QUESTION:
I live in California and have never invested in the stock market and have only used simulators. I figured out a method that basically insured me a profit because I am buying a stock and then selling it as soon as it rises, and buying it again for a low price. For example, I buy a stock at $0.770, and then in the next ten minutes it jumps to $0.775, and I sell all my stocks. In another ten minutes it is back at $0.770, so I buy, and repeat.
On the simulator, I have used this method and could make about 10 percent profit a day. For the real stock market, I was wondering if this was possible, legal, and if this has a name.
Yes, you absolutely can. Sometimes this is referred to as scalping. The better question is whether you should. There are a few points to seriously consider. First, trading can be fun and the opportunity to beat the market exciting. However, as an independent day trader competing from home, the extremely high likelihood is that you will not win. Remember that you will be competing against the professionals who use the latest technology, co-located servers, and immediate news aggregation services. Even most of them fail. And, when you do get filled, it’ll also be likely that an institution may be on the other side. I don’t like your chances.
Secondly, the backtested results of your algorithm will be misleading. Backtesting can’t exactly mimic the real world market mechanics. The simulator may record you being filled. In reality, you can’t be sure that you will pay .770 for the stock, then sell it at .775. Sure, you may have working bids and offers; however even if the market trades at your price you can’t be sure that you get filled (might be at the back of the stack), unless the price totally clears. Most importantly, if there really was an edge simply taking half ticks out of this market, competition would have priced it out a long time ago, especially now with high-frequency, low-latency trading. I think that most of the time you’ll simply be stuck trying to scratch your position, and usually will end up having to puke (take a loss).
Finally, decades of data, economic theory, and real-world evidence suggest that stock-picking as an investment strategy does not work. Even the professional money managers can’t consistently beat the markets, so why try? I get it, it’s fun to be part of the game. If you watch the financial news channels it would seem that every day is an opportunity to make profits. If you do trade, make sure it’s only with money that you can lose and not have it affect your lifestyle or retirement goals. I also recommend you read a bit about behavioral finance. People tend to have a harder time accepting losses then they do gains, in which case when you trade for real you’ll probably hold on to your losers longer, hoping for a comeback, deviating from your strategy. Be aware of this and other biases and try to remain disciplined. If you have any specific questions about trading, please let me know. Good luck.