Is The US stock market overvalued?

Discussion in 'Stock Market Forum' started by Rainman, Dec 10, 2015.

  1. anders

    anders Well-Known Member

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    There's one other point I'd make here, and it applies to so much about trading, especially if you're a day trader using your own money, and it's this: on a day-to-day basis, about 85% of all trading volume is made by an extremely small number of investment houses, with each investment house having, literally, about half a dozen traders making those trades.

    Furthermore, those trades are done pretty much on a personal level, with the trader from one house communicating with a trader from another, and setting a price to buy/sell that suits both parties.

    What this essentially means for me, is that there is grossly more control over the movement of stock prices than I can predict doing my Fibonacci retracement and other technical sorts of analysis. I simply can't out-think a market that is responding to the trades of so few people.

    So, to get back to the point of the thread, if the markets are overvalued, it's usually - usually - because this suits the small number of trading houses that generate most of the trading activity. And as individual traders, figuring out why the big trading houses behave as they do can give us some major insights for our own trading and market activity.
     
  2. JR Ewing

    JR Ewing Super Moderator Staff Member

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    It is pretty much financial suicide for the average investor to quit their job and use anywhere near a majority of their life savings to day trade. And I use the traditional definition of day trading here - the buying and selling of the same securities in the same day and liquidating positions before the end of the day so that one is 100% in cash at the end of the day.

    The average investor has about a 95% chance of failing at this - and the 5% who may succeed will be those with the most money and the most and best technological edges working for them.
     
  3. anders

    anders Well-Known Member

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    Day Trading also has the added bear-trap of being a leveraged form of gambling, which means you can lose a lot more than your initial deposit if the market turns aggressively against you.

    I spent a few unsuccessful years trying to make it as a day trader, but it was obvious it wasn't working. I also think it's the kind of trading that suits younger men, the "high testosterone" stereotype etc. Being comfortable with high risks, or even enjoying them, helps a lot in that game.
     
  4. JR Ewing

    JR Ewing Super Moderator Staff Member

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    Yeah, getting levered up can be dangerous - particularly when your method of "investing" has a 95% chance of failing.

    I've seen a few self-styled hotshot traders make a few posts here and usually leave quickly. I think they're generally here to try to find suckers to buy into their failed system they're trying to sell - usually Forex-related.

    When pressed a bit, they usually are quick to admit that most people who start trading lose everything in short order. I have asked them about the ridiculousness of that very fact, and they always seem to disappear before answering that question.

    Why would someone spend years, even decades saving up money, or building a business that they sell after many years of hard work or whatever... then turn around and throw that nestegg into some "trading system" that is highly likely to suck up their entire life savings in a very short timeframe. They also usually admit that the returns on investment aren't huge anyway, which is another reason not to bother with such a risky proposition.

    The object of investing should be to invest in such a way that is very likely to build and preserve wealth over time - not in such a way that is very likely to destroy it in short order.
     
  5. anders

    anders Well-Known Member

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    Exactly. I also like Nassim Taleb's analysis in Antifragile which states that the best strategy for investment occurs when you're able to maximize your upside and minimize your downsize.

    It sounds kind've obvious, but what many people miss is that he isn't just saying to invest in low-risk assets, because these trades still have a symmetrical risk:reward profile. He's saying to find something that's structured in such a way that it can benefit from certain market conditions which generate a grossly disproportionate upside for you as an investor.

    Easier said than done, but very worthwhile when you can.
     
  6. turt

    turt Guest

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    All businesses have a huge chance of failing and people make them fail for the same reasons. They take too much risk when the return is just not there. And they keep borrowing more money in hopes that it will some how turn around without learning from their mistakes. You can make money day trading as you can with any other business but it takes years of practice and ability to learn.
     
  7. JR Ewing

    JR Ewing Super Moderator Staff Member

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    The most common reason businesses fail is due to a lack of cash flow - along with general mismanagement - most people are just not cut out to be business owners. Of course sometimes it's just a matter of being in the wrong place or trying the wrong thing at the wrong time or whatever. You only need to succeed once - some of the world's richest men failed numerous times before they finally had the right idea at the right place and time and under the right conditions and eventually became very rich...

    I have been investing for a good 22 years, and I have experimented with day trading in the past. I define day trading as buying and selling the same securities on the same day, and basically going to 100% cash at the end of the day.

    It didn't take me long to come to some very important conclusions:

    You're far more likely to succeed if you have a large amount of money to offset transaction costs, short term cap gains taxes, and realized losses.

    You're also far more likely to succeed if you are working with highly advanced technology that offers speed and direct access (as opposed to going through a third party broker). This tends to be expensive.

    Most people cannot afford to quit a promising career or even just a decent paying job to stay home and trade all day.

    I soon realized that the vast majority of money is made overnight - that most price movement generally occurs when stocks open higher or lower than they closed the night before. I do occasionally buy and sell the same security in the same day with a LITTLE of my money. But the vast majority of the money I've made for myself and my clients occurs when my longs open up higher than they were the night before, and my shorts open up lower.

    It is very difficult for the average small investor to try to play ball with the big institutions and HFT systems.

    If you don't mind me asking, how long have you been day trading, and how have you done?
     
  8. anders

    anders Well-Known Member

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    Absolutely. Large-scale trading firms will often have their own servers and back-up servers to ensure their access to the market stays ahead of the competition.

    There was a documentary a few years ago about how one of the major shared servers somewhere up in New York state went down and cost the companies who used it a fortune. Now, contrast that with the typical home internet, which if you're like me randomly decides to turn itself on-and-off multiple times a day - there's just no way that'd work with day-trading, which often relies on high-volume speed trades at very precise points in the market.
     
  9. turt

    turt Guest

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    I don't day trade normally. I've only done it when I see a perfect set up and actually have off work/not doing anything else which doesn't happen often (and I've made a profit every time). For example, there were a few times where there would be bad news overseas and stocks would instantly become over sold at open in the US market. So I could pull 2-3% off certain stocks in a day.

    I mostly do a combination of long term long positions and short term long positions.

    I now have an account with free trading but they don't have margin yet but it will definitely open up more opportunity to reduce risk (bigger variety of stocks).
     
  10. petesede

    petesede Guest

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    This is about what I do. I have what I consider to be ´play´ money that is for those daily or short-term investments. It is an small part of my portfolio, but when I have time to actually play, it is the most fun part of it.
     

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