Am I going into trading too soon?

grey_gym_sock

when trading shares, your main competition is not private investors who didn't read the right news sites. it's not even private investors in general. most money in the market is managed by the professionals, who have teams of researchers, analysts, and specialized computer programs, to back them up. so you are not likely to get an edge by looking for news which other traders have overlooked. nor by being quick. much trading is now made by computer programs with no human intervention required. there are programs which trade on the basis of scanning twitter feeds with the aim of reacting to news faster than human traders can. so you are up against a combination of humans and machines. the humans are well-resourced, and generally of above average intelligence (though intelligence, beyond a certain minimum level, isn't that important in trading: temperament is more important). the machines are programmed by humans of very high intelligence.

also, the traders/investors who are successful (whether they be professionals or private investors) tend to end up handling more money, both because their investments grow, and (if they're professionals) because they are then likely to be entrusted with more money to manage. so you are, on average, up against competitors who are better than average!

this is not to say that you can't do better than the competition. perhaps you can; perhaps you can't. it's just that being a bit brighter than average doesn't make it easy.

you should always consider costs. suppose (for the sake of argument) that, before costs, you have an "alpha" of +5% (meaning: the ability to outperform the market by 5% per year; i.e. to make 10% if the market goes up 5% - which might be about its long-term average, on top of inflation). suppose you achieve this by buying a number of shares (selected by whatever means), holding them for a month, and then selling them and buying a new set of shares. what are your costs? for each share, 2 dealing commissions; let's suppose you use a broker where each commission is only £5, so that's £10; if you put £1000 in each share, that's 1%. you also pay 0.5% stamp duty on each purchase. and there is the bid-offer spread (the difference between the buying and selling prices at any time), which could be as little as 0.1% (but a lot more for small companies). so that comes to 1.6% total costs. per month. which is about 19% per year. so even with an alpha of 5% (which is a lot, BTW), you would underperform the market by 14% per year, i.e. if the market were up by 5%, you would be down by 9%.

that was for monthly trading. now work out the costs for day trading, and you'll see why just about everybody who does it loses money.

what i am driving at (very circuitously) is this: if you decide to go in for any kind of active trading strategy, first work out what your costs will be. and then work out what the result will be, on the assumption that you have zero alpha. (alpha can be positive, negative, or zero. the average market participant, most of whom are professionals, has an alpha of zero, by definition.) you could assume that the average real return from the market will be 5% per year. if you've seen what the outcome will be assuming zero alpha, and you're happy with that, then you are at least near to being able to make an informed decision to go ahead. the actual result can of course then be much better or worse than the result assuming zero alpha.

if you follow that advice, it will generally steer you away from short-term trading. it doesn't rule out longer-term trading (i.e. holding periods of several years) - sometimes called "investment" as opposed to "trading".

as somthing to compare with the costs of active trading/investment, note that you can buy tracker funds costing about 0.1% or 0.2% per year. so if the market return is 5% per year, that will give you about 4.9% or 4.8% after costs.

incidentally, alpha is not consistent. everybody who tries will have positive alpha in some periods, negative in other periods. if you are ahead of market, it is hard to tell whether that is by luck or by skill. it might be decades before you're sure. you might never be sure. however, that doesn't necessarily matter. you should keep track of any active investing you go in for, and compare the results with a suitable index (e.g. the FTSE All Share index, for UK shares). but providing you don't do massively worse than the index, you don't have to care about why you got the exact result you did get.

note that many - perhaps most - active investors/traders do not keep proper track of how well they have done, and as a result tend to be delusional about it. see: https://en.wikipedia.org/wiki/Beardstown_Ladies

also note that, by holding a limited number (e.g. 15) of shares, your portfolio will experience more dramatic short-term swings in value, both up and down, than it would if you held a tracker or conventional fund, since the latter is spread across a much larger number of shares (and you can't buy such a large number of shares directly without incurring ridiculous costs). this is called higher volatility, and you do not have to care about it.

holding fewer shares also - this is a different point - makes the range of possible outcomes when you come to cash your investments in (after a few decades) even broader than it already is - i.e. a better best case, but a worse worst case. the range is very broad anyway, because although we may guess an average real return of 5% a year, it could be anything, really. so if you go for active investing, instead of a very broad range of outcomes, you have a very very broad range. which is vague, but i think it matters a bit.

masonic

_Super wrote: »

It's not about predicting. It's about reading the financial papers, paying attention to news about that particular stock. Companies take hits for a reason and that reason is usually very fast into the news. If you react to that news you'll save your money.

News follows price. First you'll see the price slide and wonder why (that's all the big boys quietly making for the exit), then some time later the news will be released publicly and you'll be scrambling against all your fellow private investors for the door. The share might go into auction within a minute or so of the news being available, which often means it will come back out oversold. Often, news is released at 7 am before markets open, the share will go into auction at market opening and gap down substantially before you get the opportunity to trade on the news.

_Super wrote: »

I think they think that anyone who's interested in trading is a moron who's destined to lose their money. I'd like to think I'm a bit smarter than your average Joe and with 6 - 12 months of reading and studying the markets I think I would have a decent shot to make more return than what I get from a fund.

You have a chance of doing considerably better than a fund if you invest (i.e. holding periods of >6 months for your positions). If your holding periods are measured in hours or days, then you will be essentially gambling on the random movements of the market. That's not to say it's impossible for that to work out for you, but you'd have to be quite lucky and the vast majority of people aren't.

bowlhead99

_Super wrote: »

There are plenty of articles out there. It's just if you can be bothered to read them. I don't have any special insider information I simply read what's in the headlines. The news will come after the loss of course but the faster you react the less you'll lose.

Not necessarily the case. A company (maybe not even the company you're watching, but a rival) makes an announcement at 10am via RNS. The professionals are on it at 10.00 and three seconds. Your share starts to drop. At 10.10 you realise it is because of this news. You read the news fully and by 10.15 decide it is bad news and you better sell your shares for the 85p they are at now instead of the 100p they were earlier that morning before the announcement.

By noon the initial panic is over and the consensus is that the initial reaction was a bit of an overreaction. By 4pm the share price bounces back to 90p, without you.

The buy-and hold investor gets the newspaper the next morning and sees the bad news so he decides it's now time to exit the share at the natural level of the market, 90p, the next morning, or perhaps later that month or whenever he gets around to checking his prices, losing only 10p instead of your 15p. So in this way you have been doubly done over. You missed the news at 10.00 and three seconds so you didn't get out unscathed. And by trying to chase the market you lost 15p instead of calmly checking up on your portfolio once a month and losing 10p.

People always think they will be sufficiently on the ball to get out of a stock before the bad news continues. Maybe the share continues downwards to 60p. Maybe it goes back up to 120p. At 85p you don't know where it is going next, you just know it has lost 15p very quickly and will be fearful it will go down much further if you don't do something about it. This may or may not be the right thing to do. Without any special insight you will not beat the market and you will not avoid losses.

Like you say, you don't have any special insider information you just read the news. You will do that, on average, less well than the true professional traders and the people who have entire teams of people to read the news better than you because they are investing £100m and can afford the £100k salary cost for two man-years of review work on their transaction for a tenth of the percentage cost as you spending £10 on the broker fee for your £1000 trade.

You could buy stocks from a company and because you didn't read the news you'll wake up one morning and you'd have lost 15% and wonder !!!!!! just happend... But if you read latest news regarding that stock there is a good chance you would be able to get out in time.

The company's trading announcement comes out at 7am. At any time up to 8am you can get into the queue to place your trade to buy or sell. Then the market opens at 8am and it might open at 60p versus last night's close of 100p, due to the supply and demand driven by the 7am announcement.

If you had a 'stop loss' set on the share to exit if the share price dropped to 80p or lower, your broker will automatically sell your shares at the prevailing available price of 60p, which might or might not be the right thing to do but it produces a bigger loss than you had put into your cashflow model. If you had decided not to set stop losses you could just manually decide to get into the queue to exit at best available price and you will still take the loss of 60p whether you like it or not, despite the fact that on this particular occasion you received the news in the same time window as the best professionals.

chronicsaver

The above post is a very good post. With that said however, people shouldn't try and deter the guy from trading. The best way to learn is to actually start doing it and let him make his mistakes. The old adage goes "don't follow the herd" but there are some really obvious trades out there i.e Short EUR/USD (I don't trade FX but hey ho) and long Euro Stoxx and Dax.

It also depends on what type of trader you are technical/fundamental - it matters. My mum and a number of customers I use to serve at Sainsburys (I was a deli assistant) told me a few years ago they wanted to stop shopping at Tesco and Sainsbury's because they were becoming "too expensive". If you combined that with the fact we were coming out of a recession, it would have been a sensible trade to short both companies (I knew nothing about stock markets then). Low and behold a few years later, their share prices have been plummeted. My point here is that what fundamentally drives most companies are it's customers. If you can understand what it's customers are doing, you can take a plausible view on where you think a share price is going to go. Most "professional investors" were actually quite bullish on both stocks, particularly Sainsbury's so it's rubbish to think that 100% of the time professional investors have an edge over you.

But as I said, start off with Buy and hold investing rather than day trading. You can quickly lose your rag with the latter.

Herbalus

The trouble with your reasoning is that you believe you have insight into the markets that the professionals do not. And some people will. Evidence suggests the majority will not.

It's very easy to look back in hindsight and "prove" that your suspicions were correct. Somebody has already mentioned confirmation bias, which means you remember cases where you were right and forget those where you wrong. But look to today - if you have your own £1000 are you so sure that you know now what the supermarket stocks will do?

I'm not trying to deter the OP from trading, but if they/you/anybody looks like they've got an unrealistic expectation of how well they'll do, a lot of posters will point out that there's a more chance than not they won't achieve their goals.

Radiantsoul

chronicsaver wrote: »

Can I ask why people are being so hostile towards this guy?

They are trying to save him money.

ChesterDog

Radiantsoul wrote: »

They are trying to save him money.

...and this forum is about savings and investments, so speculative, dangerous, gambling-orientated processes will naturally receive short shrift.

redbuzzard

chronicsaver wrote: »

The above post is a very good post. With that said however, people shouldn't try and deter the guy from trading. The best way to learn is to actually start doing it and let him make his mistakes.

_Super's choice of course and he has made his intentions clear.

@_Super:

I don't think you are a moron. What you have in mind is pretty much what I did 30 odd years ago - a bit of dabbling, win some, lose some. I won more than I lost as I recall, but the biggest loss is opportunity.

I would dip in, and sell when I saw a profit, but if I had just put the £1,000 or so I dabbled with into a tracker I would have been 100% invested 100% of the time and done considerably better, with much lower risk, less time and stress. At a lower rate of return, take note - whilst it's true that a 5% profit on a share you hold for a month is well above the average market return, you can't do that all the time with all of your money.

Your plan (from memory, I'm not re-reading the thread) is to study the markets for 6-12 months and then with your knowledge of how prices move to get in and make money at a better-than-average return.

You can learn some basic stuff much faster than that with a bit of reading - perhaps you have, though it's not evident from the discussion.

Somebody has already suggested Tim Hale's Smarter Investing. Good book. It makes the case for passive investing, the exact opposite of what appeals to you, but in making that case it will tell you a lot about how markets work and why trying to beat them is difficult.

If £20 puts you off, or you don't want to read a book that frankly argues the case against your instincts, try Monkey with a Pin by Pete Comley.

I'm sure you have come across the concept of risk vs. return. The original underlying theory (look up CAPM if you are that way minded) says that the more risk you accept the more money you will make. Well, that's true up to a point. On average you will get materially higher returns from equities, at the risk of losing a significant chunk of your capital from time to time, than you will from putting your money in a savings account. Most people here would say that having 100% of your money in equity trackers is near the higher end of the risk scale, but interestingly you seem to have equated that with conservative, low risk, unadventurous investing!

Of course CAPM says you can make more money by taking more risk...

Up to a point. Sort of. Well hardly at all, actually.

You cannot apply this simple risk vs. reward theory mechanically, especially if you are not diversified (very unlikely with what you have in mind), have disproportionate transaction costs (as you will with frequent trading), trade in very imperfect markets (none is [perfect] anyway, and at the extreme if you hold a portfolio of penny shares it is very unlikely that you will ever see a better return for your extra risk) etc. etc.

In other words, just piling on risk is not a workable investment approach, whatever your tolerance for short term losses.

Diversification. Beyond the common sensical idea that not having all your eggs in one basket must be good, do you understand how it works? That you can in effect average your returns across a number of investments, while having a risk level lower than the average risk of the individual holdings? Funds do diversification for you, within their sector/style of course.

These are really basic concepts. You might ignore them as a day trader but at least you will know what you are ignoring and the implications of that.

Whatever you do, to succeed will require time and effort - much more for trading than for buy-and-hold. A little of that invested in reading will be much more efficient than only learning by experience.

Good luck with whatever you decide. Having saved £15,000 towards your future security you are already well ahead of just about all 22 year olds, so I am not judging you to be an idiot.

gadgetmind

chronicsaver wrote: »

Low and behold a few years later, their share prices have been plummeted.

But -
1) Yes, the share prices dropped but they could have gone the other way.
2) And they did for quite some time. Would you have held your nerve?
3) All the time you're shorting, you have the pay the dividends instead of receiving them.

chronicsaver

gadgetmind wrote: »

But -
1) Yes, the share prices dropped but they could have gone the other way.
2) And they did for quite some time. Would you have held your nerve?
3) All the time you're shorting, you have the pay the dividends instead of receiving them.

1) Point being? But they didn't go the other way, they went southwards.
2) As I said, when you have a view, stick to it unless circumstances which influenced your view have changed. There was clearly a lag between the year the recession hit and the point it started to affect consumers. Waiting 2 years after the recession would have been sensible.
3) Fair point. I actually got burnt on this today! I was short on the FTSE.

The Retail stocks example, was just an example. I was only trying to highlight a point here that you "can never beat the professionals." The majority of the time, they have the edge over you but that's why you don't go and recklessly punt on every opportunity your eye meets.