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Is day trading better than long term investing given the fact that compound interest can result in large profits in the long term with small daily profits? For example earning 1% per trading day can result in 700% profit per year?

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    May I ask how you came to those numbers? How/ why are you expecting any day trader would turn an average daily profit of 1%? – Daniel Jul 24 '18 at 8:43
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    Actually 1% per day is the goal in my trading department. That said, the calculation is wrong because you run very fast into scalability issue.s I.e. you CAN make 1% on average, just you can not necessarily compound but pull the money out and look for new strategies. Strategies DO have limits how much money they can handle before returns go down. – TomTom Jul 24 '18 at 10:03
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    Start with $10k. Assuming it can be scaled up as you succeed (it can't) and you earn 1% per trading day (~252 trading days per year) and in a mere 5 years you're worth $2.7 trillion dollars. But you're now in the top US tax bracket of 37%. Geez, there goes about $800 billion of that. Oh wait. Over 90% of wannabe get rich day traders blow out their account in the first year. Of the remaining 10%, many lose and a few make some good money but no one does these numbers. EVER! OK, time to wake up from this dream. – Bob Baerker Jul 24 '18 at 12:23
  • @BobBaerker Actually besides the compounding - I think traders get special tax traatment in the US. Not totally sure - read it ona couple of books but I am not in the US so I do not care. Also - as trader you can MOVE. Once you make a million or two a year - live where you want ;) – TomTom Jul 24 '18 at 14:53
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    There are some tax benefits (deductions) to Trader Tax Status (TTS) but only a small fraction of active traders qualify because they must trade substantial volume consistently over a long enough period of time. An issue of convenience is that you receive mark-to-market treatment and don't have any issue with wash sale violations. irs.gov/taxtopics/tc429 – Bob Baerker Jul 25 '18 at 14:16
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If you are equally accurate in forecasting market movements on all time frames, then yes, trading more frequently will allow you to profit from more fluctuations and generate higher returns, up to the point where transaction costs outweigh this advantage. However, there are active traders squeezing the predictability out of market fluctuations on all time frames. It is extremely difficult to generate average daily returns of 1% or even 0.1%. Very long time frames have the advantage that you can build wealth in diversified investments without having to predict better than other traders.

BTW, by my math, 1% compounded daily for 252 trading days gives over 1100% per year.

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Is day trading better than long term investing

Yes, it totally is. IF you can pull it off. Which 95% of the people or so cannot.

Your question is similar to:

Is life as a golf professional better than working at a factory. Yes, it is. IF you can actually pull it off. Because most people cannot - I for example will never be a golf pro. Period. I just lack the skill.

Day-trading is EXTREMELY competitive. Yes, you can make ridiculous returns. Actually it is better than pretty much every job you can think of from an earning potential point of view. But most people just cannot do it. Period.

And THAT is your problem. Do you have what it takes?

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    The notion that there is an "it" that you can "have" is misleading. The "it" that you need to "have" to consistently make large returns without taking the occasional huge loss is superior luck, not superior skill. – Eric Lippert Dec 16 '19 at 19:16
  • Skill is most definitely a leading cause of 'it". Have you ever heard of something called risk management? Successful traders employ it, though there aren't many successful traders... – Bob Baerker Dec 16 '19 at 20:07
  • Eric, this is as ignorant as assuming that luck decides why there are always the same people in the world championship for poker. BAD luck will wipe you out occasionally. Risk management keeps you in the game. It is luck until you meed someone who earns more living from this than you likely can imagine. It is luck as poker is luck - for those who do not know how to play it. – TomTom Dec 16 '19 at 20:18
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Is day trading better than long term investing

This depends on a lot of variables. One, profit, you mentioned in your post:

For example earning 1% per trading day can result in 700% profit per year?

So, lets just for a moment assume you can pull that off - what your are missing is investment sum and opportunity costs and risk.

First, 700% of $10 is still only $70. So it will only make sense if you have sufficient capital to cover for your time invested.

Then, day trading is not an investment strategy, it´s an occupation. So it all comes down to how much you can make in that same time elsewhere.

And at last, you have to consider risk, also. If you have to live on the returns of your day trading activity, an economic downturn can cause you to have to consume your investment capital at a market low.

So you are really comparing apples and oranges. Long term investment is letting your money work for you, whereas day trading is working with (your) money!

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  • I think you went off on a tangent here with the money working for you versus working with (your) money along with opportunity costs and risk. Yes, 700% of $10 is still only $70 but compound that out 10 years and it's a really hefty number. No one can make that kind of money in that same time elsewhere. One can't even make this kind of money in the first place. The OP's premise is wishful thinking by someone who hasn't day traded in size or duration. – Bob Baerker Jul 24 '18 at 12:31
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    @Bob Baerker: You are missing the point. You´d have to actively and successfully trade with your $10 every day. You cant do this in your breakfast break, you´d have to give up your job! So If I normally make 100k as an IT-Consultant, you are already $99.930 short after the first year! You can invest into an ETF with no more than 30 minutes of your time per year! – Daniel Jul 24 '18 at 12:36
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    @BobBaerker He is not. Day Trading is a job. You don't get return on investment, you get paid for making right decisions. It can be AMAZING - but it is a JOB. And one more like a top athlete. And you CAN get paid accordingly. – TomTom Jul 24 '18 at 14:50
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Check out a tool I created called CompoundTable. I believe the key is not to set the bar too high. If you feel confident you can make 2% per week, then that's what you should shoot for, even if you possibly make 3% or 4%. Pick a return that you are comfortable with and feel certain you can attain.

If you set the bar too high: example - at 1% per day. And you are in a position that is up .89%, you will be tempted to not lock in profits while you are up .89%, but you will continue to hold because you want the 1%. You hold, the stock goes down, and you lose all of your gains. If this is the case, you may want to set the daily at .5%. Or move up to a weekly or monthly time frame instead of feeling like you absolutely have to make .5% today. What happens if there are no opportunities that day?

I've found that being more conservative with the percentage return and choosing a later period is more realistic and attainable. So, for example if you are trading stocks that have potential movement of 3%-5%, pick a realistic period of 1%-2% per week. Or 4% per month, which is even better, because the longer of a period you set, the less tempted and emotionally pressured you will be to feel like you absolutely have to meet your weekly goal, which may cause you to break your rules while trading and enter trades that do not match your strategy criteria at all.

Also, you will run into a max trading amount, you'll have to keep that in mind. It's going to be different for everyone because it depends on how much you can trade with without your emotions coming into play. Some guys are comfortable trading with $30,000, some $75,000, some $150,000. Hence, you will only be able to compound up to your max trading amount. At that point you are no longer compounding, but will continue to have a regular return off your max trading amount.

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This is actually a very good question, that most non-traders are often asking. The answer is very simple, but not what most people want to hear, namely:

Yes, it's very possible to pull off 1-2% profit per day for a half decent trader, with little risk.
-- But it is entirely up to you!

Like already mentioned, most of people (99%) are not, because they simply lack the perseverance and motivation to sit and trade on multiple screens for the 116 consecutive winning trading days it would take to pull off a 10-fold account balance increase. People want to get-rich-quick, and after 3 weeks they start getting sloppy, lazy or distracted and start losing.


The calculation is simple:

We want to calculate how long it will take to multiply an initial investment by 10x through compounding, if its daily interest rate is 2%.

P = Principal (initial) Value
F = Future (final) Value
r = Nominal (daily) interest rate [points]
n = Number of annual compound events

The compound profit factor is defined by R:

R := (1 + r)

So the future value, after n days are:

F1 = P*(1+r)
F2 = F1*(1+r)
F3 = F2*(1+r)
   = P*(1+r)^3
...
Fn = P*(1+r)^n
   = P*R^n

So if P = 1, we want to find n such that Fn = 10.

n = ln(Fn)/ln(R) 
  = ln(10)/ln(1.02) 
  = 116 [days]
  =  23 [weeks]  (if we divide by 5 [workdays/week])
  =  ~6 [months] (if we divide by 4 [weeks/month])

All that said, it's all a matter of opinion and what you consider as an investment. Day-trading is a job and and you need to be on point to be successful. A long term stock investment is only as good as your account allows. Buying 1 stock of Apple is not an investment, no matter how well it will do in the future. But buying a 100,000 USD portfolio of S&P500, is.

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    An answer that wholeheartedly approves of the idea of 1% daily gains, without even the whisper of risk is dubious at best, and harmful at worst. – Grade 'Eh' Bacon Dec 16 '19 at 19:09
  • Not only is it absurd to suppose that any typical trader yields a consistent 1% a day, the math here characterized as "simple" is -- though correct -- needlessly complex. The simple way to express this is the rule of 72. Divide the interest rate into 72, and that's roughly how long it takes to double the investment. If it takes n days to make 2%, you double your investment in about 36n days. If 3%, 24n days. 6%, 12n days. And so on. – Eric Lippert Dec 16 '19 at 19:12
  • Yes, it's very possible to pull off 1-2% profit per day for a half decent trader. It's even possible to do even better than that on some days. What's lacking from your premise is accounting for the losing days and every day trader has many of those, sometimes in the vicinity of 50%. What separates a good trader from the pack is risk management - few BIG losers. The idea of averaging 1% a day (1,300% gain per year) is preposterous and can only be achieved on the FANTEX (the Fantasy Exchange) where everyone wins. – Bob Baerker Dec 16 '19 at 20:15
  • @bob-baerker As I said, this is not what anyone want to hear and believe, because they simply don't know any good traders (1/1000 at best) or even half-decent. I happen to know several dozens and at least 5-10 of them pull off 3-4% a day, consistently. You comments seem to indicate that you have tried to trade yourself, and obviously failed at it. Regarding proper risk-management, that is obviously part of fundamental and basic trading education, so if you skip that, then of course you'll crash hard. – not2qubit Dec 16 '19 at 20:26
  • Also, I see a lot of hand-waving arguments in the comments, and I decided to spell out the precise mathematical details for those interested. This is not a post about statistics, so if you want me to also wipe your noses with that, I suggest you post a question in the Quantitative Finance SE. – not2qubit Dec 16 '19 at 20:28

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