | April 21, 2008
Few other fields have more published rules and guidelines than trading. After all, there's no Idiots Guide To Trial Defense. We've been inundated for decades with the old saws about cutting losses quickly and letting winners run. Still we see little improvement in the trading performance of most participants. Futures trading is truly a zero sum game.
Each night the Clearing House pays out the same amount of money it collects. Toss in commissions, charts, research and the endeavor quickly reaches negative expectancy. Since I began trading on the CBOT floor in 1982 much has changed. Electronic access, FIFO and lower commissions have vastly leveled the playing field between professionals and the rest of us. While technological advancements have made trading short term more appealing than a generation ago, in my view retail traders should consider trading less. In fact rather than enhancing returns and cutting risk most short term strategies only accentuate the losses associated with futures trading. Allow me to share with you some cautionary aspects and a bit of advice that could help you clear some preliminary hurdles.
Commissions:
One of the least talked about advantages of being an Exchange member are ultra low commissions. I'll let you in on a dirty secret. The most legendary floor traders would have been net losers if they'd been paying the same commission schedule as you. In the larger financial products it was very typical for a floor trader to trade 1000 contracts a day in hopes of making just $1000 a day in profits. Superstar traders like Tom Baldwin would trade 20,000 lots on a busy day. I'd wager that many of you who've suffered grave drawdowns in your futures account are gross positive! Think about the paradox. Profitable trading yet net losses.
If your trading style is of a scalping nature I have a couple of suggestions. If you're trading more than several hundred contracts a day then lease an exchange membership. I won't go into the details here but for larger traders a seat will cut your costs dramatically. If you choose to remain at the retail level then try trading an exchange or product with low fees. Eurex charges far less than U.S. Exchanges. If you must scalp in America then look at low fee products like Treasuries. Or if you want to scalp a non-fixed income product choose a market with a larger minimum tick size. Paying $4-5 a r/t to scalp markets with $5 tick size is nonsensical. Cutting transaction costs is one of your most viable edges.
Short Term Technical Trading: I'm going to be both emphatic and controversial. There's is no system based on short term indicators generating anything other than real time random performance. It's utterly naive to believe the next few ticks can be handicapped by a stale set of variable equations. Now I know some of you are thinking I'm out of touch. That's because you've just successfully back tested some esoteric system with divergences, crossovers and filters.
You're sure this new optimized system is gold.
Think again. First the obvious. The Goldman's, Morgan's and big bucks CTA's with their vast computing power and impeccable tick data have already tested every conceivable indicator under the sun. Even if you're onto something remotely consistent you'll be subject to all the problems of high frequency short term trading such as commission costs, unable price orders and slippage. Now here's the rub. There's many signals derived from longer term strategies that will produce quality short term trades. Which signal has a more reliable chance of generating short term follow through? A new 5 minute high or a new monthly high? As a technician doesn't it make better sense to monitor a wider array of markets and spot higher percentage opportunities then to "specialize" in a single market and take a series of weak signals derived from noise?
Trade The News:
One of the pretexts of technical analysis is the theory that news is already reflected in price. Nonsense. Markets are organic. Market moving institutional participants are constantly reevaluating their positions based on evolving perceptions of fundamental information. Think of the market as a basketball game. We're watching a half court offense methodically passing the ball around the perimeter in search of a high percentage shot. Suddenly an athletic defender intercepts the pass and runs down the court uncontested for a slam dunk. That defender's name is News and he can spoil even your most conservative plans. News often comes unannounced. News can be as subtle as a dry Sunday in July when perceptive traders figure out there's a potential drought and push futures to an up limit open on Monday. No matter how mechanical and detached your approach you'll be frequently confronted by decidingly anti-technical factors.
Position Sizing:
It only matters how much you bet. Too many times we've all made historic market calls only to take a small profit much too soon and then watch the market explode for weeks on end in the direction we anticipated Then the next time we try to milk a winning trade for a bit more and see our open profit evaporate. It seems that picking the markets direction is seemingly easier than extracting consistent profits. I preach two approaches. For folks who're reasonably well off and seeking more modest returns I suggest you vastly under trade. Practice with scaling out of winners along with a hard protective stops. Larger accounts should risk no more than 1-2% their equity on each trade. One can always save up an additional $5000 in trading capital but refunding an account with an extra million isn't as simple as moonlighting at your day job.
For smaller accounts I advocate a more wide open strategy. You're probably not going to double your account 12 consecutive times trading for 1 tick at a time. None of us are that good. What you can do however is hit an occasional home run. I'm not saying just let it rip without an uncle point but you must intelligently look for opportunities that'll give you a quantum leap in return. Unless you're still a teenager, compounding $5000 by 20% a year isn't going to be a life changing experience.
Learn About Options: Like futures themselves, options are increasingly traded electronically and have enjoyed tremendous surges in volume and liquidity. For small traders the ability to over leverage with a defined stop loss on equity is a boon to your big play potential. I'll give you a pertinent example. This past December I had strong resistance on the March e-mini S&P at 1511. I decided I wanted to risk $10,000 on a short position. Index futures margins would have allowed me to short just 2 futures.
A 100 point down move would in turn have resulted in a $10,000 profit ($50 per point x 2 contracts). Instead I bought $10,000 worth of put spreads with an expected 8-1 payoff if futures closed below 1400 at January expiration. Fortunately the trade worked and my 10k turned into a minor windfall of $80,000. Another advantage to long premium options trades is the ability to trade futures contrary to your options position. If you're long calls you can then be a natural seller of futures.
Often if you're in a rhythm you'll quickly pay the cost of your options with the proceeds from your gamma hedging. Accept Your Psychological Shortcomings: We're all flawed in one way or another. Discretionary traders in particular are subject to the pitfalls of poor trade selection, over trading, undefined risk tolerance and revenge trading. A movie actor can vacillate between bi-polar feelings of arrogance and guilt but what makes his foibles different than a traders is the simple fact that he gets paid no matter what. We will never trade perfectly but must attempt to at least minimize our natural self destructive impulses. Keep a journal of your trades.
Don't just mimic the information contained in your brokerage statement. Instead keep a log of you felt emotionally about each trade. Like me you'll find there's commonalities with many of your losses. For instance if I fail to take a signal that would've resulted in a big winner I'll invariably next act on a weak signal and often over trade it to boot. Doing nothing more than eliminating your "trouble spots" will save you money that can be dedicated to the next good setup you perceive.
Hopefully I'll have an opportunity to expand on these points in subsequent articles. Till then, best of trading and good health to all.
Kurt J. Eckhardt began his trading career in 1982 as an active floor trader in the Treasury Bond pit at the Chicago Board of Trade. Today Kurt is president of Eckhardt Research and Trading which offers the first ever futures pool to trade live on line while educating clients. Please go to Ecktrade.com for details and contact information.
Sorry for coming across like a whining little bitch.
But I hit the nail on the head as far as the discipline comment. Discipline in individual-independent trading is a myth, an urban legend. The guys "you know" that make money consistently, how do you know he is not eating like a bird and shitting like an elephant like jem said. Traders are good at hiding losses and understating risk.
As far a the inverse strategy of shitting like a bird and eating like an elephant - even Taleb has stated that humans are not psychologically and biologically evolved to handle that. We need food, money, sex, etc. consistently to be in good mental health. Occasional feasts, occasional windfall profits, and occasional orgies do us no good.
Why does Rick Santelli cover the bond pit instead of trading in it like he used to? Why does Eric Bolling comment on the market instead of trading at the Nymex like he used to? Why do traders sell systems instead of trading them?
And you can all drop names of successful "traders" like Simons, Cohen, Jones, Soros ect., ect. - but these guys have the best technology and they hire the best traders. They don't mess with the markets with their own money all by themselves like we do. You can't even call them "traders" - they are managers and asset gatherers. And how do you know they are not trading an extremely conservative strategy that returns only 3% a year, and leverage it at 10 times for a 30% return?
I'm not saying long term successful daytrading is not possible - i'm saying its extremely freaking hard when its discretionary and you are independent and that longer term trading is probably easier. Also we all know a 10% return a year is easy but how many of you can live off that? So capitalization is a huge issue as well, which requires OPM.
But I hit the nail on the head as far as the discipline comment. Discipline in individual-independent trading is a myth, an urban legend. The guys "you know" that make money consistently, how do you know he is not eating like a bird and shitting like an elephant like jem said. Traders are good at hiding losses and understating risk.
As far a the inverse strategy of shitting like a bird and eating like an elephant - even Taleb has stated that humans are not psychologically and biologically evolved to handle that. We need food, money, sex, etc. consistently to be in good mental health. Occasional feasts, occasional windfall profits, and occasional orgies do us no good.
Why does Rick Santelli cover the bond pit instead of trading in it like he used to? Why does Eric Bolling comment on the market instead of trading at the Nymex like he used to? Why do traders sell systems instead of trading them?
And you can all drop names of successful "traders" like Simons, Cohen, Jones, Soros ect., ect. - but these guys have the best technology and they hire the best traders. They don't mess with the markets with their own money all by themselves like we do. You can't even call them "traders" - they are managers and asset gatherers. And how do you know they are not trading an extremely conservative strategy that returns only 3% a year, and leverage it at 10 times for a 30% return?
I'm not saying long term successful daytrading is not possible - i'm saying its extremely freaking hard when its discretionary and you are independent and that longer term trading is probably easier. Also we all know a 10% return a year is easy but how many of you can live off that? So capitalization is a huge issue as well, which requires OPM.
You're actually a very knowledgeable and deep person-if that makes you a "whiny bitch" then consider the sources.
Newer, discretionary traders don't understand that less than the markets change it's WE who instead change.
I've posed this before here: Pick your daydream. If you're driving a 1991 Dodge Dart it might only take a 2001 335i to get you aroused. But guess what? As soon as you make enough for the BMW you'll be thinking "screw this old bimmer I want a Carrera." Worse yet you'll take it for granted that you should continue the same equity curve. You'll no longer be as cautious and prudent because your mind is no longer as cautious. Levels of success once titillating become boring.
I've known traders who went two decades without a losing year-in one case I know a trader who went 15 years without a losing week only to over trade a big position in 2000 and lose 90% of his net worth. Being disciplined in the past isn't good enough: on each and every trade you must be disciplined. Forever. Like a drunk in a program you can NEVER slip off the wagon. Easier said than done.
Newer, discretionary traders don't understand that less than the markets change it's WE who instead change.
I've posed this before here: Pick your daydream. If you're driving a 1991 Dodge Dart it might only take a 2001 335i to get you aroused. But guess what? As soon as you make enough for the BMW you'll be thinking "screw this old bimmer I want a Carrera." Worse yet you'll take it for granted that you should continue the same equity curve. You'll no longer be as cautious and prudent because your mind is no longer as cautious. Levels of success once titillating become boring.
I've known traders who went two decades without a losing year-in one case I know a trader who went 15 years without a losing week only to over trade a big position in 2000 and lose 90% of his net worth. Being disciplined in the past isn't good enough: on each and every trade you must be disciplined. Forever. Like a drunk in a program you can NEVER slip off the wagon. Easier said than done.
Well said.... your statement is the art of trading in a nut shell.
