Don't Day Trade, Do this Instead

Why is it that every day trading guru tells you the best way to make money is by day trading, but in reality 90% of traders lose money? And the 1% you see online tend to have deals with brokers, which would be fine if they were just recommending a good deal, but a lot of these scammy brokers specifically ask gurus to push people like you to use their platforms. And rather than simply offer a service and make a cut whenever you trade, these brokers make the most money when you lose via something called the B-book. Whenever you lose a trade, the broker makes a profit, which is your deposit, and gives a kickback to the guru that sent you there. But that's only part of what makes this whole day trading thing a scam. And the biggest scams lie right here on YouTube and social media. Look, we've all seen these guys on YouTube and on X and other various forms of social media. Types who draw nice lines to explain how market makers are controlling the markets, with liquidity pools and funny acronyms about shit that doesn't even make one iota of sense. If you have half a clue about market participants, fellas like this guy and this and this and this, and I think you kind of get the picture now. But the only thing you need to know is that this is all complete bollocks and it's a marketing technique to get you to buy their crappy course. And yes, we sell an academy, but we just don't pretend there's some super secret holy grail method that you you don't know about with regards to day trading, which is largely impossible these days, and there's going to be more on this later. If you were to ask them what risk premium harvesting is, effectively how you make money in the markets, they would look at you blank-eyed like a Xanaxed-up sloth. And for those that don't understand what a market maker is, all they do is provide two-sided quotes to markets and make money off of a spread. In other words, they will quote both a bid and an offer and tighten, which means quote a lesser spread, if they feel they have more information about asset, which should really drive more flow to that individual market maker, meaning more revenue from the spread. Because at the end of the day, traders want the cheapest cost of trading, which is a simple price signal. These idiots act like market makers rule everything, they work almost together as one— in fact, they're competing against each other for flow— and that there are no risks involved. Well, let me tell you something, any market maker I know wants to get rid of any lopsided book as fast as possible. They don't want to hold their positions because holding these positions means that they face market risks. They want to be something called delta neutral. In other words, they don't really care which way the market goes, they just want to provide liquidity and make money from the spread. Sometimes they might have a bit of a view and hold if they spot the adequate conditions to offload their positions at a better price, but generally they want to have a flat book at the end of the day. Just wanted to give a big shout out to our sponsor Tickmill. Now if you don't know about Tickmill, they are one of the longest running FX CFD and futures and options brokerages in the industry. They're run by two brothers and they've been doing this for such a long time. And I tend to only work with people who I know are of good nature, good quality, and have a fantastic product. I've known about Tickmill for the last probably 10, 15 years when I was at TradingView, various brokerages, and they've always been around as one of the firms that have a fantastic reputation. Now they offer FX futures, options, CFDs on over 600 different assets. And I think that is testament to the extent to which they want to cater towards traders who want to go a little bit varied across different asset classes. Now I'm predominantly US stocks focused. However, sometimes I still have a punt around in FX. I'm just not going to go and tell you guys to do it because I don't think it's necessary for every retail trader. However, we're all going to go and have a punt, so why not do it with a firm who is absolutely excellent and who will go above and beyond to fit you as a customer into their company. Click below to sign up with Tickmill if you want best-in-class execution. If we return back to the market-making risks for a sec, I can provide some backing for this view, and it's from this CFTC paper from 2012, which is actually very outdated now, which means that all of what I say is even more impactful Now we'll start with this part. It says that we find, number one, HFTs in aggregate make most of their dollar profits from opportunistic traders, i.e., day traders. On a per-contract basis, fundamental traders incur the least cost to HFTs, while small traders incur the most. Now in this, fundamental traders can be longer-term guys. Interestingly, aggressive HFTs, so high-frequency trading firms, make a large fraction of their profits from mixed and passive HFTs. And the effective HFT transaction cost on non-HFT trades is approximately 0.22 basis points. And that number one is key. Market makers these days have become more and more HFT-focused. Some HFTs are aggressive liquidity takers, i.e., not market makers, and some are passive high-frequency market makers or liquidity providers. And some are considered mixed—they do both market making and liquidity What's key here though is that HFTs generally make money from opportunistic traders, which is ironically exactly what the cunts in the introduction are. So while they're selling you a market maker model or institutional model, some HFTs who also do market making are absolutely cleaning up on their flow, if at all it hits the market, because it's more likely that their broker just internalizes their risk as we described in the first bit and waits for them to lose. Fundamental traders, on the other hand, those with longer holding periods are not profitable for these guys. Now that's why we focus on this and not short-term day trading nonsense that everyone knows leaves you pulling your hair out. Now there's more on this because Panel A here in this picture shows that aggressive and mixed HFTs make positive profits from all other types of traders, while passive HFTs make profits from all other types of traders except from fundamental traders. In particular, aggressive HFTs make about 45% of their profits from adversely selecting the other HFT subtypes. That basically means they just pick them off because they're doing something a bit wrong. Panel A shows that all types of HFTs make the majority of their dollar profits from opportunistic traders, i.e., day traders who don't know what they're doing. Panel B describes the profits and losses on a per-contract basis, and these results provide an estimate of the effective transaction costs involved in trading with certain groups. Since we compute profits on a 1-minute basis while resetting each trader's inventory to zero, their profits can be interpreted as short-term transaction costs extracted from the rest of the market and not gains from long-term directional positions. Absolutely key. The below table shows you which participant makes most money from the other. Note, when paired against any counterparty, small traders are considered net losers. Bear that in mind when someone shows you a 1 or 5-minute chart next time, because this study is done over a 1-minute time interval since these are the time frames HFTs operate their datasets over. Oh, and to further compound these wankers' fucking bullshit, this study was done over a decade ago, and these algorithms and technological capabilities have gotten so much more advanced. Do you understand now why I think day trading is largely stupid for most people. The reason why we say in one of the first videos in our Academy is to stop competing in arenas where you have no business doing so is exactly for this reason. To conclude this, I'm just going to quote from the final bit of the paper: Recent theoretical papers have highlighted concerns of faster traders adversely selecting slower traders and competition on speed leading to socially inefficient arms races for speed. Our results suggest that HFTs have strong incentives to take liquidity and compete over small increases in speed in an industry dominated by a small number of incumbents earning high and persistent returns. They are competing on speed and tech. If you're trading on a 5-minute chart or see anyone that is, send them this video because they are basically turning up to play golf at Carnoustie against prime Tiger Woods, Mickelson, and Jack Nicklaus on the roster with a fucking strap-on as a golf club, and they're blind, and they're also retarded. Anyway, If you want to trade like an HFT, why not just buy the shares of a fucking HFT and stop doing all stupid shit all the time? Here's Virtu, literally a listed HFT market maker and aggressor. All right then, enough moaning and swearing. What should we do instead? Now the real trick to markets is to extend your time frame, become a medium to longer term investor. Of course you can trade around it, but really you want to be having a position not over days but weeks, months, years. These are the time frames at which you can really, really grow your wealth. You won't be part of that 90% that tend to lose money every single day. You won't have the stress of the intraday noise and the intraday swings, which have no actual basis or objective reasoning to be involved. This is a very extreme example, but take Warren Buffett, okay? And it is an extreme example because he had something on his side called insurance float leverage from when he bought GEICO. He used all of those insurance premiums to actually then just go and invest in the market by Berkshire Hathaway. However, you should follow his model, maybe not for the same length of time because we're able to be far more nimble at lower capital amounts. He's managing billions, obviously. But the trick is to really focus on opportunistic growth, explosive growth within a system. If you're doing this with day trading, you're focused on noise. You cannot get to an actual thesis because all you're focused on is the competition I've already described. You're competing against the smartest people in the world with the most capital, the most human capital as well, i.e., talent, PhDs from MIT. You don't want to be fighting them. And the intraday volatility is not measurable against any kind of longer-term barometer. It's just insane to be day trading as a retail investor these days. But the best part of this is that there's very minimal stress because once you've got a system nailed down, you're able to risk manage that system systematically, obviously, and also take positions from a systematic and discretionary basis. As well. So now you know what to do, I guess the key question is how do you specifically do this yourself? I'm going to show you some live examples right now of how to invest rather than day trade. So how do we actually do this then, the whole medium-term investing/trading business? Well, I'm going to show you with the very foundations of the 1-4-10 method. Yes, I know it sounds gimmicky, But we need a gimmick so that it sticks in your brain so you understand the foundations of how markets and systemization of a strategy actually works. What does the 1 stand for? Stands for the United States. We focus on one country. That is it. What does the 4 mean? Well, we look at 4 moving averages to be able to understand what a strong trend looks like. And then the 10 is basically looking at stocks of $10 billion and above. In market cap. This defines quality. We want to be long quality stocks. We don't want to be long dog shit because dog shit stocks imply they have a poor balance sheet and a greater likelihood to fall over the future. Now I'm going to show you quickly exactly what has come up on the charts. And what you can see here from just following a couple of these foundational concepts is we've got Nike up there, which is fantastic. Stick. I'm long Nike at the moment. And so what we're seeing is that the strategy has actually picked up again. Now is a time to get involved. And the reason why I like Nike so much is because they have had a changing culture recently. They've realized that the old advertising style doesn't necessarily work very well. And you might notice here that I'm bringing in some discretion. Discretion is very important because even though you've got a systematic basis to maybe get involved in a stock, you still need bit of discretionary catalyst to be able to really, really fundamentally have a strong view on some. However, the system gives you the idea of what is actually moving. It's your job then to take a look at what's picked up by the system and then decide to execute. That is absolutely key. So what you can see from Nike here is that we have traded above all of the moving averages, and just yesterday a brand new signal was picked up because the market moved from below the 20 moving average to above the 20 moving average. Absolutely key. But even more key component here is that volume increased at the same time. Very, very important to focus on. And alongside that, there's a few other bits in the background which I'm not going to get involved in right now because we delve into those in the Academy. They're rather more complex. But what I want you to understand is the extent to which focusing on a very, very simple trend following system can lead to much, much greater profit than anything to do with day trading. The second part of it is of course the discretionary bit, and that is where you really need to be able to come and think a little bit. But maybe that's only about 30% of what you have to do. Building a strong trend following and momentum system is where your focus should be in the right asset class, and the right asset class at the moment is US equities. Fundamentally, over the past couple of years— well, I'd say past couple of years, I'd even extend that the past decade and a half, US momentum factors have been the biggest thing that has made people money. So to summarize, the longer the time horizon, the higher your chances of making money and staying in the game. And this isn't just something I do— people inside the Think Academy do it too and are absolutely crushing it. Guys like Pat Farrell and David Belle have completely flipped their results and way of thinking And to be honest, quality of life, I guess. No more staring at charts all day and anxiously waiting to buy or sell, because we know that is bollocks, bullshit, nonsense, dogshit. But you don't need to believe me. Go and watch this interview I did on the channel where Pat says all of this and more. I'll see you in the next video.