[ Off Topic - Eleleth ]
I don't daytrade, I "weektrade". For weektraders, I recommend Datek.
To explain the "negative sum game" :
First, imagine a stock market in which there are no commissions and no bid/ask spread. Over a short period, such as a day, the total market capitalization doesn't change significantly. The market does not create or destroy wealth. Traders exchange dollars and shares between each other. For every dollar that one daytrader wins, there is another dollar lost by a daytrader. This is a zero sum game.
As a novice player, what are your chances in this hypothetical zero sum game? The poor traders who were novices 30 years ago have lost all of their money and are out of the game. This loads the game with above average players. Further, the good traders who started out 30 years ago now have a huge pile of money. They place big bets today. Being good traders, and placing large bets, they win a lot of dollars. Someone must lose a dollar for every dollar they win. Many small novice traders must lose on small bets in order to provide for the large winner. So, although the number of dollars won equals the number of dollars lost, less than half of the players are winners. Some new players will become big winners, but most will lose all of their money.
Now, let's step back into the real world. Trading is not free. As daytraders exchange shares and dollars, the brokers, exchanges, and market makers all take their cut. Overall, the traders lose since the brokers and market makers always win. This is a negative sum game, for the traders. For every dollar a trader wins, more than one dollar is lost by another trader. If you use SOES, you buy at the ask and sell at the bid, so you always pay the full spread. If the spread is only 1/8, and you do 10 round trip trades of 1,000 shares per day, the spread will cost you $312,500 per year, assuming 250 trading days. Your broker's $25/trade commission will cost you an additional $125,000 per year. Any additional profits are yours to keep. The game is loaded with good players who win on large bets. What are your chances of winning in this negative sum game?
Consider a trader at your brokerage who starts the day with $100,000 and makes 10 round trip trades on stocks with a 1/8 spread, and manages to break even for the day, after commissions. In the hypothetical zero sum market, they would have made a daily profit of 1.75%, which is 7549% annualized. Instead of that great profit in the zero sum game, they only break even in the negative sum game. In order for them to break even, someone else had to lose, because your broker and the market makers won.
On the positive side, there are lots of huge winners who started out as small novices. If you stay with the SOES firm for a while, let us know what fraction of the traders last for a year. Thanks. |
