what do you think of this stock trading theory?

Question

I am sure I am not the first to try this approach. It's based on the formula that every time you increase your principle by1 percent, then every time you do this 100 times, your principle will be double. so if you average 1 percent gain on selling a stock, and you do this 20 times a day then your principle will double every 5 days.

I imagine there is something similar to this that day traders try to do. I know you will never consistently make one percent on every trade, but if you average that, then it still works out. Gaining one percent on a stock isn't that hard, is it?

Answer 1

it's even easier to loose 1%.....
And don't forget commissions and taxes you have to make more then 1% just to acheive 1%. As an example, you invest $1000 and make 1%. That comes out to $10. But even at scottrade, you pay $7 to buy and $7 to sell and $3 in taxes. So your 1% gain of $10 costs you $17. Even on $10,000, your gain is $100 but taxes and commisions take nearly half of it.

investing isn't like pitching quarters.... you actually need to learn things and it's a lifelong endeavor....

There is a difference between 'traders' and 'investors'. In the long run traders are statistically losers. That's why there are so few Warren Buffets in the world.

success in anything of value takes effort, knowledge and experience. There is not some little trick that is going to make you rich.



If you're interested, here are some things you can learn to be an investor. It's not as exciting, but it is more successful.... you can always use 10-15% of your portfolio to gamble with, but learn to be an investor with the bulk of it.

Start by getting a subscription to Barrons or Investors Business Daily… Do this for 6 months or a year. At first, It seems a bit mysterious, but pretty soon you start to understand the terms and things that investors are looking for and what they are afraid of

Go out to the internet and search on the following subjects. Become very familiar with the concepts.
Asset allocation
Long term investing
inflation
Roth ira vs ira
Large med small cap
Value vs growth
Indexed mutual funds
No load mutual funds
ETF
Sector funds
Bonds CD preferred stock
dividends
International funds
Market cycles
volatility
Fundamental analysis
Technical analysis

In most cases, I think it is wise to use indexed mutual funds and ETF's to build the base of your portfolio.


Good luck

Answer 2

You're playing with numbers from a presumption that you will be one out ten traders that can make any winning trades at all.

A winning trader does not focus on how much money he can can make, but rather from a standpoint of risk. What you're computing is the sure sign of a novice.

Logically, this should work if you can have better than 50% winning trades with a reward/risk ratio of 2:1, and use good money management.

What you're forgetting is that the stock market is neither rational nor logical, and is based instead on human emotion. Multiply that by 20 times and see what you get.

Answer 3

First, it would only take 72 times if you re-invest the gains. The rule of 72 is 72 divided by the rate of return, which gives how many compounding periods it takes to double the principal. If a mutual fund returns 12% a year, The initial investment will have doubled in 6 years

If you just re-invest the original principal and pocket all gains, the it would take 100 times.

To make a 1% gain 20 times in one day is 22% total gain is impossible.
There are 6.5 hours in the trading day, allowing 20 minutes for each trade. Buying a stock and it going up 1% in 20 minutes is a rare occurance. And doing it 20 times in one day is impossible. If you lose 1% in 20 minutes, then crucial time is wasted, and now winning trades are needed to get back on track. Assuming, that you lose 1% on 1 out of 5 trades, then instead of 72 times it would take about 120 times to double your original investment.

Tossing in the factors of bid/ask spreads and commisions means that one would need more than a 1% gain. Capital gain taxes will eat in up that too.

Bottom line, years and years of academic research shows that its possible to make any money day-trading the market. If it were possible to make decent money, everyone would be doing it. A small fraction of those who day-trade make money overtime. Stocks with daily price moves large enough to trade also are the riskiest (high beta) Thus, on a risk adjusted basis, the gains are no better than buying the s&p average.

Answer 4

I think all three of the prior answers missed the point. When you pour money into the stock the price will go up. The first problem is that if the stock goes up 400%, your basis in the stock you own is surely not 100% (the original price). As you are buyng the stock, the price of the stock goes up. Your final buy, for example, is probably at something close to 400% of the original price. That means your basis in the stock is probably 250% of the original price. The original price was something like the market's estimate of what that stock is worth. Now you are suddenly holding a pile of that stock priced at 4 times what the unmanipulated market thinks it ought to be worth, you've paid 2.5 times what the market thinks it's worth, and you want to sell it. This can't be good. When you start to sell, the price will start to drop. Unfortunately for you, the price will drop veyr quickly because there is a big seller in the market (you) and the price wants to revert back to the market's assessment of fair value. That means your average selling price might be 150% of the original value. When the dust settles, you bought at 250% of equilibrium price and sold for 150% of equilibrium price which means that your clever manipulation left you with a rather big debt to the bank and nothing else to show for your trouble.

Answer 5

As a day trader, I can tell you that commission costs will eat you up. As the above post mentioned. Even when you pay less than $1 on commissions, it's bad enough when you look your montlhy statement and find out you paid $200 on trade commissions. (note if you want to day trade paying more than $1 in commisions, you better go to the slot machines).
If you make more than 30% of yearly returns you should be more than happy day trading. Of course you haven't heard of options, since you can make a better case of big returns in short time with OTM options.

Answer 6

Read Jason Kelly's book: The Neatest Little Guide to Stock Market Investing.

It's a good place to start in order to avoid mistakes.... that doesn't mean you won't, but it can steer you away from dumb ones.

Answer 7

If someone here knew how to make piles of money in the stock market, they would be on a giant yacht in the Caribbean under a pile of naked chicks, not answering questions on the yahoo answer board. Remember it's easy to make money when your already sitting on a pile of it. If you don't have a pile, your going to have to work your *** off learning, trading, etc. etc. or be just stupid lucky. Hope this helps.

Answer 8

It's not that hard. But in practice, it's hard to do.Talk is easy, put in practice is hard
Only person can do that is Warren buffet, but even him losing 900 millions bet on the currency
His business return 29%/year after years

Answer 9

Read some stock tips on this site to help you with it

Answer 10

Transaction costs generally kill incremental strategies like this.