Profitability Question and Example

Z

zerfetzen

Hi,
I'm very new to the idea of trading. I have a question. I have read a variety of articles, posts, etc., but am trying to learn the basics. Here is the question:

How would you determine a requirement for profitability of a trade, a priori?

For example, let's take an average American making I think about $45,000 annually for household income, which is in the 25% tax bracket.

Let's say this person dabbles with swing trading, and buys 100 shares of a $5 stock, investing $500, but also paying $10 with an online brokerage.

If this person sells the stock tomorrow at $6 per share, does the $10 brokerage fee apply up front (which would return $588) or at the time of the sale (which would return $590)?

For the next question, I'll assume the brokerage fee was taken up front, and so this person receives $588. At the end of the year, this specific transaction is listed on a Schedule D, and after (25%) taxes, only $441 remains, causing the 20% increase in the sale price over the buy price to actually be a loss.

If this is true, it does not seem that 1 or 2-day swing trading of stocks can be profitable. I have calculated daily percentage change on several stocks, and cannot find a single instance of daily change that could, even if predicted accurately, yield profits.

If I am thinking about this wrong, please point it out. Thanks.
 
Stock is not the good instrument to day trade, it's more likely to buy and hold for some period for a small percentage gain. You'll need to read a few books on TA, FA. etc. in order to understand the movements behind a stock or the market in general. There are many interesting factors involves so don't skip anything because what you don't know might hurt you later; things such as news, earning...and continue to put more efforts into doing more searches on the market as you come along will help. Good luck.

sg20
 
Are you German? Funny user name that you chose.

1) The brokerage commission or transaction fee is subtracted immediately once the trade is executed. If you buy 100 shares at $5 and sell it at $6 it would yield you a net profit of $80 ($600 - $500 - twice $10 fee).

2) Only the profit is taxed depending on your tax bracket so in our example it would be 25% of the $80. Not the $100 gross profit because the fees can be deducted as cost.
 
Thanks sg20, I'm sure you're right. The odd thing is that if Wkipedia's description of swing trading (http://en.wikipedia.org/wiki/Swing_trading) has any merit, there are 22 occurences of the word "stock", and zero instances of "futures".

It probably just means that the article isn't very credible.

If stocks are bad for an introduction to occasional swing trading, then what is recommended? Futures?

I've been playing around with R (free statistical software), and am now able to instantly download and analyze daily stock data from Yahoo Finance, which is fun to learn with while developing a paper trading style.

If, for example, futures is the way to go (or something else?), then where can you download free daily data? Sorry for all the erratic questions. Just trying to learn enough basics to put a few stakes in the sand, so I'm not all over the place. Thanks.
 
Nope, not German :)) It's a long story, but zerfetzen means to rip or tear to pieces, and I guess I like that idea. Anyways,

Thanks Prince for that feedback, that makes all the difference in the world! The way I was thinking about it, no one would ever be profitable.
 
Quote from zerfetzen:

Thanks sg20, I'm sure you're right. The odd thing is that if Wkipedia's description of swing trading (http://en.wikipedia.org/wiki/Swing_trading) has any merit, there are 22 occurences of the word "stock", and zero instances of "futures".

It probably just means that the article isn't very credible.

If stocks are bad for an introduction to occasional swing trading, then what is recommended? Futures?

I've been playing around with R (free statistical software), and am now able to instantly download and analyze daily stock data from Yahoo Finance, which is fun to learn with while developing a paper trading style.

If, for example, futures is the way to go (or something else?), then where can you download free daily data? Sorry for all the erratic questions. Just trying to learn enough basics to put a few stakes in the sand, so I'm not all over the place. Thanks.
More...

Swing trading occurred in all markets and they are easily recognizable. For "day trading" stocks, swing trading is the best choice for newbie because it moves relatively slower and more pattern like. The obvious choice would be to find the pattern that has a wider range therefor longer time frame and more points. I don't recommend futures right a way because it takes a long time to learn, and most of the time you have to learn on your own because traders don't like to give their secret away. The better way I think would be to learn to trade from stock an then advance to other markets as your ability to read the chart improves.

sg20
 
Quote from sg20:

I don't recommend futures right a way because it takes a long time to learn, and most of the time you have to learn on your own because traders don't like to give their secret away.
More...

The bigger question will be: can you handle the $70,000 or so worth of market value that the S&P futures trade at currently? Futures are a mammoth to a beginning trader and can wipe out a small account in a matter of days.

It doesn't take long to learn because they move like any other market. It's the sheer size which is a big hurdle for newbies.
 
Quote from zerfetzen:

Nope, not German :)) It's a long story, but zerfetzen means to rip or tear to pieces, and I guess I like that idea. Anyways,

Thanks Prince for that feedback, that makes all the difference in the world! The way I was thinking about it, no one would ever be profitable.
More...

"but zerfetzen means to rip or tear to pieces"

that is exactly what stocks do to the majority, in order to fund the minority. :D

Are you a zerfetzenTEE or zerfetzenTOR?
 
Quote from zerfetzen:

If this is true, it does not seem that 1 or 2-day swing trading of stocks can be profitable. I have calculated daily percentage change on several stocks, and cannot find a single instance of daily change that could, even if predicted accurately, yield profits.
More...

I find lots of trading systems show profitable outcomes but they tend to be longer term.
 
Quote from prince-in-jail:

...It doesn't take long to learn because they move like any other market. It's the sheer size which is a big hurdle for newbies. [/B]
More...

I don't doubt your ability to trade but from my observation, most ET lose more money than gained trading futures given couple years of experience. With the kind of leverage for futures you don't need to trade size for a good gain then you might lose just as much and more.

Like you said futures are just like any other market but will take some getting used to, to trade up to speed with the market which I believed new traders are not able to adapt.

sg20
 
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