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Can Day Trading be profitable for retail?

  #60 (permalink)

New York, NY
 
Trading Experience: Beginner
Platform: Vanguard 401k
Broker/Data: Yahoo Finance
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jefforey View Post
My opinion is : No, It cannot be profitable. (...) retail user cannot be profitable consistently.

Your conclusion is mostly correct.


jefforey View Post
I agree that there is no incentive. I am just looking for some evidence. Not here to offend anyone. One way would be to post backtesting results done using tick data, I guess.

In fact I can prove you're mostly correct based on live results rather than backtest results.

I have a leaderboard too. I happen to be a market maker for about 2000+ FX accounts. We know how profitable our counterparties are on every single trade since day 1, so this is over a very large sample size.

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While I don't know if the beneficial owners of these accounts are 'retail' or 'institutional', I can distinguish them by account size, and there's a very distinct pattern which is consistent with what you'd expect of retail trading behavior. For example, for all accounts with more than $100,000 cash equity, their trade PnL distribution is almost symmetric, so these accounts are about equally willing to take a $100k loss against us as they are to take a $100k win against us. You'll notice that the orange curve is very asymmetric, meaning that small accounts are willing to take big profits against us but very reluctant to take equally large losses against us i.e. they cut their losses too quickly. This is typical, we see these traders take stop losses much more often.

If you draw a vertical column at $0 gross profit, you'll see how profitable each group generally is when they trade against us:
- For all accounts with less than $100,000 cash equity, they are profitable when they're trading against us for about 21% of the time.
- For all accounts with more than $100,000 cash equity, we become more evenly matched as they make money when they're trading against us for about 50% of the time.

If you consider that most retail traders have less than $100k cash equity, here you have it: most of the retail traders I've encountered consistently lose money.

(Note: Some people may argue that this is unfair. It isn't. I can spread 0.1 pips to a 'retail' trader but 1.0 pips to a more profitable trader, and other market makers are competing for the same flow so I have to give the best possible spread. My decision is maximin optimal for the retail traders because they get to enjoy lower spreads.)


jefforey View Post
Add co-location which further improves the chances of limit order execution and decrease slippage the profit increases further. Add reduced exchange fees (some brokers have this privilege) than profits increase further.

I think you have the causality reversed. The benefits of these are very small to a retail trader. The successful traders find a way to make profit and eventually it becomes sensible for them to make these micro-optimizations to improve their revenue or reduce expenses.

The reason is quite simple really, I agree with @Anagami. Daytrading is like being a stay-home writer, most people lose money and it's not that the system is rigged against stay-home writers, it's just good literature is a very competitive and efficient market.


Last edited by artemiso; February 14th, 2018 at 04:16 PM.
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