the morality of day-trading

M

mop

2,500+ Posts
so i have been thinking about learning how to day trade and my brother was asking about the dubious nature of making money off other people's bad trades.

thoughts? i can see his point.....i am curious to hear from those who agree and those who disagree as well as why or why not.
 
I don't understand the moral objection.


On every single stock transaction, there is somebody on one side who thinks the stock will go up and somebody on the other side who thinks it will go down. Morally, day trading is the same thing as any other kind of trading. It's just that you trade more often.
 
If you don't have an advanced understanding of mathematics, you'd have more fun in Vegas with the same risks.

Morally, there is nothing wrong with it. It's not all betting on market crashes, it benefits on market volatility. The trick is to know when to get out before the stock swings up or down depending on if you are long or short.
 
A few years ago, I read that the Catholic Church ruled that speculation is a sin. So some people consider this activity immoral. Maybe you could check into this and see what they said exactly.
 
I'm not really sure I understand the question. A trade is a contract between buyer and seller. Both have agreed to do the transaction. I'm probably much more of a purist in that a trade is a trade, and should always stand (regardless of price), but I can understand arguments/concerns about that kind of siutation. That being said, currently there are a rules and mechanisms that exchanges have to deal with/attempt to prevent what are called clearly erroneous transactions (ie: NASDAQ rule 11890, NYSE has LRP's), but erroneous trades are an issue that exchanges are currently dealing with (much more so than normal due to the recent volatility and ridiculous rules put in place by the SEC), and is a problem for member firms.

All traders have different models with different time horizons, so you could "in theory" make money but as a day trader, you're going to be the chum in the water that the professionals feast upon.

I don't see this ending well for you.
 
mop - i know i rag on you a lot, but hey i still want the best for you. that being said, don't start day-trading. you don't know the market to the extent that traders do and never will (not a slam...that's their life). sure, you could likely make some money, but you could easily lose a lot too. it's gambling, especially when you're talking about day-trading.

as for morality in the stock market....there is none. if you make what you think is a "good" trade, you are inferring that the other person made a "bad" trade (as in...if i'm buying at this level, anyone who is selling is doing the wrong thing). that's not always the case, maybe they're trading for a different reason than you, so you can't take that in mind.
 
But maybe we can see a difference between the trader who sees (or thinks he sees) value in a company or a product that others do not see, and the trader who looks to profit from the momentary shifting of others views. The day trader, in a sense, has forgotten the purpose of the market, which is to trade things of relative perceived value. He instead capitalizes -- or attempts to capitalize -- on the fact of changing perception itself. He's not there to invest in companies, or to find true value in the market. He's there to make money on others' misplaced optimism and pessimism.

I don't know if I want to call it immoral. That may be too much. But I could understand someone calling it sleazy. The day trader is parasitic. The regular trader is synergistic.
 
thanks guys i do appreciate the thoughts and concerns (johnny).....i have always been very good at math and i have a friend who makes a killing do this. he put in the necessary 6 months of time until he "broke through"....which is what i imagine doing. he does it in a trading house with others and they learn a system. he has been doing it for 4 years and seems to make over 6 figures. i suspect (i could be wrong!) that i have the same abilities to do this very well, but i don't want to do something that hurts others and i am trying to sort through any possible moral implications of this.
 
People buy and sell things every day. stocks, options, futures, currency (whatever it is that you're looking to do) are just different products.
You concern about morality is lofty, but irrelevant. You should be much more concerned about risk tolerance. No offense, if it was as easy as being smart and hanging out for 6 months to read some books, wouldn't more people do it?

Day trading was something great to do 15 years ago, when SOES was around. The day trading pool that I think you are thinking about dipping your toe into dried up years ago. Why do you think you'll fair better than the people who have been beaten up over the last 5-10 years who have years more experience than you doing the same thing?

I hope I'm wrong, but again, I don't see this ending well. You're going to be picking up pennies in front of a steamroller.
 
no hornbud....that doesn't make sense to me at all, i left "math" after engineering calculus 2 at UT and that was 18 years ago. but then again, i suspect that wouldn't make much sense to the people i know who have done quite well of late.

i do appreciate the thoughts. i am going to proceed, if at all, very cautiously!
 
The ability to perform math is handy with trading but it's not the only way to make money in the market.

Discipline and risk tolerance are particularly important and probably more so than outright intelligence above a certain reasonable amount.

If you are somebody who hates to be wrong, day trading might not be for you.

If you are somebody who can't admit they were wrong, day trading might not be for you.

If you are someone who researches a good idea and it doesn't work 3 times in a row and then you can't pull the trigger the fourth time, day trading might not be for you.

If you can't afford to lose money while you learn then day trading might not be for you.

Basically, you need be able to accept risk because you can't make money without taking risk BUT you also need to be disciplined enough to cut your losses when they happen.

Usually, people are either too risk averse to take the appropriate risks or if they are ok with risk they are not disciplined enough to keep from blowing up.

I do believe it is possible to make money doing this and I do not believe there is anything morally wrong with trying to make money in an open, transparent market that nobody is forced to participate in.

Good luck either way.
 
on 2nd thought hornbud....upon skimming over that link, yes, i can make sense of it (not fully grasped yet mind you). but i am still not convinced that this complex rendering of the reality must be understood in order to trade successfully. sort of like expecting someone to understand everything about a car's inner workings before driving it (bad analogy, but you get the point!). at any rate, i think a thumbnail understanding of that would suffice.
 
Would your edge consist solely of what is learned in their training program?

How does this company make money?

If they have an analytical edge why do they need you?

If they are just "sifting" for naturally talented, instinctual traders to make money off of then what do you gain?

I would give some serious thought to the morality of the company I would be depending on more so than the morality of participating in a fiercely competitive short term market against competitors that are better capitalized, have years of experience, and see and hear more than you do.

Again, not saying it can't be done but I don't think it is easy either.

Just some thoughts.
 
i'm guessing they trade based on technical analysis...which i find to be absurd and, going back to C's post, completely removed from the concept and purpose of the market in the first place.
 
The purpose of the market is to match buyers and sellers.

If the market did not exist then when you wanted to buy/sell some stock you might have to call 10 different companies and see what their price is and how much they are willing to buy/sell of the particular security you are interested in.

How does technical analysis harm that?

If anything it attracts additional participants which should increase the likelihood of the matching process succeeding.

If you need to buy/sell what do you care that the guy on the other side is using technical analysis for his reason to buy/sell?!?!
 
when there are a lot of technical traders the markets can move for reasons completely unrelated to the actual businesses which the market was created to trade. that, to me, is not good and can cause widespread harm/panic/damage.

you ask why should i care? because i care about the health of the overall market and i believe technical analysis and trading based on technical analysis is nothing short of a parasite.

i was a stockbroker. i've had my series 7. my opinions are all based on my short time as a broker and watching and learning from other brokers/traders.

you say that the purpose of the market is to match buyers and sellers and that technical analysis drawing more participants is actually a good thing. i think this is a very flawed analysis of the purpose of the market and the value in more participants.
 
JohnnyM - it would help the discussion if you would state your definition of "the purpose of the market".

I don't think the purpose of the market is to make investors money.

I think the purpose is to provide a means for organizations/individuals to orderly enter into/exit out of investments (i.e. provide liquidity) without having to cross a wide bid/ask spread to do so.

Take an example: if I had the choice to invest in one of two completely identical companies and one was publicly traded and I knew that when I wanted to liquidate my position in that public company I could do so by crossing a bid/ask spread of less than 20 cents over the internet or I could liquidate my position in the private company by advertising my interest to do so on craigslist or in a newspaper ad or by asking acquaintances and knowing that it might take weeks to establish a price somebody was willing to transact at then I think the value of liquidity in markets becomes apparent (sorry for run on sentence).

I think so many people take liquidity for granted.

Again, by your standards, what is the "purpose of the market?"
 
There is a lot written about speculation, which is basically profits without creating anything useful, i.e. by working-like this discussion:

Europe’s financiers were seduced by the lure of easy subprime mortgage profits, just like everyone else, and they’re suffering now, just like everyone else. But give Europe credit for one thing: Thanks to its Catholic roots, Europe’s leaders understand that the financial crisis wasn’t caused by some vague form of “greed”; it was caused by greed purposely channeled into useless financial speculation, rather than into productive investment.

This difference was clearly recognized by European leaders when they met Saturday to deal with the financial panic. They blamed the U.S., and its brand of “Speculative capitalism” for the crisis. French President Nicolas Sarkozy personalized the difference between real productivity and speculation when he said: “We want a capitalism of entrepreneurs. We don’t want speculators.”

So I guess it is all in how your value system defines speculation, and whether you feel it is immoral or not. I think a lot of our financial practices are immoral, although many are not illegal.
 
NYT story link

Above link to NYT story (sign up might be req) on oil speculation. Lots of good thoughts in my opinion. Written by the author "When Genius Failed" on the LTCM blowup in 1998.
 
Theer's nothing immoral about day-trading. It's overly-confident people throwing money away while providing additional liquidity to the market. What's not to love?
 
I can understand why you would think it is immoral because you are making a trade when you believe it is a bad deal for the person with whom you are trading. You are implicitly under the opinion that based upon your intelligence, knowledge, or both, as an aggregate, your trades are good for you and bad for your trading partners.

Although I am not a Biblical scholar by any means, my guess is that morality based upon the teachings of Jesus Christ would characterize as immoral a plan by which you intend to benefit yourself at the expense of another.

Of course, you can rationalize it by asserting that you are not adding any hurt to your trading partner because he/she is either not as smart or does not have the same knowledge as you so would have made the trade with someone else if you were not there to take advantage of them. But do two wrongs make a right?

Is it immoral to sell a thirsty traveler a bottle of water for $2 if you are very confident that he could buy it 100 yards down the street for $1.50? Would it or why would it make a difference if you also knew that if he did not buy from you, he would buy the water for $2 from the guy next to you because the traveler lacks the intelligence or knowledge to know that he could buy the water cheaper a few yards away?

I frankly do not know the Christian moral code well enough to know whether the code is sufficiently relative so that morality is dependent upon the behavior of others. My guess is that you cannot make an immoral act into a moral one simply because if you don’t act immorally, someone else will.

If your friend is making 6 figures a year and all of his/her friends are making 6 figures day trading, why are they limiting their income to 6 figures? To make six figures, on average, how much money do they have invested at any particular time? What have there average ROIs been over the 4 year period?
 
sdhorn,

How do you know I'm making a trade because I think it is a bad deal for my trading partner?

Maybe I bought the stock a long time ago with the intention/plan of risking $XXX in that investment and the investment has not gone my way and to limit my risk I sell the stock according to my plan. I may be grateful to have a buyer and I may have no opinion on whether he makes money on his side b/c I have no way of knowing his motivation for buying. For all I know he has been short that same stock and is now covering his short and he is grateful to me to be selling.

I get what I want - I limited my risk according to my plan.

He gets what he wants - the ability to take profit on his winning trade.

Both were willing participants in a transparent market.

Who is harmed here?

There can be a very wide range to people's motivations and intentions when participating in the market and allowing the possiblity of only a very narrow interpretation ignores a very wide range of possiblities.
 
burdine - I probably misrepresented what I meant to say.

I agree that the main purpose of the market is to provide liquidity. I understand that more traders = more liquidity. However, I also believe that the market is there to provide stability. In my mind, technical trading = less stability. So, it works both ways.

I'm not saying that I want technical trading outlawed or anything...I just think it's a horrible reason to make trades and I believe it hurts the stability of the market, which in turn harms the overall economy.

I like the fact that we have the market, I guess I just wish people were more cognizant of the big picture (being the overall economy) and less focused on what's going to make them a quick buck.

Call me an idealist, but I think there's a better way. I think accurate makes some good points above and I agree with Sarkozy's quote of wanting a capitalist economy based more on entrepreneurship and less on financial speculation. IMO, the vast majority of people in the financial sector add no value to the economy. When billions of dollars are being funneled to people adding no value to the economy, we're just building the house of cards bigger.
 
In my opinion, the market is largely amoral.

It is a human construct where good things can happen and people's best instincts can create wealth and value and people's worst instincts can rip off/destroy wealth and value.

Such is the case with most human endeavors.

Back to the original poster's question, by risking his own or company's capital and providing liquidity (a proven benefit) it is morally acceptable that he earn a return on his risk of capital (though I think the odds would favor his losing money in the endeavor).
 
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