Fwd: Warning signs of the coming financial armageddon, #569

Henry C.K. Liu hliu at mindspring.com
Wed Feb 24 11:02:17 PST 1999

Doug Henwood wrote:

> Regardless of the social/economic effects, people who day trade on the web
> will be lucky to break even. There's a lot of nonsense in financial theory,
> but the near-impossibility of beating the market and the counterproductive
> nature of excessive trading aren't part of the nonsense.

This is the conventional wisdom, but so far it has not ben borne out by empirical data. The odds of beating the market has improved due to the increased inefficiency in markets of immense complexity. Also the markets are now structured so that there are million, almost endless, of segments that individual specialists can exploit, outside of the major trends. Its like catching the bubbles when every wave breaks and each bursting bubble is worth $1K to someone. Day trading is designed to take advantage of these new market conditions by 1) by providing instant entrance to large numbers of independent traders who are very specifically focused, both in substance and timing, and 2) these day trades constantly eliminate market inefficiencies or irrationality and at the same time create new ones. These trades are both the exploiters and creators of conditions that validate chaos theories that begin to even the traditional inequality between the big boy and the little guy. One thing about the market, if there is no money in it, it won't happen. The growth of day trading is not based on ideology or charity. People have been making out well in it and it will continue to expand.

I personally have made a bit of money trading on the convergence between the Japanese yen and the Austrian dollar (shilling), in June 1998, which without the trading model I would not have known a relationship existed between the two currencies. The opportunity window lasted only 6 weeks, but the profit from 5 trades could carry my operation for the next 6 months without further trading. The upside return is 60% and the down side loss is 15% and the probability of winning if one can find the trades is 80%. It represented very good odds. A 60% return on investment over a period of 6 weeks is unbeatable. Traders move from bonds, to currencies, to interest rates as the markets shift. The big institutional closed out the proprietary trading units after the LTCM debacle. So right now there are thousands of laid off traders making very good living with their severance pay as trading capital.

For example, one day trading strategy on the high volatility British pound tested with March 1995 price data, yielding a high percentage success rate and average profits of $253 per trade of $1000. Active, speculative trading on coffee in June 1995 yielded before cost profits of more than $6,000 from $10,000 trading capital. And an even more sedate trading style on coffee trading produced a $378 profit per trade of $1000. These outstanding results are replicated and documented across numerous commodities, including a variety of currencies, grains, meats, metals, stock indices, foods, fibers, energies and interest rate contracts. Most of these trade carry a 20% loss cut off.

These trade are relatively risk free over time, but they do require focus and time and disciplined effort to locate trading opportunities. The big houses cannot afford to do them because their high overhead will cause them to lose money during period of dry opportunities when the strategy finds no or too few tradable opportunities. So the big houses either has to stretch the model beyond its paradigm validity to assume higher risks just to keep trading. Individual day trade generally have low fixed overhead. Many looking to net less the $200k/year, so they can generally afford to wait or shift into other sectors. The general rule is that when more traders focus on a particular sector, the degree of inefficiency decreases and trading opportunity dries up. so the market is constantly shifting. As inefficiency is reduced in one sector, it produces inefficiencies in other sectors, and it the the job of day traders to find hem and reduce them for profit. Of course, leverage increases one risk. But individual traders are generally protected by heir inability to borrow excessively, a blessing in disguise.

The NASD chief has repeatedly raised concern over day trading. The head of Wall Street's so-called self policing group has added his voice to a rising chorus of concern about the growing popularity of risky day trading among ordinary investors. But the conflict of interest is very obvious: don't risk your money yourselves, let us risk your money for a fee.

The big attraction of day trading is that one person, sitting and watching a screen all day and trading for his own account has the potential to make large sums of money on upswings in the stock and other markets. While some of these upswings are large from daily price movements, others are tiny and are called "teenies". One teeny equals 1/16 or 6.3 cents on 1,000 shares of anything- but one can make money on thirty-seconds and even sixty-fourths of a point per share with this specific method of daytrading. (New rules mean these tiny fractions must appear on trading screens, instead of remaining invisible to the public so the exchange marketmaker can lock in all the profit on the increased spread.)

It is not important to know even what the stock symbol stands for, much less what the company does or it's long range prospects. The only important thing is whether you can lock in a couple of teenies by seeing the numbers hit the screen and executing quickly as the tide moves in the right direction. At some firms, 30 trades a day is the average and long term is 30 minutes. Bottom line: if you make 30 trades and lock in 10 "teenies" a day over 25 working days, you're taking in about $15,000 a month. And unless, you are hooked to a life style, you can always walk away when you have enough.

Market reforms inspired by exposees of excessive spreads in Over the Counter markets triggered the new day trading dynamics with its far reaching effects. For one thing, the reduction in tradings spreads is saving investors $20 billion a year. New software has leveled the playing field. And there are 25 year olds making over a million bucks a year on tiny price fluctuations.

Although the trend started as a kind of male mentality, video game kind of thing it

has since spread to everyone wanting to work from home, savor independence and take a risk. Women definitely are included in this hot new trend. Some pool their money and one will trade for all of them from home with some recent women college grads have grossed as much as a hundred thousand in 6 months time.

A sample strategy - Gap & Snap: Often, when a stock gaps up at the opening of trading, it can be an indication that the stock is very strong and will continue to rise. However, gapping stocks might also be met with strong resistance, only briefly trading up from their open and then falling to trade at lower levels for the remainder of the day. As a day trader, you will want to identify and trade those gapping stocks that are more likely to continue to trade strongly while ignoring those that are weak after opening strong.

Our Gap & Snap strategy identifies the best gapping stocks, and traders use models to assist their execution of the strategy.

This strategy works by identifying stocks that gap up by at least 5/8 at the opening of trading. We then let those stocks trade for a full 30 minutes and mark the high that each of them reaches during that period. The stocks are bought that day only after they trade above their 30-minute high. When traders have purchased a stock, they should determine their stop based on the degree of risk they are willing to take. However, their stop should be no lower than 1/16 below the low reached during the first 30 minutes of trading.

Finally, if a stock trades below its first 30-minute low before it breaks its 30-minute high, the strategy is invalid.

This strategy has had a high degree of reliability to give gains of 1/2 point or more.

All the above are for information only. It is not a recommendation to do day trading or to follow the strategies. Like everything else, a certain amount of research and learning is necessary to be successful. But certainly there are worse jobs around.

As I said, I think this is a progressive trend. It is about time for the average person with a certain level of skill and basic intelligent to be able to claim a fair share in the control of capital by risking their vacation money. And because of advanced in communication technology, the freedom permitted by this line of work is unprecedented, not tie to locations, no bosses supervising over you, etc., etc.


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