Daytrading Is Impossible

Apr. 30, 2014

 “Only if you are also willing to take all of your money, rip it into tiny pieces, make cupcakes with one piece of money inside each cupcake and then eat all of the cupcakes.”

–James Altucher, when answering the question, “Should I daytrade?”

 

Several years ago, one of my highly-ranked students was trying to decide on where to go to college. Even though she had won state titles and had a good ranking, tennis pros in town said that she’d never play big-time tennis because she was too small and played too defensively. I would overhear parents telling each other that my student didn’t play a game that works in college tennis. A local Big Ten coach even told her she was stupid to consider Northwestern (ranked in the top 5 in the nation) because she’d never even make their lineup (the top six singles players on each team play the matches).

In other words, she should take her scholarship offers and rip them into tiny pieces, make scholarship cupcakes, and then stuff those cupcakes down her gullet.

Fast forwarding to the present, my student defied all worldly logic and went to Northwestern anyway. She ended up playing #1 singles for the Wildcats and was ranked as high at 11^th nationally. I never asked her what she did with the cupcakes.

James Altucher is an extremely successful investor and an entertaining and funny writer. But, if he’s right, what hope do I have trying to daytrade for a living? What hope do any of us have?

Putting aside the anger I feel from Altucher’s opinion, I must begrudgingly admit that he may be right. Daytrading is probably a losing proposition…but not for the reasons you think.

For one, daytrading is not fun, at least for me. I’ve stared at a computer screen for hours and taken many trades, sometimes making money and sometimes not. I didn’t enjoy it. I love the research and I love the testing. I love the building of portfolios and studying compounding rates. I don’t love pushing buttons.

If doing the work isn’t enjoyable, the work isn’t going to be done right. Corners will be cut, shortcuts will be taken, signs will be missed. I only know this because it’s happened to me. If you don’t do the work, you won’t get the results. In that way, daytrading is impossible.

But what if the work was enjoyable? What if someone (or something) sat at the computer all day while you did research or went to the mall? What if someone took every trade perfectly and never took a shortcut? What then?

This is where it gets interesting. Is daytrading impossible or is it just unlikely? That’s a huge difference. It’s one thing to say that most people probably won’t train for six years and then play for the #1 team in the country. That’s true. It’s another thing entirely to say that it’s not possible for someone under 5’4” to play big-time college tennis. So, is Altucher right?

The biggest problem to daytrading is trust. Without trust, there’s no chance. If you don’t trust your System, you’ll turn it off before it ever has a chance to work for you. To build trust, you need numbers.

I’ve been working for over two weeks on some new charts to shut Altucher up. My first argument that daytrading can work is this Annual Report on the GBPUSD.

According to the research, there are no losing years.

But here’s a major problem. Losing sucks. There’s no way of getting around that. Living through a losing month is not pleasant, and there always will be losing months. After a losing trade or trades, the elephant in the room is: has the System stopped working? And how will I ever know if the System is broken?

A big answer to this question is winning percentage. If your winning percentage starts falling way off, you might need to make an adjustment. The difficulty is that you’re going to have to wait through many trades to get this data. The winning percentage of that GBPUSD chart is 86%.

You can’t panic and you need to trust. But if it’s averaged 86% for eleven years and you start losing half of your trades, it’s time for an adjustment. On the other hand, if your winning percentage is 30%, you won’t know for a long time if it’s working or not. It might be broken or it might be fine. Meanwhile, you’re losing most of the time.

The other indicator is monthly losses. You should know what the worst month is in the history of your financial instrument. If you exceed that by a significant margin, you need to make an adjustment.

However, the goal is to never make an adjustment. That’s what research is for. It’s scary to trust your trading system, but it’s essential if you want to get rich (or retire). Warren Buffett doesn’t freak out during a downturn because he knows what the value of his portfolio and what is likely to happen in the future.

If you know your System, you won’t freak out when you have a losing month. The math tells you what you might expect in the future.

The number blatantly show that Altucher is wrong, and I am obsessed with proving him wrong with my own money. If I’m right, I’d be happy to buy him all the cupcakes he desires.

Disclaimer:
It should not be assumed that the methods, techniques, or indicators presented in these products will be profitable or that they will not result in losses. Past results are not necessarily indicative of future results. Examples presented on these sites are for educational purposes only. These set-ups are not solicitations of any order to buy or sell. The authors, the publisher, and all affiliates assume no responsibility for your trading results. There is a high degree of risk in trading.

HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THE RESULTS MAY HAVE UNDER- OR OVER-COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN.