AI Projects Low Odds for Day Trading Success

 

Of course we already knew that the odds of day trading success are low, largely impacted by the low barrier for entry that will result in a higher failure rate than if there was a skill level qualifier to reduce participants.

I asked Google AI on the odds of day trading success, and the result was it stating pretty stark odds of success.

This is what it presented:

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The odds of success in day trading are very low; academic studies and broker data consistently show that 90% or more of individual day traders lose money, and less than 1% to 3% are consistently profitable over the long term. 

The Reality of Day Trading

While day trading can be profitable for a small, highly skilled minority, it is exceptionally challenging for the average person. Most individuals who attempt day trading end up with financial losses, often quickly. 

• High Failure Rate: Studies across various markets (U.S., Taiwan, Brazil) show a failure rate of over 80% within a typical six-month period, with some research on persistent traders (those who trade for more than a year) indicating a loss rate of up to 97%.
• Active Trading Underperforms: The most active individual traders consistently underperform simple, passive buy-and-hold investing strategies (like an S&P 500 index fund) by significant margins after accounting for commissions and fees.
• Few Make a Living: Only a very small fraction, around 4%, manage to make a living from day trading, and even then, the income can be volatile and may not be substantial. 
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Reasons for High Failure Rates

Most traders fail due to a lack of discipline, poor risk management, and unrealistic expectations. 

• Emotional Decisions: Trading based on fear, greed, or excitement ("revenge trading" after a loss) often leads to poor outcomes.
• Lack of Plan/Strategy: Many traders lack a well-defined trading plan with specific entry/exit rules and risk management protocols (like stop-loss orders).
• Insufficient Capital/Knowledge: Success requires substantial starting capital, sophisticated tools, and extensive knowledge and screen time, which most beginners lack.
• High Transaction Costs: Frequent trading generates significant commissions, fees, and taxes, which eat into any potential gross profits.

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Then I asked the odds of using AI for day trading success. The answer was also not very rosy:

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The odds of success using AI for day trading are complex and highly dependent on the user's skill and the quality of the system; off-the-shelf solutions often fail, while custom, professionally developed systems can be highly effective, especially for institutional investors. 

Key Considerations

• Institutional vs. Retail Access: Large financial institutions and hedge funds use sophisticated, multi-million dollar custom AI systems to gain an edge, and a significant portion (60-70% of US equities) of trading volume is already algorithmic. The average retail trader generally does not have access to this level of technology.
• Performance Metrics: AI trading bots often report significantly higher win rates (60-80%) and faster execution speeds than human traders (40-55% win rate), attributed to their ability to process massive datasets 24/7 without emotional influence.
• Risks and Limitations for Average Users:
  • No Guarantee of Profit: Even with AI, there is no guarantee of making money, and losses are possible.
  • Complexity: Truly effective AI requires significant expertise in programming, data analysis, and market dynamics to build and fine-tune; off-the-shelf bots are often overfitted or ineffective.
  • Market Volatility: AI can struggle to navigate extraordinary market events or crashes, which can lead to significant losses if not properly monitored and adapted.
  • The "Edge" Problem: If a highly profitable AI algorithm is shared widely, its edge will quickly be normalized as other market participants adapt or use similar tools.
  • Scams: The market is flooded with scam AI trading apps and services that promise high returns but do not deliver. 
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Summary

While AI demonstrably provides advantages in speed and data processing, successfully leveraging it for day trading as a retail investor is challenging. Success generally requires the user to have substantial knowledge and be capable of developing or heavily customizing their own robust, risk-managed system, not simply buying a generic bot. 

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At least it was being honest about it being very difficult either way.

 

 

 

How To Wrap A Cat For Christmas

Trading Is An Open System = Increasing Complexity Over Time

 

I’ve seen posts online stating that trading shouldn’t be difficult because all it involves is buying and selling and the rules are pretty similar to when it originally started.

That mindset is wrong though. This first thing missed is trading isn’t just about buying or selling, but buying or selling at the RIGHT times to maximize profits and avoid losses.

The next oversight is not realizing the market is an “open system”, meaning its overall behavior can and will change over time as new participants enter the market with different buy and sell strategies. Over time, as market participants acquire more knowledge and skills, the market will also change to reflect that.

An example of this would be the Olympics over time. If you look at the sporting events of Olympics at the turn of the century versus now, the skill levels that qualified for medals in past history wouldn’t even pass the qualifying rounds for the same sports today. Even though the rules of the past haven’t changed much compared with current rules, the skills and strategies of the participants have.

Current markets include a mix of humans, computer programs, and artificial intelligence into the mix attempting to execute the best buy and sell strategies. This means to succeed in trading over the long term, one must be capable of adapting to market behavior changes over time.

Open systems will change and adapt to new information received. This means that a “market edge”, an advantage one has over others in the market can only work if the information that creates that edge isn’t known by all members in the system. Otherwise, if the information becomes widespread, the market will adapt and the edge will be neutralized. This is why many books and courses promoting sure fire trading plans don’t work- the information is already known by the market. 

PSA: Ignore The Media When They Cover The Market

At the start of August the market had taken on some roller coaster gyrations and the media has been flashing red alert signs to make you think it could be time to panic.

The problem is the news ignores the day to day market activity unless a big move happens and the then they attempt to connect it to some event happening that day as if they actually know the cause and effect. They actually don’t.

By focusing on the the short term, it’s easy to jump to questionable conclusions.

This is the Dow Jones Chart for Monday 8/5/24, when the market had a big drop:

So the news reported on that. Then they focused on the drop the prior two days to add some more fear to their report:

Thurs 8/1/24 – Monday 8/5/24:

Three days of declines….the month of August off to a scary start as reported in most media.

They do these things and then they wonder why people make panic filled market decisions that they say no one should do.

When you look at longer time frames, the perspective changes.

Here’s several months of market activity this year:

You can see the market has experienced two major declines earlier this year but recovered to make new all time highs.

The thing is at every major decline the news media sounds “alarms”, then ignores the market unless it makes new record lows or hits all time highs.

This should make it clear that they are not at all helpful is gauging market sentiment and it’s best to stick to your own due diligence when managing your investments or trades. 

Risks of Looking for a Mentor to Learn to Trade & How to Avoid Getting Scammed

In the past I wrote about why those looking to find the exact details of how to successfully trade by books, courses, clubs, seminar’s, etc, were likely doomed to failure. 

 

My conclusion was the likely best path outside of finding a legitimate mentor is biting the bullet and making the determination to learn to trade on your own.

I was not positive on seeking help from a mentor since there are a ton of fakes out there and the threats they pose to your success are greater than you may imagine.

The bottom line of successful trading is based on one’s ability to determine the following:

1. Market trend for the time segment you are interested in trading.
2. Optimum entry zone area to place your trade.
3. High probability target area where you exit for profit, and additional target point(s) if you have runners.

Your stop should be beyond your optimal entry zone such that price moving to that level is a signal that your price movement assessment was wrong and you need to exit the trade and reanalyze.

All these things should be determined BEFORE placing the trade. The first problem I see with many “mentors” is they promote only figuring out an entry beforehand and then figuring the rest out as you go along real time. In the age of high speed trading algorithms, this is basically suicidal as there is no way you can reliably react fast enough to market activity against computers that can make thousands of trades per second. The market can turn against you in a split second and there will be no time to start “analyzing”.

Learning to trade successfully is very difficult as shown by the greater than 90% failure rates attributed to many studies.

As hard as learning to trade is, there are big risks in seeking a mentor. The first more obvious risk is wasting your time and money on someone who actually can’t trade. People have spent tens of thousands on signing up for “special” trading classes or sessions that were promoted as sure fire routes to trading success, then when they fail, the customer gets burned by being blamed as not trying hard enough. In truth, the mentor never knew what they were doing and their “expertise” was selling trading courses.

The more dangerous and insidious risk of hooking up with an incompetent mentor is the corruption and poisoning of your mind. If you are fed garbage theories and techniques for trading, you will be trying to fit your understanding of market movement with WRONG assumptions you think are FACTS, which results in you being hopelessly off track in finding actual reliable and repeatable solutions. Any natural solutions your mind might discover will be suppressed by trying to force fit market movements into the phony structure created by the quack mentor.

This is why there is great risk with any information provided that is coming from a non certified source. Some people think that a mentor is harmless or legitimate if they provide free information or don’t charge for their services. But bad information is still bad information regardless of whether one paid for it or got it for free. In the age of people getting paid for viewer clicks, the incentive is to just make info that looks good and attracts people with little regard to quality or accuracy.

You see these suspect fake mentor videos all the time. They supposedly are showing you past trades they made, but they are invariably quiet on exact details and planning to satisfy all criteria of entry, target price, and stop areas and make like they are figuring it out on the fly. 

 

Finding a Mentor that Actually Knows how to Trade

Your first and foremost resource to check is your family tree to see if there is a relative that is actually successfully trading. They likely won’t tell you their exact trading techniques, but they will likely be a great resource for looking at your trading plans and giving you insight on how to go forward. 

 

Testing a Mentor

The only way to be sure your prospective mentor knows what they are doing is to get concrete proof from them and not just accept their word or testimonials from others.

They can prove their legitimacy the following ways:

1. Show you their tax forms showing that they truly earn a living by trading income rather than selling trading education.
2. Demand to see them trade live for at least 3 weeks to a month and have them talk through ALL their trades. Note, it’s critically important you see ALL LIVE TRADES not explanations of past trades. You want to see if they can explain their logic in an understandable way and that they are the ones who are actually trading. I see many videos online where the “trading mentor” looks like they are struggling to make sense of a trade as if it wasn’t their trade, but are trying to tap dance their way through a successful trade someone else did.

Watching someone trade live over several weeks will tell you what their consistency and profitability is. Also make note if they are consistent in using an understandable and repeatable method to determine trend, entry price, target price, and stop, or if it looks like they are just winging it. Someone just trading on the fly is not going to help you with making a trading plan even if they trade successfully.

The vast majority of trading mentors promoting themselves will avoid being cornered to prove their legitimacy which are red flags that they should be avoided.

William J. O'Neil: Legendary Pioneer in Trading Using Both Fundamental / Computer Technical Analysis

 

William J. O'Neil passed away during Memorial Day weekend. He leaves behind a legacy of being an early adopter of computer assisted technical analysis in determining what stocks to invest in and achieved great results with it.

His best selling book, "How to Make Money in Stocks", is one of my first books purchased on trading/investing.

As the founder and former chairman of Investors Business Daily publication, William revolutionized investment analysis, empowering countless individuals to make informed decisions and achieve financial success.

With his CAN SLIM® Investing System, William transformed the way investors approached the stock market. His expertise and commitment to providing accurate information empowered investors of all backgrounds to navigate the complexities of investing. His visionary methodology, which focused on identifying stocks with strong fundamental and technical characteristics, became a cornerstone of Investors Business Daily and a guiding principle for countless investors worldwide.

Beyond his professional accomplishments, William's passion for education and mentorship left an enduring legacy. He shared his knowledge and insights, inspiring a new generation of professionals to embrace integrity and perseverance.

Article Link: Link

Legacy: Link

 

 

Learning Trading Analogy: Much Worse Than The Hardest Jigsaw Puzzle Ever Faced

 

 

 

The struggle of learning to trade has been compared to puzzle solving, in this case a jigsaw puzzle.

While a puzzle analogy looks good, trading is no ordinary puzzle and provides no short cuts that your standard puzzle does.

Standard puzzles come with the following assists that can aid in solving them:

1. You know how many pieces are in the puzzle.
2. You can see the clear shape, color, and configuration of each piece, helping you to figure out which pieces go together. You can easily isolate the border pieces based on the piece shape.
3. You can usually see a picture of the completed puzzle, giving you help using color groupings to match associated puzzle pieces.

The “trading” puzzle has no such advantages:

1. You have no idea of how many pieces of the puzzle you need to create a working trading system. The market is a complex system of the resulting input of millions of traders/investors/computers. That creates an infinite number of solution paths along with their corresponding puzzle pieces that are waiting to be discovered.
2. You don’t have any kind of descriptor information on any piece. You have to work to find working pieces of the puzzle through pain staking observation. There are a myriad of potential behaviors/conditions to analyze to try to determine some type of connection/relationship for each “puzzle piece” to be discovered.
3. There is no advance “completed picture” to look at that will help you put the puzzle pieces together.

Faced with these additional hurdles, it’s clear the level of difficulty in solving the trading puzzle will be extremely high compared to even complex jigsaw puzzles.

While solving a hard jigsaw puzzle can take weeks or months, solving the puzzle of learning to trade can takes years or even decades, if ever.

 

 

How to Evaluate a Trade: Good or Bad?

 

 

 

When it comes to trading, the false belief many have is a profitable trade is a "good" trade while one that loses money is a "bad" one.

In reality, this isn't the case if ones goal is to develop good discipline in creating a trading plan that generates consistent profits.

Your developed trading plan MUST answer the following parameters:

1. Best entry value/range - this is your best predetermined entry area. This is critical as a good entry will have minimal whipsaw into loss area that can cause you to lose confidence in your trade.
2. Profit target - this is where you exit assuming the market moves according to your plans. You know the target in advance.
3. Stop Loss- If the market moves against your position, this is the value at which you have decided your trading plan isn't going to work out and you are exiting your trade to minimize loss.

It's important to note that the above 3 values are determined BEFORE you initiate your trade. In the age of super computers, thinking that you are going to have enough time to respond to market moves on the fly is a recipe for future disaster. Having your values set in advance puts your trade in cruise control. Either your trade moves to the profit target or it hits the stop loss.

Evaluating the Trade

Once the trade is completed you have two possible outcomes:

1. Winning Trade.
2. Losing Trade.

Executing the trade will also have two possibilities:

1. You followed the full trading plan.
2. You deviated from the trading plan.

This gives you four potential outcomes which will be the grade of your trade:

I. You followed the trading plan and had a winning trade

This is a clear good trade. You had a plan, properly executed it and the result was a winning trade.

II. You followed the trading plan and had a losing trade

This also falls under being a good trade. The trading rules were followed. Your next step here is to do some analysis to determine why the trade didn't work out- whether it falls within the expected win/loss ratio of your plan or if your plan needs adjusting.

III. You deviated from the trading plan and had a losing trade

This is a no brainer bad trade that can be expected from not following the trading plan.

IV. You deviated from the trading plan and had a winning trade

This is a bad trade and something many people get wrong by not realizing it. Not following the trading plan results in inconsistent actions and inconsistent results, and can reinforce bad habits. The trade being profitable in this case doesn't change the fact that the trading plan wasn't followed which is going to sabotage any hope of being consistent in generating profits.

 

Market Takes a Breather and Drops over 9% in 4 Days

What a difference a week makes! Last Tuesday, the Dow closed around 17500. Today the Dow closed at 15781, about 9.3% lower – erasing all its gains for the year.

Of course all the market talking heads have plenty to say about it after the fact, but what were they saying before it happened? If they don’t have the ability to warn of impending market reversals, then how much weight should you put in their “after market” analysis?

Mega moves like this is a great illustration of why one should always employ stop losses and risk management when in the market. The only absolute control you have is when you enter the market and when you exit.

It’s a guaranteed fact that there were traders who were long in this market without employing any stop losses. It’s also a near guarantee that those traders had their accounts wiped out.

It’s also likely that there are traders who were short without using stops, and those who didn’t blow up their accounts with the market’s move up during this year likely made a killing these last few days, but these type of traders are doomed to give their returns back to the market because eventually they will be on the wrong side of a massive move and suffer the same fate as the traders who wiped out their accounts. Trading without using stop losses is equivalent to engaging in Russian Roulette on a continual basis- it’s not a question of if you will suffer devastating losses, but when.

The true professionals love downdrafts like this as they look for some good bargains that were oversold due to excessive fear. Of course low prices can head even lower, so risk management and stop losses are still needed.

Those like myself, analyzing market price behavior, have been given a golden year of data. The market spent several months in a pretty narrow trading range that heavily favored a delta neutral style of trading. The big drops now favor trending and momentum players. Seeing how the market behaves in both a tight range and trending environment provides great insight opportunities.

Life Cycle of Trading Blogs

In the past I blogged about the scarcity of personal trading blogs, and the difficulty of finding US based trading blogs in general on the Web. For the trading blogs found, they typically go through the following stages of existence:

1) The Introduction

The start of a trading blog is very similar to any blog in general- a brief introduction followed by what they intend to write about. There we see one big split among trading blog intros:
a) Normal
b) Attention Grabber/Proclamation

Normal intros just state their case that it will be a blog on trading without much fanfare. The "proclamation" intro makes a big claim about intended performance that attracts attention from others. An example of attention grabbing blog intros:
I'm new to trading, but will try to make big bucks from my modest account.
These fall under claims such as someone starting with around $30K, and saying they plan on building it up past a million bucks over time. Some even put a time limit on this feat to add to the pressure of achieving it. Mind you every trader is aware of (or at least should be) the high rates of failure in day trading and the corresponding low rates of success. Hope springs eternal with new traders. =) Another example would be someone saying they will double their money on a regular basis over time.
It's fair to say even those who make far more modest claims privately hope to achieve these type of results, but don't wish to be judged by that bar level.

2) The Activity Phase

Here is where the actual blogs of traders put their plans into action. Results here invariably follow the reality of low success probabilities with the majority of trading results being mediocre at best or losing big sums of money at worst. There are a few rare ones that show high promise with successful results with at least a positive balance over time. The successful ones attract a good amount of attention since they are few in number.

3) The End Phase

Trading blogs reach a point in time where they mostly end in one of the following ways:

a) Blowing up- when a day trader loses all their money and can no longer trade. The odds favorite for this type of scenario typically goes to the blogs that make those big proclamations of making big bucks fast. This makes sense since the pressure to perform results in greater risks being taken. A side effect of many "blow up" blogs is their sudden disappearance, as in the blog will be taken offline as if to erase the past.

b) Abandonment- this is the typical path most blogs of all types take. Blogs become less frequent over time and eventually stop with no official ending.

c) Official Hiatus - When a trader decides to take some time off to work on their system due to lack of performance expectations. The majority of these don't return.

These above three are the most common ways trading blogs end. Here are the extremely rare ones:

d) Officially Giving Up- Trader admits day trading is too hard to master and actually calls it quits. No one like to admit defeat so this makes sense.

e) Successfully Retired- When a trader successfully trades the market over time and eventually retires the blog to move on to other ventures and generally enjoying the lifestyle successful day trading provides. As expected, this is the rarest of all endings.

I've seen some short term successful trading blogs stop blogging, but I've never seen one that showed their continued success over a significant amount of time like at least a year or more of consistent high profits, which justified their reasons to stop blogging along with a formal ending saying they were moving on. Just to be clear, I'm referring to personal trading blogs and not commercial ones of any individuals selling training courses or systems of some sort.

Of course, that's not to suggest successful non professional traders don't exist, just that many likely don't blog.  Here's an example of one of the best past blogs I've seen chronicling the performance of traders that don't blog: Link

An example of an extremely successful personal blogging trader is Michael Burry, a medical doctor who traded/blogged during his off time as a hobby. He eventually created a hedge fund and scored huge on his correct market calls during the 2008/2009 market crash.

The big market moves of Wednesday and today are a great illustration of how deceptively easy the market appears along with the potential for stellar gains and/or losses.

The chart above is  ES market activity for Tuesday, Wednesday, and Thursday of this week. I included Tuesday to show you a typical trading range for the market - about 15 - 17 points in a day. The market moves on Wednesday and Today were more than double that with a 40+ point range - giant moves!!
Viewing the completed chart makes it look fairly orderly and straight forward- market drifts, then dives sharply, then recovers. You might even be tempted to think the movement looks pretty predictable and easy to forecast. Ah, but things aren't as easy as they appear. Cover up the 3/4 of the right side of the chart, and slowly move the paper to the right, and try to predict where the market is headed. Not as easy or predictable now, is it? =) That's what traders face trading real-time - trying to gauge where the market is headed with only past data/charts as a reference/guide. They key to being successful is trying to map out in one's head what the "end of day" chart looks like long before it actually takes shape on the chart.

The majority of traders were fooled by the Wed/Thurs big swings. These are people who are seasoned traders, not beginners.

Before I describe the events on the chart, I need to define two terms. The ES futures market runs nearly 24 hours/day and is composed of two parts:
1) Cash ("Live") Market - This is the time floor traders at the exchange actively trade the market, 9:30am - 4:15pm EST.
2) Globex Market - The time outside of Cash Market hours - from the afternoon through the next morning until the Cash Market reopens.

Okay, so looking at the chart, Tuesday was a normal day and ended down. During the Globex session, the market rose slowly but steadily. Then we get to the Cash Open on Wednesday, and the market starts moving down. During this time all the Twitter message traffic shows traders are going long, buying as the market is dropping, thinking that the market is going to resume moving up. The market keeps drifting lower, but people still keep buying. At this time there is hardly anyone mentioning going short (selling).
As the chart shows, the market was basically a one way trip down and those who bought now had to get rid of their positions with losses, then they would buy in again at a lower level, only to exit that position with losses as well. They never considered reversing and going short instead.
Some who bought at the start of the day and held their position, starting feeling lots of pain later in the day with mounting losses until finally, they close their position with a big loss. This is why you should use stop loss orders to keep small losses from becoming big losses. Unfortunately traders including me don't like using stops because the market tends to seek them out before continuing in the planned direction. But big market moves like on Wednesday/Thursday show why not using stops poses such a big risk.
So the cash market closes and continues to drop during Globex before slowly starting to rise before Thursday's cash open. At this point Bulls are very jittery and Bears are licking their chops to short more when the market moves up. A lot of the same people who were trying to "buy the dip" on Wednesday are now shorting the market rally, expecting it to fall back down. As the really continues, they exit with losses, and short again higher, only to close with losses as the market moves higher.  The Twitter traffic is the reverse from the day before - lots of people selling, very few buyers. Instead of reversing their mindset to buy, they keep selling. Towards the end of the day the market climbs at a faster pace, giving enough pain to sellers to force them to close, which adds pressure for other sellers to close, otherwise known as a "short squeeze". The market zooms up and makes up all the ground it lost the day before, as if Wednesday never happened.

Summary:
Wednesday: Market falls but majority is tricked to thinking it will go up and wind up losing. Bears are giddy with delight, and think market will be falling further the next day.
Thursday: Market roars back, but the folks who lost money on Wednesday are not likely participating because they are too nervous and wounded. The Bears who stayed in thinking the market would keep falling lost all their profit. New Bears who shorted today and stayed in lost their shirts with big losses.

You should find it fascinating that so many seasoned traders were tricked into doing the opposite of what they should be doing. This is what makes trading difficult - the market send out signals that are meant to confuse the majority of traders, despite their preparation.

How did I do? Well, I successfully got the bulk of Wednesday's down move, but even though I expected Thursday to be an up day, I got left watching since it never pulled back to what I was expecting as a low risk entry point. I can live with that, and I'm all kinds of glad I wasn't lured into trying to short this market today...it was a beast in the up direction!

In terms of the potential gains or losses made by traders - they were amplified by the big size of the swings: a 40+ point range! So for example, 1 ES contract gives you a $50 gain/loss with every point move up or down respectively. So a 40 point swing represents a $2000 gain/loss depending if the trader had a winning or losing trade- and that's just 1 contract. So you can see if a trader had many contracts and was wrong, things could get ugly fast.
In a worst case scenario a trader would be long on Wednesday and stay long, getting big losses. Then they would try shorting the market Thursday and wind up with huge losses again. The size of these swings could easily break an account - which is the risk all traders face. On the other hand, the trader who is on the right side can get tremendous gains. Therein lies the risk and reward of trading. It's not easy, you can lose big if not careful, but the potential is also there to make life changing wealth.

Automated Vs Discretionary Vs System Trading

In the world of trading, there are two main schools of thought- programmed/automated and discretionary methods of trading.

Discretionary trading is when one is making decisions on what to do real time based on market activity. Automated trading removes the human decision making element out of the process and does pre-programmed responses based on market activity.

For computer automated trading - ideally the biggest pro would be that you'd be able to turn it on and just sit back and let the cash roll in while it does its thing. No thinking required- just a simple flip of the switch to make money. No faulty human interaction to mess things up...

It's the Holy Grail that every trader has thought about at some point and would love to have- who wouldn't?

On the opposite end, you have discretionary trading, where people decide whether to buy or sell based on what they see going on in the market. This is what the majority of non professional retail traders do.
The region of space both types can share is systematic trading - where you trade according to a defined set of trading rules and methods. The automatic traders will have these rules programmed in while the discretionary trader manually operates his system. My trading style falls into the category of discretionary system trader.

Which method is better? People working on automated systems swear by them and condemn discretionary traders as giving their money away to the market. Discretionary traders scoff at automated traders as trying to perform an impossible task resulting in a big waste of time and money.
In the professional world of Wall Street, automated trading machines exist but they only look to make pennies per trade- the key for them is performing thousands of transactions per second so they can make big profits on mass volume. You need big bucks to have such a machine and a big outlay of capital to be able to afford to trade on such a large scale. In other words, this is not available to non professional private traders like myself that trade on a far smaller scale.
On the smaller scale,  an automated system would have to place fewer trades that would last longer. To date, while I have "heard" of automated systems that are successful for the retail trader, I have yet to see a bonafide proven system that one would say is successful if your goal is to keep risk low and live off the income.

The Kryptonite of discretionary traders are their emotions. The market is geared to induce an emotional response that will lead you to doing the opposite of the right things to do. One of the first things a competent trader has to master is the control of their emotions and ego- it's the cause for most discretionary trading losses.
Purely discretionary traders treat the market like an extension of a Vegas casino and make "bets" based on gut feelings. As you move towards more organization and control, you have "system" traders who have a defined method/strategy of making trades, but it's not automated and instead done manually.

This is the biggest "pro" of automated trading - removing the human chaotic human emotional factor from the equation.

However, as a discretionary system trader, my answer may be biased, but I think "organized/system" discretionary trading is superior to automated trading for the following reasons:

1) The market is comprised of living/thinking traders, which makes the market a living entity of sorts composed of the summation of human actions. Trying to code that type of random behavior analysis into a working program is incredibly challenging and perhaps beyond the scope of the technology that currently exists for it to perform consistently well for retail traders.
2) It's said that the market never repeats but often rhymes- making it difficult to program in those subtle variances.

3) The learned response: being able to learn/adapt from past mistakes favors discretionary over automated trading.

From the above, I think #3 is the biggest reason against automated system trading. When market conditions cause a trader to lose money, they know they need to make changes to their methods. A discretionary system trader likely has a better feel for the market than an automated trader who just plugs in market variables. As a result, the discretionary trader will have a better chance at pinpointing the exact problems while the automated trader only knows the current running programs need changing, but no specifics on which variables or rules to change.
Running automating trades comes at the price of not having a hands-on feel of the market, so detailed knowledge of market behavior and nuance is not as developed as those with their hands continually on the driving wheel such as discretionary traders are.
I can point to my own trading growth from being able to do analysis on my trading logic and figure out what improvements to make to adjust for the market.

Amazing Skilled "Retail" Trader Winds Up Making $$$$

This story is quite amazing-

Karen was a CFO for a small company who didn't actively manage her investments - she had a financial adviser for that.
Sometime in the year 2000, her friend got her to go to a seminar on investing and she decided to take a 1.5 year $22K specialized investment course. I would never take such a course as I would immediately be wary of a scam with pricing like that.
After that, in 2002, she opens her own account with $10K and begins trading.

In 2007, a "light bulb" in her head goes on and she takes a leap of faith to move on to attempting to trade full time for a living and leaves her job as CFO. She starts her initial account with her liquid life savings at $100K that she got from her former financial adviser.

In 2008, she had a 50% return, and some of her friends gave her money to manage/invest.

Fast forward to 2011, and Karen has made $41 million in profits!!

The video is an interview of her telling her story. I wholeheartedly agree with her work ethic about needing to diligently put time in studying and analyzing mistakes for improvement to reach higher levels.

By the way, regardless of her great success, I do NOT recommend anyone spending $22K for an investment course. That is waaaaaay too much- I don't care how good they claim their training is. With some searching, I think all the info you need is freely available via the library and other sources.

2011 Market Stats & Day/Swing trading Vs "Buy and Hold"

Where does the time go....it feels like the year really flew by...

With Friday's closing market data, the final stats for how the market fared in 2011 are in:

The Dow was the only one of the three popular indexes to finish in the green, and a bit anemic at that. Nasdaq was in the red and the S&P 500 finished the year just as it began - it's like the year never happened.

Short Term Trading Vs Buy and Hold Long Term

I can't tell you how may blogs and articles I've read that "love" to preach that day trading is bad and buy and hope hold investing is soooo much safer and the smarter choice.

All these articles seem to miss one tiny detail:

ALL TRADING IN ANY TIME FRAME CARRIES RISK WHICH MUST BE MANAGED TO AVOID BIG LOSSES.

Far too many people who write about the benefits of long term buy and hold strategy make it sound like the extra time spent in the market somehow makes that decision safer in the long run.

Most make this call as they don't believe anyone can successfully time the market. Of course, if this were truly the case, then none of us should be in the market, period, since be it long or short time frame, that means we don't have the ability to respond intelligently to changing market conditions.

Here is one good example why buy and hold is NOT a substitute for proper risk management of your investment-

Netflix (NFLX)

Netflix started the year at about $175 and was off to the races in no time. It peaked at about $300 in July, then ran into a brick wall of bad business moves and bad press which started a prolonged descent. It ended the year at $69 and change.

An investor who sold at the peak in July would have had 71+% gains for the year, while the person who "dilligently" followed the rules of "buy and hold" ended the year with about a 60% loss.

Okay, so some will argue that there was no way to know $300 was the peak and it was time to get out then. Fair enough, but proper risk management would have alerted all those who were paying attention that the long term up trend was broken through in August and that was a clear EXIT sign if there ever was one. The exit price at that time was about $246, so a person paying heed would have wound up with a 40+% gain for the year, still very impressive and light years better than the 60% loss buy and holders now have. Even if one missed the first big exit signal, there were many opportunities to exit with yearly gains intact before the floor completely collapsed.

The above chart shows you the inherent weakness of buy and hold strategy - it makes the assumption that the stock will eventually recover and make everything good. The unanswered question is what if it doesn't?

The bottom line is there is NO good reason why anyone should let yearly gains of 70+% turn into a 60% loss. Properly managing your investments mean taking profits when they are high as well as cutting losses.

Another argument against short term trading is you will have to pay higher taxes than if you held onto your investments. So who do you think is happier- the person who made big bucks this year selling in the short term, of which a portion they have to pay taxes on, or the "smart" bagholder buy and holder who can now claim a big fat long term capital gains LOSS?

One more argument is folks will say, just invest in index funds as they are safer than separate stocks. That may be true in general, but the returns can be anemic (see above stats for the year) and in a Bear market can be just as dangerous as stocks to own.

To be clear, I'm not advocating that people start "experimenting" with day trading or short term trading - as they both require study and practice to become proficient. What I am saying is EVERYONE who is in the market needs to understand to how employ proper risk management no matter what time frame you're in. If you have a broker investing for you, it still pays to know about risk management in order to tell if your broker is doing a fair job or not. At the end of the day, the person with the most to gain or lose in the market is YOU and no one else, so it can only help you to know these things.

Market Starts Day Positive, Takes a "Death Dive", Then Reverses Again Reaching The Highs of The Day

Day Traders had a stomach churning session of a day today at different times depending on whether one was long or short in the market.

After 8 straight days of losses, the market was due for a positive day, and that's the way it started out. However, shortly after, it went negative and the selling started to accelerate. It was NOT a pretty sight if you were long. This is one advantage the average "buy and hold" investor has over day traders - they don't have to watch their positions deteriorate with increasing losses with each passing second.

Even with only a relative fewer shares, I was not immune to the big dive without feeling my stomach tighten a bit. CRR had dropped over 10 points from yesterday - so with even less than 100 shares, I was looking a sizable loss for a small trade. Training and practice prevented me from panicking, as I had already planned to buy more shares if the market went lower - I just wasn't anticipating a 10+ point drop in about an hour. I bought a few more shares at my first target area, but that was before the big plunge down. I mapped the next buy target area, but got distracted with other activities and missed making a purchase - which turned out to be at the lows of the day. It wouldn't have made a big difference, as I was only going to add a few more shares in case there was more down side.

So while I was disappointed that I missed getting shares at the lowest price, I felt relieved we were moving back up. CRR grinded up today and did so in such a way as to not leave a clear entry point for adding more shares. It ended the day gaining back what it lost, so the early purchase I made as it went down in the morning became profitable. I was quite happy I didn't panic sell my position at the morning lows which many may have done. My small position made it easier to control the fear factor.

My other position, NFLX, also dived, but it was for less points and I had less than 1/2 the number of shares I had in CRR, the losses were light, especially compared to CRR. However, I screwed this trade up. It started off positive and profitable in the morning, and I failed to cash out when I saw some warning signs. I was so "sure" the market would be moving higher, I ignored them - my "rogue trader" got me again. Eventually NFLX also reversed and I was profitable again, but this time I missed cashing out again thinking it would go straight up. The stock eventually gave the profit back and was meandering when I decided to just close it out as I feared it would be going negative. Of course knowing Murphy, shortly after the stock started moving up again. For my time and trouble, I netted the big sum of 25 cents. If I had sold when I was supposed to based on my analysis, the profit would have been from $50 - $100. Three words come to mind - bad trade management.

Ironically, I made five trades today and the two I traded badly gained money (but left much on the table) while two of three I did by the book lost money (sometimes even perfect trade set ups don't work).

As for the market in general - the market dive and reversal created a very bullish candle, which may have noted the market bottom - we shall see.

Blue Tuesday

Monday trading was a hot mess since I was so eager to put my methods in action that I made careless mistakes aplenty.

But Tuesday I was calm, cool, and collected, determined to do things by the book as I wrote it.

The result was the best single day I've had in a while and I believe the best stats to date:

9 profitable trades out of 9: 100%

9 good trades out of 9: 100%

I started the day with an EOD swing trade of SINA from Monday, and focused on that stock's movement throughout the day, selling at higher points, and buying back at lower points. It can be difficult to execute at times since you have to make sure you're on the correct trend movement as opposed to a trend change reversal.

I'm continuing to trade in smaller lots as a safeguard.

Now all I have to do is keep the "Tuesday Trader" in action and keep the "Rogue Trader" at bay and I should be all right.

Ten Rules for Rookie Day Traders

I saw this on Market Watch, and thought it had some good info worth passing on. many of these rules apply to veteran traders/investors as well, especially rule number 1: "Enter, Exit, Escape". Just applying this rule alone would make a BIG difference in turning most peoples investment experience from negative to positive.

_____________________________________________________________

10 rules for rookie day traders

Commentary: : Set limits, stay focused, and use your money wisely

By Michael Sincere

MIAMI, Fla. (MarketWatch) — If you are going to day trade, it’s essential to have a set of rules to manage any possible scenario. Even more important, you must also have the discipline to follow these rules.

Sometimes, in the heat of battle, traders will throw out their own rules and play it by ear — usually with disastrous results.

Although there are many rules, the following are the 10 most important:

1. The three E’s: enter, exit, escape

Rule No. 1 is having an enter price, an exit price, and an escape price in case of a worst-case scenario. This is rule number one for a reason. Before you press the “Enter” key, you must know when to get in, when to get out, and what to do if the trade doesn’t work out as expected.

Escaping a trade, also known as using a stop price, is essential if you want to minimize losses. Knowing when to get in or out will help you to lock in profits, as well as save you from potential disasters. Read more: 4 big risks to your investment portfolio now.

2. Avoid trading during the first 15 minutes of the market open

Those first 15 minutes of market action are often panic trades or market orders placed the night before. Novice day traders should avoid this time period while also looking for reversals. If you’re looking to make quick profits, it’s best to wait a while until you’re able to spot rewarding opportunities. Even many pros avoid the market open.

3. Use limit orders, not market orders

A market order simply tells your broker to buy or sell at the best available price. Unfortunately, best doesn’t necessarily mean profitable. The drawback to market orders was revealed during the May 2010 “flash crash.” When market orders were triggered on that day, many sell orders were filled at 10-, 15-, or 20 points lower than anticipated. A limit order, however, lets you control the maximum price you’ll pay or the minimum price you’ll sell. You set the parameters, which is why limit orders are recommended.

4. Rookie traders should avoid using margin

When you use margin, you are borrowing money from your brokerage to finance all or part of a trade. Full-time day traders (i.e. pattern day traders) are usually allowed 4:1 intraday margin. For example, with a $30,000 trading account, you’ll be given enough buying power to purchase $120,000 worth of securities. Overnight, however, the margin requirement is still 2:1.

When used properly, margin can leverage, or increase, potential returns. The problem is that if a trade goes against you, margin will increase losses. One of the reasons that day trading got a bad name a decade ago was because of margin, when people cashed in their 401k(s) and borrowed bundles of money to finance their trades. When the bull market ended in 2000, so did many traders’ accounts. Bottom line: if you are a novice trader, first learn how to day trade stocks without using margin.

5. Have a selling plan

Many rookies spend most of their time thinking about stocks they want to buy without considering when to sell. Before you enter the market, you need to know in advance when to exit, hopefully with a profit. “Playing it by ear” is not a selling strategy, nor is hope. As a day trader, you’ll set a price target as well as a time target.

6. Keep a journal of all your trades

Many pros swear by their journal, where they keep records of all their winning and losing trades. Writing down what you did right, or wrong, will help you improve as a trader, which is your primary goal. Not surprisingly, you’ll probably learn more from your losers than your winners.

7. Practice day trading in a paper-trading account

Although not everyone agrees that practice trading is important, it can be beneficial to some traders. If you do open a practice account, be sure to trade with a realistic amount of money. It’s not helpful to practice trade with a million dollars if the most you have in your account is $30,000. Also, if you do practice trade, think of it as an educational exercise, not a game.

8. Never act on tips from uninformed sources

Most pros know that buying stocks based on tips from uninformed acquaintances will almost always lead to bad trades. Knowing what stocks to buy is not enough. You also have to know when to sell, and by then the tipster is long gone. Legendary trader Jesse Livermore said it best when he wrote this about tips: “I know from experience that nobody can give me a tip or a series of tips that will make more money for me than my own judgment.”

If you can’t trust your own judgment, you may want to avoid day trading altogether.

9. Cut your losses

Managing losing trades is the key to surviving as a day trader. Although you also want to let your winners run, you can’t afford to let them run for too long. It’s more art than science to get it right, but learning how to control losses is essential if you are going to day trade. Once again, never forget the three E’s: (enter, exit, and escape).

10. Be willing to lose before you can win

Although many traders can handle winners, controlling losing stocks can be difficult. Many rookies panic at the first hint of losses, and end up making a series of impulsive trades that cost them money. If you’re day trading, you must be willing to accept some losses. The key: know in advance what you’ll do if you’re confronted with losses.

Although anyone can learn to day trade, few have the discipline to make consistent profits. What trips up many people are their emotions, which is why it’s so important to create a set of flexible rules. Your goal: follow the rules to help keep you on the right side of any trade.

Michael Sincere (www.michaelsincere.com) is the author of Start Day Trading Now (Adams Media, 2011), Understanding Options (McGraw-Hill, 2006), All About Market Indicators (McGraw-Hill, 2010), and Understanding Stocks (McGraw-Hill, 2003).

Week of Trading Wrap Up and a One Time Snapshot Summary

I have to say this week started out iffy, but turned out good in short order. My trading mistake, AKA Walter Energy, had moved against me by several points and I had failed to exit when i should have earlier. I knew that Monday would be the day to either exit and take my painful medicine if it continued to climb. So when it had gapped up by 4 points Monday morning, I didn't panic, but knew i was going to have to start closing out my position at the end of the day.

As fate would have it, I was saved by the Bear as the stock reversed course and gave back all its morning gains. The rest of the week went pretty smoothly by comparison.

Friday morning with the market in a major gap down with the Japan tsunami report made me feel very uneasy about being long, and decided to closed my CF stock and put positions to go flat and wait.

When I resumed trading I mismanaged or maybe I should say "mangled" my new trades and would up giving back the lion's share of the profits I had. I was way too focused on expecting trending breakouts and not planning for ranging moves. The market can be such a tease- it sure seems like when I correct follow my ranging rules the market breaks out and I lament over the extended move I missed. Then if I plan on breakouts, the market ranges and I wind up giving back gains. In this case, i just waited too long and missed the obvious signs to exit earlier.

All I have left is one small short position in WLT, which was all I was willing to risk over the weekend. This market is poised to move strongly either up or down, and it's highly news driven right now.

I decided to make a snapshot of my trades for the week, but will only do this once. It takes time, and I know myself too well, and would likely eventually forget to remove my account number or do some other oversight and wind up setting myself up for ID theft. Perhaps I'll do a weekly summary if I do decide to keep a running log.

At least this time you can compare the trades with the pulses I made during the week to see if there's truth in advertising. ;-)

I'm a Hybrid Trader

In the day trading world, you typically have two groups of people - those who scalp many smaller moves throughout the day, and those who trade longer time frame moves, which may occur only once or twice a day. On an even longer term, you have swing traders who may have a position open for several days.

I prefer to combine all methods - initiating a trade when I believe there's a longer term move happening- preferably long enough to qualify for a swing trade. Once in the trade, I can then actively manage it by adding to or reducing my position as the stock does mini-reversals in the shorter time frames as it moves towards my longer term target price. So in a sense, I'm day-trading my swing trade. The benefit of trading this way is if I screw up on the day-trade part with a bad entry, there's a good chance I can be saved by the longer term trend which is moving in the same direction.

By day trading the swing trade, I can extract more profit rather than wait for the target to be reached while the stock is oscillating up and down. It also ensures profits are locked in throughout the main trade.

Trading Update with Bonus:

This will also appear in my xanga blog (http://soullfire.xanga.com/)

I covered my last position in Amazon in the morning, a bit too soon I might add - and re-shorted on rallies. It was trending up so shorting gains were reduced, but I was not yet willing to go long.

Closed my last position during after-hours as I think Amazon could still go lower, but it could also reverse and start heading back up strongly. Plan to day trade on the short side until the up trend is confirmed- then I'll go long.

After getting bruised by Walter Energy for several days during its run-up, today marks the first time adjusting my position in the stock was profitable per my average price in. Maintaining a position...

Now for the bonus - a snapshot of my trading log for the day:

Still trading smaller sizes while I work on fine tuning my trading/timing strategy as well as precision in entries and exits.

Time to Fire This Up Again

It's been awhile since I've posted anything here. Much has changed since my last post. For one, I have undergone pretty intense self-training in the science-art of short term trading and after foraging in the wilderness for a good period of time, I have now finally come out feeling like a brand new person with new skills and insights.

The investor/trader who posted here last May has been replaced by an improved version with a new mindset and plan. =)