What do intelligent people think of Market Trading?

[zveruga]

I had been fascinated with the subject for a couple of months now. From what it seems -- all Market trading is essentially a negative-sum game -- Winners profit to the extent that Losers lose, but both are taxed by brokers. Yet it isn't just individuals who choose to play this game, where odds are stacked against you. Reputable financial companies employ day traders, and seem to turn a profit.

So my questions are:

1) Given that the number of losers must be larger than the number of winners, are the winners consistent, or are the losses shared by all players in the long-run? Basically, can one theoretically win against the odds, or is this a myth perpetuated by brokers who profit in either case?

2) There are how-to books out there that show the basics of technical analysis. If the majority of traders use technical analysis to make a profit, but majority of traders has to lose money, isn't that a contradiction?

3) Is there any difference between trading and investing -- and if so, what is it? Does the negative-sum nature of the game change with long-term investments?

 

[f95toli]

Why do you think it is a negative-sim game? It can be, but is not always so.
The most fundamental "rule" of the market is that you can't beat index in the long run, and in a healthy economy index is suppose to reflect how well the companies are doing "on average". Since the economy can grow there is nothing that stops the market from growing either.

That said, daytrading does not really work this way since it is by its very nature so focused on what is happening short-term, I am not sure exisiting rules and regulations of the market can really "control" daytrading in the same way it controls the "normal" market.

 

[rimshaker]

Being a successfull trader (especially on your own) is considered the hardest profession in the world. Not to be confused with the most dangerous or hardest in terms of manual labor per se. It's the most demanding simply because of the sheer number of people you compete against. And it's very stressful since it's about money.

Like I said in a previous thread, being a successful trader is having the skills to read people and their emotions. Then comes the idea of supply and demand. Things like technical analysis are just tools, it's not the foundation of how to be a good trader. But the catch is this: you have to learn how to read the crowd AND know when to do the opposite. Being on the bandwagon with everyone else will only get you so far.

Trading and investing can have different meanings for different people. It all depends on the person's outlook and time horizon. It can range from minutes to decades. Either way, it's generally accepted that trading is the short term, and investing is the long term. But like I said, short and long can mean totally different things depending on the person.

 

[ReiAyanami]

Equity markets are inclined positively over time. In fact despite broker fees, enron scandals, ect... equities outperform every other investment vehicle out there in terms of risk-to-reward ratio. You can't find a govt bond/savings account/ corporate bond that pays better. 11% annually is impressive which (according to my econ teacher) would allow any person to become a millionaire before 60 if they just start saving (even a little) from age 20.

More is produced per person which means each person has more. Just as each company produces more, sells what they produce, and then shareholders value is increased.

1/3rd Capital + 1 Technology = GDP growth

 

[ReiAyanami]

well, trading vs investing. the theory goes that 80% of stock movements happen in 20% of the time, so the best is to simply try to capture that 20% of the time and switch out into another that is about to go up.

supposedly 9 out of 10 daytraders will lose money overall (often all their money). that's why nasdaq made some restrictions from trading on margin, such as the pattern daytrader, and 4x turnover limit

 

[Shalmanese]

Yes, in a negative sum game 90% of people will lose and 10% of people will gain. all this means is that you need to be in the top 10% of traders. Given the number of amatuer traders out there who aren't all that rational, this isn't as hard as it seems.

 

[glugglug]

Individuals don't control the market. Financial institutions and other large businesses do. In general, these institutions are not that bright (there are exceptions of course). Most individual casual traders I know do a lot better than the "professionally managed" funds. In fact, 80% of the managed funds which "try to beat the market" do worse than they would just following the S&P 500 index. There are 2 possible reasons behind this:

1. stupid fund managers
2. corrupt fund managers that buy/sell stocks with the fund for the purpose of increasing the value of their personal investments on the side, and aren't really trying to increase the value of the fund. (More likely IMO) This is why for a "safe" investment you want an index fund not a managed one.

Personally I beat the index by a little over 15% last year, my first year seriously investing, and am doing 10% better than the index so far this year (meaning where the index has 1.36% gain so far, I have over 11%, not 1.36 *1.11 = 1.496)

BTW, the only 10 year periods in which the index has had a loss include the 1929 crash.

 

[zveruga]

Wow, many differing opinions here Very helpful tho. I think Ill take my demo account a little more seriously now, and see if I can be in that top 10%. Any ideas on fundamental vs. technical analysis approach? Or use both?

 

[zillafurby]

Originally posted by: zveruga
Wow, many differing opinions here Very helpful tho. I think Ill take my demo account a little more seriously now, and see if I can be in that top 10%. Any ideas on fundamental vs. technical analysis approach? Or use both?

both and keep a close eye on material and nonmaterial news

 

[rimshaker]

If you treat trading as a hobby, or just part-time work to try and supplement a job, it will almost always end up in losses in the long run.

Trading successfully has to be a full-time career where you are genuinely interested and immerse yourself on the broad subject. It's just like any other professional career... years to become educated, and always life-long learning.

The public's general knowledge of the market pretty much stops at mutual funds and maybe a couple of stock tickers they watch on cnbc. It has a casino-like atmosphere at times. Most have no clue just how complex and career-oriented trading can be.

 

[yongsiklee]

Very dangerous game like casino gambling...And I don't believe in mutual fund...A lot of crooks...
Housing market is "real."

Last year was my first year for stock investing/trading and I learned a lot. I ran the gamut from despair to joy.

Last year I lost about 50% of all my stock investment for three month period since I started trading (I once lost $10k in three days); and then dramatically came back from the loss and despair, and made a 300% gain from the 50% loss, making a 50% total return last year.
...

This year I got very cautious and I'm 100% cash now.

Although I made a 50% gain last year( My fund came from selling my house), if I didn't sold that house, I could've made a 100% return. Housing market got even hotter after I sold it damn

I still consider myself extremely lucky...thinking what if I couldn't have made the dramatic 300% return....

 

[Hector13]

Originally posted by: yongsiklee
Last year I lost about 50% of all my stock investment for three month period since I started trading (I once lost $10k in three days); and then dramatically came back from the loss and despair, and made a 300% gain from the 50% loss, making a 50% total return last year.

not sure if I follow your math here.. (1 - .5) * (1 + 3) = 2 = 100% return, not 50%.

In any case, both the nasdaq and russell 2000 (small cap stocks) were up over 50% last year as well, so depending on how much risk you took to get that 50% return, you might have been better off sticking to index funds.

 

[yongsiklee]

Originally posted by: Hector13

Originally posted by: yongsiklee
Last year I lost about 50% of all my stock investment for three month period since I started trading (I once lost $10k in three days); and then dramatically came back from the loss and despair, and made a 300% gain from the 50% loss, making a 50% total return last year.

not sure if I follow your math here.. (1 - .5) * (1 + 3) = 2 = 100% return, not 50%.

In any case, both the nasdaq and russell 2000 (small cap stocks) were up over 50% last year as well, so depending on how much risk you took to get that 50% return, you might have been better off sticking to index funds.

Can you recalculate this way?

(1X 0.5) X3= 1.5.

I gained .5 which is 50%




BTW, nasdaq and russell 2000 (small cap stocks) were up about 50% last year and it won't happen again for a long while.
If you bought index funds last year, consider yourself very lucky.
This year nasdaq and russell 2000 are so far about flat or up/down about 0.05% after 4 months.
Buying stocks this year based on last year's unbelievable performance is "plain stupid."

In addition, My dramatic return from slum last year was a pure luck and a newsletter writer's ruthless endorsement of some stocks.
He, however, is now under a SEC scrutiny. And, my success last year had nothing to do with general market performance: I, like many others, focused on some micro Cap stocks which moved independently from the market. How do you feel when your favorate stocks heads down when the market skyrockets? Oops! lol I do agree with you in that trading/investing individually is very risky. But index funds or following the market are no shields from loss: until last year from the year 2000 for 3 years Nasdaq lost 80% and SNP 500 index lost 50%.

I don't believe in the stock market but I'm still waiting for another right time ...or wrong. :Q

 

[rimshaker]

The scary thing about the broad markets is that we have only just begun a long bear market cycle. This bear market is only 4 years old. Primary cycles usually last almost 20yrs in duration. I wouldn't be buying and holding for the long term that's for sure.

 

[Hector13]

Originally posted by: rimshaker
The scary thing about the broad markets is that we have only just begun a long bear market cycle. This bear market is only 4 years old. Primary cycles usually last almost 20yrs in duration. I wouldn't be buying and holding for the long term that's for sure.

if "primary cycles" last 20 years... how do you know this bear market isn't just a small set-back in a long-term bull market??

personally, I wouldn't put any weight in that tecnical analysis crap. it is easy to say when a stock was "overbought"/"oversold" after the fact.

 

[yongsiklee]

2/3 of people think that the stock market will improve eventually following an economic recovery.
This is barely a bear market. This is part of a bull market with some kind of hesitation by geopolitical and/or valuation reason. But that doesn't mean the market won't pull back significantly in the near future....

 

[JayMassive]

I'm just not a fan of my money gaining or losing ground based on somebody else's "estimations". Alcoa nearly doubled their revenues in their last earning report. DOUBLED. Yeah, not such a bad number for a company that large. But shoot, somebody "estimated" they'd earn 42 cents/share. And since they only made 40 cents/share, the stock took about a 10% dive. I guess I should skip the engineering degree and grab a degree in "earnings estimates".

j'son

 

[Brian2k1]

Originally posted by: JayMassive
I'm just not a fan of my money gaining or losing ground based on somebody else's "estimations". Alcoa nearly doubled their revenues in their last earning report. DOUBLED. Yeah, not such a bad number for a company that large. But shoot, somebody "estimated" they'd earn 42 cents/share. And since they only made 40 cents/share, the stock took about a 10% dive. I guess I should skip the engineering degree and grab a degree in "earnings estimates".

j'son

I understand how you feel infact, I was burned by Wal-Mart just last year and Intel this year, but analysts "price-in" the expectation in their valuation of the stock. So if Alcoa is valued at $37 per share that is given under the assumption they will make earnings equal to .42cents per share. If they miss their earnings estimate then the stock needs to be re-evaluated and it usually dives in the case of Alcoa to $34. Because investors buy on speculation usually weeks and sometimes months in advance, stock prices are typically inflated and over-valued. That's why sometimes stocks fall even though the company meets expectations. Investing is tough but one of the best and oldest pieces of advice is "Buy the Rumour, Sell the News"

 

[rimshaker]

Originally posted by: Hector13
if "primary cycles" last 20 years... how do you know this bear market isn't just a small set-back in a long-term bull market??

personally, I wouldn't put any weight in that tecnical analysis crap. it is easy to say when a stock was "overbought"/"oversold" after the fact.

The primary bull market was over in 2000. It started roughly around 1982, about 18 years. The nasdaq collapsed, the S&P500 had a severe correction, but the Dow Jones seems to be intact just trending sideways since 2000. Let's just say this new bear simply had an appetizer starting with the nasdaq. Look out for the full course meal to start this decade.

Proper use of technical analysis is not to catch the very top or the very bottom. It's just to signal that something has changed and that it's in your favor to act. TA should never be used alone, but should always be part of a trader's toolbox.

 

[Orsorum]

Originally posted by: rimshaker
<blockquote>Quote
Originally posted by: Hector13
if "primary cycles" last 20 years... how do you know this bear market isn't just a small set-back in a long-term bull market??

personally, I wouldn't put any weight in that tecnical analysis crap. it is easy to say when a stock was "overbought"/"oversold" after the fact.

The primary bull market was over in 2000. It started roughly around 1982, about 18 years. The nasdaq collapsed, the S&amp;P500 had a severe correction, but the Dow Jones seems to be intact just trending sideways since 2000. Let's just say this new bear simply had an appetizer starting with the nasdaq. Look out for the full course meal to start this decade.

Proper use of technical analysis is not to catch the very top or the very bottom. It's just to signal that something has changed and that it's in your favor to act. TA should never be used alone, but should always be part of a trader's toolbox.[/quote]

And what will that full course meal entail?

 

[Brule]

The 20 year rule isn't exactly set in stone, although I'm sure many will disagree. Twenty years is such a high percent of the total lifetime of the market, so even using statistics it is impossible to develop cut in stone rules. With modern technology drasticly increasing actual production, the way of thinking about the market can change.

To the original question, it is not a negative-sum game. The two camps of investing and playing with the market can use each other. Warren Buffet did not touch the hot stocks, even those based on more solid ground, in the late 90's even when he could have made boatloads of cash. At the same time there are .com millionaires who got in and got out. Both are smart, yet have vastly different ideas. In theory, everyone wins when capital is directed correctly in a capitalist economy. In practice this isn't the case, with government impact and idiotic or corrupt corporations.

As for my personal experience, I am not a broker nor do I have a ph.d in economics. I love to play the game with fake money, and have never lost, posting 20-50 percent increases at times, and even today staying toward the top of the pact. But when my family turns to me for help in their investments I am much safer with life savings and so far have helped them to remain relatively safe, yet balanced with good rewards.(completely safe is impossible)

Remember there are lies, damn lies, and statistics. It was once said that democracies have a 200 year life cycle. Moore's law will be broken soon. Physics itself has been torn apart, and what was accepted as fact even 20 years ago is being questioned. Don't take theories that have been working as law.

 

[rimshaker]

And what will that full course meal entail?

Real bear markets demolish everything, even down to the most beloved largest companies in the Dow. It doesn't happen overnight though, takes years. When people can't stand to hear the word 'stocks' and even the banks/brokerages actually discourage clients from putting money into equities... that's the full course meal..... and ironically, that's near the bottom as well.

 

[Orsorum]

Originally posted by: rimshaker

And what will that full course meal entail?

Real bear markets demolish everything, even down to the most beloved largest companies in the Dow. It doesn't happen overnight though, takes years. When people can't stand to hear the word 'stocks' and even the banks/brokerages actually discourage clients from putting money into equities... that's the full course meal..... and ironically, that's near the bottom as well.

That's also the best time to buy.

/me pats his growing bank account

 

[Brule]

That's also the best time to buy.

/me pats his growing bank account

Same advice was given to me by a futures trader friend in Chicago. He made enough cash during the 2000 readjustment to quit his job and move back home. He's in his twenties and works his own hours in a state resembling semi-retirement.

 

[Basse]

On a side note:

Whats the tax on what you gain in the US? Let's say you earn $1000 on a good deal, how much does the government take?