Breaking News
0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

Day Trading Short Is A Sucker Bet

By Boris SchlossbergStock MarketsApr 09, 2021 05:14AM ET
www.investing.com/analysis/day-trading-short-is-a-sucker-bet-200572134
Day Trading Short Is A Sucker Bet
By Boris Schlossberg   |  Apr 09, 2021 05:14AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
  • Vegas games have a surprisingly thin edge
  • There are big differences between trading and gaming
  • Trading is both less predictable and less random
  • Stocks are subject to upward drift
  • The long trade has a bigger edge than most Vegas games

Win - Lose Days
Win - Lose Days

Vegas games have a surprisingly thin edge

Let’s look at three very popular games in Vegas – craps, blackjack and roulette. In craps the edge to the house is between 1.4% to 5%. That means for every 100 bets the house wins 52% to 47%. In roulette the spread is 51.4% to 48.6% on a single zero wheel. In blackjack the edge is even thinner at 51% to 49%.

Overall the numbers hardly seem impressive. The basic formula of Vegas is that for every one dollar of betting casinos make a nickel and out of that they need to pay for all the staff, the infrastructure and the advertising. Yet the latest pre-pandemic data the total revenue of Vegas casinos was in excess of $22 Billion in 2019. The nickels add up.

There are big differences between trading and gaming

I am always loath to make direct comparisons between gaming and trading because although the two seem superficially similar there are key differences between the two activities. Gaming is a fixed odds structure with inviolable rules that always conform to the law of large numbers. It’s also (unless the equipment is broken) a nearly always random process where one bet is completely independent of the next because it is not based on human behavior (poker is the exception). 

Trading is both less predictable and less random

Trading on the other hand is a social construct of very few rules and certainly none of them fixed. Academics like to pretend that trading generally follows the standard distribution curve but that’s not true.  Trading is open ended, contingent on  human action and reaction, often not random and most importantly subject to what is known as fat tails. These are events (like market crashes)  that should happen once every 10,000 years but occur at least once a decade. So trading is both less predictable than gaming and less random.

Stocks are subject to upward drift

Ultimately however, both gaming and trading depend on numbers and to that end here is a fascinating statistic that should make your eyes bulge out. If I were to ask you what is the spread between winning days and losing days in the stock market, what would you say? Many people would guess that any given day is a 50% bet, but the numbers actually tell a very interesting story. For the past seventy years from 1950 to 2020 the ratio between up days and down days is actually 53.8% to 46.2%. That is a 7.6% edge to the long side – odds that are 1.5 times better than some of the most popular games in Vegas. 

Stocks as an asset class are unique in this way. The spread doesn’t exist in commodities or currencies which are bounded instruments whose value does not change much over time. It’s the reason  why the UK pound was about 1.5 US dollars in 1970 and why it’s close to that value today. Meanwhile the Dow Jones Industrial Average was 700 in mid 1970’s and is more than 33,000 today. Stocks are subject to what is called an upward drift and that small but very persistent spread between winning and losing days is the reason why long term investing is such a powerful way to generate wealth.

But the data on stocks also provides a very interesting insight into trading. It suggests that being short is a sucker bet. Of course there are a million exceptions to that statement and the history of speculation shows many examples of wildly successful shorts like Enron, Worldcom and eventually maybe even Tesla (NASDAQ:TSLA). Indeed the shorts could make a very credible claim that 94% of all stocks ever issued to the public have either gone bankrupt or been merged out of existence. If you are speculating on individual issues you may indeed prove profitable from the short side. But if you are day trading stock indices the data is incontrovertible. There are only two ways to bet if you want to be on the right side of probability – long or cash. The upward drift of stocks is so established that any momentum breakout strategy naturally favors the long side. This is particularly true over this decade when the spread between winners and losers was so wide (57.3% to 42.7%) that you could have minted money at will if you had a decent long only intraday strategy.  

The long trade has a bigger edge than most Vegas games

But what is truly surprising is that this approach would have worked even during the worst time for stocks since the Great Depression – the 1970s. In  the 1970s equities went nowhere for a whole decade losing 50% of their value twice during that time. Yet even during that most miserable period when mass media proclaimed that stocks were dead forever the spread between positive and negative days was 51.3% to 48.7% or 2.6%  – same as blackjack.

Today’s extraordinary bull market can’t last forever but while the party lasts traders need to be keenly aware that the long only trade has a 7.6% advantage. Those are odds that would make Vegas executives green with envy which means the only way to trade is long and strong or dash into cash. Trying to pick tops is a sucker bet. 

Day Trading Short Is A Sucker Bet
 

Related Articles

Day Trading Short Is A Sucker Bet

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Comments (1)
Lesego Oratile
Lesego Oratile Apr 10, 2021 9:05AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
just want to make money
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
or
Sign up with Email