Thursday, March 16, 2006

Daytrading vs. Savings Accounts

Stealthbucks commented that he was curious that so many personal finance bloggers seem really excited about savings accounts from Emigrant Bank, ING, HSBC etc that are offering interest rates in the 4-5% range. don't get me wrong, I recently opened such an account with HSBC. With interest rates higher than they were a few years ago it makes sense to park cash temporarily in such an account. And for those just starting out on the saving and investing journey it makes sense to do this before taking the plunge into more sophisticated investments. Also I have long had a Cash Management Trust account (a Money Market account in American) with Adelaide Bank in Australia (and Macquarie Bank before that).

What is stunning though is comparing my recent day-trading with such a savings account. I have really improved my performance and I hope this keeps up... I am still kind of skeptical. I was always skeptical in the past of people who claimed such high rates of return... It so goes against everything taught in finance theory too... The key is risk control combined with excellent pattern recognition and letting winners run.

Anyway, basically I am taking $10,000 and then using daytrading buying power I can borrow $30,000 extra. If I make 1% in a day's trading as I mentioned in a previous post I have made $400 on the $10,000. Today I made $600. You can't expect to make money every day wins and losses have to average out. But that is a 4% rate of return in one day! if you put the $10,000 in a savings account you get 4% in one year!

Maybe there is something wrong here? Of course this is a reward to skill rather than to capital. If you randomly make daytrades even with stops you will lose money. If you got caught in the huge downdraft in GOOG a couple of weeks back you could have lost $7000 of your $10000 in a few minutes. Even with a stop in place the loss would likely be in the thousands due to the extreme rapidity of the collapse. So you only want to put a fraction of your total capital on the line and keep packing profits back into other investments (as well as spending and taxes). This is the risk control strategy of most professional traders. I first read the ideas in Teresa Lo's writing.


Adventures In Money Making said...

whats your trading strategy?

mOOm said...

In day trading I am trading mostly on technical indicators available on any standard charting application on the web + my knowledge of chart patterns and Elliott Wave. The main thing is to allow winners to run and stop out losers. News, fundamentals etc. plays some role but more minor. More in which stock to pick to play...

In longer term time frames, macro-economic fundamentals and other technical indicators including my own one come into play.