Compound interest and day trading

Question

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?

Answer 1

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.

Answer 2

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?

Answer 3

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!

Answer 4

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.

Answer 5

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 F_n = 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.