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Can Day Trading be profitable for retail?
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View Poll Results: Can Day Trading be profitable, consistently, for retail traders
Yes 72 72.00%
No 13 13.00%
Can't say 15 15.00%
Voters: 100. You may not vote on this poll

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Can Day Trading be profitable for retail?

  #61 (permalink)
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artemiso View Post
Your conclusion is mostly correct.



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.)



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.


Not sure I fully understand your chart, but does this chart represent individual trades, or traders?

What I am getting at, if you can share it, is what percent of small traders have made money since inception, and what % of large trader have made money since inception?

If you can't share or don't want to, no big deal, just please say so.


For reference, I was talking with a forex broker a while back, and he said that 91+% of accounts were unprofitable...

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  #62 (permalink)
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Beautiful...

and interesting @artemiso.

Opens up a number of evaluative metrics that would be interesting to explore.

If the tearsity of my prior response especially about about back testing was ill received by you, I apologize.

Dan

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  #63 (permalink)
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kevinkdog View Post
Not sure I fully understand your chart, but does this chart represent individual trades, or traders?

What I am getting at, if you can share it, is what percent of small traders have made money since inception, and what % of large trader have made money since inception?

If you can't share or don't want to, no big deal, just please say so.


For reference, I was talking with a forex broker a while back, and he said that 91+% of accounts were unprofitable...

The horizontal axis is gross (brokerage fees excluded) PnL of individual trades.

The vertical axis is cumulative probability, meaning probability that a trade makes profit of up to the amount on the horizontal axis.

If you see the orange curve, the cumulative probability of making $0 is around 79% for the group of traders in the orange curve. This means that only 21% of trades taken by accounts categorized in that group make positive gross PnL.

I can express this by cumulative profit of individual accounts on the horizontal axis too to arrive at the statistic you asked your broker for, but that isn't as a meaningful as knowing the outcome of individual trades because it's harder to normalize accounts as they have subscriptions and withdrawals, different account length etc.

Trimming it down a lot: 79% of trades taken by small accounts lose money (to market maker). Does this make sense?

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  #64 (permalink)
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wldman View Post
and interesting @artemiso.

Opens up a number of evaluative metrics that would be interesting to explore.

If the tearsity of my prior response especially about about back testing was ill received by you, I apologize.

Dan

No, I actually haven't read your post.

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  #65 (permalink)
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Right...

@kevindog

The vast majority of retail trading accounts will not be profitable. Frequency, deposit, and a number of other factors are likely demonstrable across a data base like @artemiso has. I'm sure a guy like artemiso has looked at the data and executes a plan that gives the greatest edge in business.

Some of the responses open up the question in interesting ways.

I stand by my initial comments, but perhaps could have show better tendencies.

Dan

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  #66 (permalink)
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I stand outed..


artemiso View Post
No, I actually haven't read your post.

I read all of your posts that show up in the log. There are a few names I scan for as sources of specific and valuable insight. @artemiso , top of that list.

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  #67 (permalink)
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WLDman says...


artemiso View Post
The horizontal axis is gross (brokerage fees excluded) PnL of individual trades.

The vertical axis is cumulative probability, meaning probability that a trade makes profit of up to the amount on the horizontal axis.

If you see the orange curve, the cumulative probability of making $0 is around 79% for the group of traders in the orange curve. This means that only 21% of trades taken by accounts categorized in that group make positive gross PnL.

I can express this by cumulative profit of individual accounts on the horizontal axis too to arrive at the statistic you asked your broker for, but that isn't as a meaningful as knowing the outcome of individual trades because it's harder to normalize accounts as they have subscriptions and withdrawals, different account length etc.

Trimming it down a lot: 79% of trades taken by small accounts lose money (to market maker). Does this make sense?

Everyone interested in trading the financial markets should understand this post. Very very valuable distinctions can be drawn from the last bit of this thread. Certainly a "top ten" thread snippet in the last long period of time.

Dan

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  #68 (permalink)
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wldman View Post
I read all of your posts that show up in the log. There are a few names I scan for as sources of specific and valuable insight. @artemiso , top of that list.

Thanks for the feedback. To be clear, I'm sorry if it came across that I didn't read your post because I didn't think there was any interesting content, I actually really just looked at 1st page of this thread because it was too long and I'm still at work. I do appreciate you imparting your wisdom to the rest of the members as well.

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  #69 (permalink)
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No man,

Not that at all.

I'm wise enough to figure out very quickly the validity and the value of information...ESPECIALLY information that is born from specific talents or attributes that I do not have.

My bad assumption is that because I am engaged and deeply interested in a post, that everyone or anyone in the thread sees or cares the same about any of it.

In my late day delusion, you and I were having a conversation.

Glad you are well and grateful for your contributions to the forum.

Dan



artemiso View Post
Thanks for the feedback. To be clear, I'm sorry if it came across that I didn't read your post because I didn't think there was any interesting content, I actually really just looked at 1st page of this thread because it was too long and I'm still at work. I do appreciate you imparting your wisdom to the rest of the members as well.


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  #70 (permalink)
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I thought I'd give my best definitive answer. The definitive answer is yes. Day trading can be profitable for retail but it is not profitable for most retail and even among the better retail traders, it is not profitable enough to make a living on a tiny account. Second, the question as asked cannot be answered because it isn't defined well enough. How profitable? How consistent? If that is an open ended, consistent forever then that's unanswerable but unlikely for all traders. You need to ask also what is the distribution of returns?

Based on my years of studying the market, my own hypothetical and published tracked performance and others I've seen, I will try to give you the most accurate answer possible. The best futures day traders (probably applies to other day traders) can make between 50% and 200% on an account basis while keeping drawdowns to under 50% and often under 30%. As for consistency/longevity, this type of performance is possible to do over at least multiple years, we'll say 2-5. Doing anything in trading consistently beyond that is a big question mark.

There is really no reason to even discuss or argue whether or not day traders can do this. I mean that if you are a top 15% day trader you should be able to do this. Most traders cannot afford to day trade for 50% or even 100% returns. So, it is very difficult to go full time. But, there is really no reason to discuss whether or not these returns are possible because it is easy to find such published track records. There are even programmed systems with returns like these.

The more interesting question is if you want to move yourself beyond a top 15% performer, what type of returns might be possible and how would you do it? How do you move into top 2% to 5%? This is where we do not have a lot of data as most traders in this group are unwilling to share their returns. But, if it is possible, I will show you how and where the risk comes from.

1. Risk a large percentage of account per day. If you are very consistent then you can risk a high % of your account each day and still keep risk of ruin to something marginal. For example, if you make at least several high probability trades per day then having a run of 12 losing days would be very unlikely even over 5 years or so (<5%). Given that sort of knowledge, you can determine an amount to risk per day... For example assuming you have a 55% of being profitable on the day, out of ~240 days (i.e. proxy for trading year), the probability of having a run of 12 losing days is less then 1%.

Now given this, it means you can risk up to 8% of your account each day. That would be 4 trades at 2% risk each, for example. So, let's see how that looks on a 25k account. It gives you a $2,000 daily loss limit. Assuming you can make 25% of your risk on average, that yields $500 per day. A theoretical return of $120,000 or a 4.8x return. This becomes more difficult to do on accounts sub 25k because the risk per trade drops such that you have to effectively hyper scalp. The risk is you start on a bad day or have a bad run to start with.

2. Trade multiple contracts on high probability trades. If you can find 1 trade that you make $50 per day trading 1 contract at high probability, then adding 10 contracts takes that to $500. The risk is that your stop loss is blown and that your win ratio drops.

3. Trade for bigger winners. If you can catch a big trade then you could pull off $2,000 or $3,000 or $4,000 on a single contract. The risk is that (1) holding open a big winner like that will put a large percentage of the account at risk-- it is a form of compounding, (2) catching big winners is very subject to volatility. This sort of trader might not be a strict day trader but might still be mostly day trading.

Also, as an aside, I suspect it is not always a skills gap in a lot of cases as to why retailers lose, it is because they are effectively setting themselves up to lose because they trade tiny accounts which makes the average trade a bigger percentage due to fixed futures contract.


Last edited by tpredictor; February 14th, 2018 at 05:33 PM.
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