Things have not been going well for the day traders for quite some time. Indeed probably since the stock market Internet bubble blew up in 1999. Vast numbers of them have departed the scene since then having been whipsawed one time too many. The strange thing is that for every departure there is a replacement and sometimes two replacements or more. The lure of easy money is strong indeed. The overwhelming majority of these rookies are going to be blown out of the water in short order.
This essay is not addressed to this soon to be road kill. It is addressed to the old timer day traders who remember the glory days of the 90s when they had the world by the tail with a downhill drag and who can't figure out what went wrong.
The first thing to understand is the wisdom of the old Wall Street saying. " To never confuse genius with a bull market. " A bull market makes everyone look good except for the shorts. I am afraid however, that the problem goes much deeper than that. The simple truth of the matter is that there isn't much to learn about day trading. Everyone tries very hard to conceal this basic fact by using a great deal of mumbo-jumbo theories and strategies. These strategies can be broken down into two major subsets. These two strategies are technical analysis and "chasing the news" or if you are kinder than I am "trading the news." Mostly it is a concoction of both fortified with the latest, hot black-box formula. Which is usually but not always technical in nature that some propeller-head is promoting.
My dark suspicion is that the brutally short-term charts that you are compelled to use in day trading is so short as to render technical analysis worthless. Almost everyday some system seller comes up with a new system, which he claims has been back-tested to biblical times with great results. The back-testing that these system sellers are using is a joke. And for a very good reason. The truth is so ugly that no one wants to believe it.
All day trading systems without exception break down if you keep going back in time with your analysis. Every system in the end, no matter how well it works in the short term, is over the long term no better than a coin toss. The promoter will only back-test his hot, new system to the point were it starts to break down. He will then promote his system as having been back-tested from that point forward. He will of course remain silent about the problems that were encountered if you go back in time any farther. When this system breaks down, he will have a hot, new, improved system to sell to the same jerks who bought the original system.
After all the prior system did work well enough in the beginning! There are promoters who make a career of selling new systems after their old systems break down. What makes all this work of course is that everyone wants desperately to believe that there are systems that work.
The real problem of course that everyone is so desperate to avoid is that the shorter the time period under consideration the more unpredictable and random market action becomes. Consider Powerhouse Industries the wonder stock of the day. It has a relative strength that will knock your eyeballs out. If your holding period is six months, the strong probability is that the stock will be up. We don't care what the stock does six months from now. We need to know what the stock is going to do in the next five minutes, in the next hour.
In the time period we are forced to consider the strongest momentum or relative strength is virtually worthless. Stock market action in periods this short is essentially random. It can not be predicted. It is a coin toss.
There is not much to be said about chasing the news except that it seems to work less and less well all the time. As more and more idiots try to make this alleged strategy work. The strangest thing about chasing the news is that anyone would be stupid enough to think that something this childish is going to make you money. Yet armies of day traders are trying to make a career out of buying every positive news report and selling every negative news report. One of the few absolute rules on Wall Street is that you can't make serious money by stampeding with the herd. How can you expect to get rich by doing what every Tom, Dick and Harry are doing? I hope we all know that the more people that are employing a strategy the less well it works. Everyone in the world is trying to make this strategy work and therefore it cannot work.
If you expect me to reveal a day trading system that works, you are out of luck. In the more than forty years that I have been hanging out in the blood splattered battleground that we call a stock market. I have never found a day trading system that works. The only thing I have ever found that works is being a contrarian-value player.
Those interested in technical analysis will find my essay on technical analysis in today's world well worth your time.
Fred Carch is the author of Forty Years A Speculator. His blog is http://www.fortyyearsaspeculator.blogspot.com
This essay is not addressed to this soon to be road kill. It is addressed to the old timer day traders who remember the glory days of the 90s when they had the world by the tail with a downhill drag and who can't figure out what went wrong.
The first thing to understand is the wisdom of the old Wall Street saying. " To never confuse genius with a bull market. " A bull market makes everyone look good except for the shorts. I am afraid however, that the problem goes much deeper than that. The simple truth of the matter is that there isn't much to learn about day trading. Everyone tries very hard to conceal this basic fact by using a great deal of mumbo-jumbo theories and strategies. These strategies can be broken down into two major subsets. These two strategies are technical analysis and "chasing the news" or if you are kinder than I am "trading the news." Mostly it is a concoction of both fortified with the latest, hot black-box formula. Which is usually but not always technical in nature that some propeller-head is promoting.
My dark suspicion is that the brutally short-term charts that you are compelled to use in day trading is so short as to render technical analysis worthless. Almost everyday some system seller comes up with a new system, which he claims has been back-tested to biblical times with great results. The back-testing that these system sellers are using is a joke. And for a very good reason. The truth is so ugly that no one wants to believe it.
All day trading systems without exception break down if you keep going back in time with your analysis. Every system in the end, no matter how well it works in the short term, is over the long term no better than a coin toss. The promoter will only back-test his hot, new system to the point were it starts to break down. He will then promote his system as having been back-tested from that point forward. He will of course remain silent about the problems that were encountered if you go back in time any farther. When this system breaks down, he will have a hot, new, improved system to sell to the same jerks who bought the original system.
After all the prior system did work well enough in the beginning! There are promoters who make a career of selling new systems after their old systems break down. What makes all this work of course is that everyone wants desperately to believe that there are systems that work.
The real problem of course that everyone is so desperate to avoid is that the shorter the time period under consideration the more unpredictable and random market action becomes. Consider Powerhouse Industries the wonder stock of the day. It has a relative strength that will knock your eyeballs out. If your holding period is six months, the strong probability is that the stock will be up. We don't care what the stock does six months from now. We need to know what the stock is going to do in the next five minutes, in the next hour.
In the time period we are forced to consider the strongest momentum or relative strength is virtually worthless. Stock market action in periods this short is essentially random. It can not be predicted. It is a coin toss.
There is not much to be said about chasing the news except that it seems to work less and less well all the time. As more and more idiots try to make this alleged strategy work. The strangest thing about chasing the news is that anyone would be stupid enough to think that something this childish is going to make you money. Yet armies of day traders are trying to make a career out of buying every positive news report and selling every negative news report. One of the few absolute rules on Wall Street is that you can't make serious money by stampeding with the herd. How can you expect to get rich by doing what every Tom, Dick and Harry are doing? I hope we all know that the more people that are employing a strategy the less well it works. Everyone in the world is trying to make this strategy work and therefore it cannot work.
If you expect me to reveal a day trading system that works, you are out of luck. In the more than forty years that I have been hanging out in the blood splattered battleground that we call a stock market. I have never found a day trading system that works. The only thing I have ever found that works is being a contrarian-value player.
Those interested in technical analysis will find my essay on technical analysis in today's world well worth your time.
Fred Carch is the author of Forty Years A Speculator. His blog is http://www.fortyyearsaspeculator.blogspot.com
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