Thomas Yeung, 09 July 2021
If you want to become a day trader, I don’t blame you. People who consistently earn several percentage points per day can become wealthy beyond belief. Crypto arbitrageur Sam Bankman-Fried recently became a minor celebrity after revealing he was a billionaire by age 29.
Typically, professional traders like Mr. Bankman-Fried are either exploiting price differentials or using some form of statistical arbitrage. That’s when investors profit from minor pricing divergences across different exchanges or assets.
But you don’t have to be a financial genius to turn $10,000 into $1 million. That’s because trading insights can also come from sentiment analysis. It’s a tool that commodity traders and market makers have used successfully for decades to earn their keep. (Day traders who lose money are usually amateurs who are simply guessing what prices will do).
The same practice can get applied to stocks, particularly those that are either illiquid or small-cap. These inefficient assets are a treasure trove of mispricings; any investor with superior sentiment insight will run circles around others.