Why Intraday Round Trips Need an Edge After Trading Costs
Summary
The document considers whether buying or shorting before the open and closing at the end of the day can be profitable. It raises concerns about intraday news, noise, and competition, then presents a simplified target-and-stop gamble to explain why trading costs raise the win rate needed to break even. In an equal-distance target and stop setup, costs reduce the reward and increase the effective loss, so a strategy needs an advantage over a fair, cost-free outcome.
The answer illustrates the point with brokerage-cost and target examples and argues that wider targets lower the required win probability when costs are fixed. It also notes that wider targets can make drawdowns harder to tolerate. This is a toy framework, not evidence that end-of-day strategies as a class are unprofitable: it omits market data, execution details, changing prices, and risk over repeated trades. The displayed break-even algebra has apparent inconsistencies, so its numerical probabilities should not be treated as reliable estimates.
Key ideas
- Transaction costs make an equal-target, equal-stop trade require a win rate above the cost-free break-even level.
- A wider target can reduce fixed costs as a share of the potential reward.
- Wider targets may expose a trader to larger losses relative to account equity.
- The answer offers a simplified gamble model rather than empirical evidence about end-of-day strategies.
- Errors in the displayed algebra make its example probabilities unreliable.
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Full text
# Can end-to-day trading be profitable? If not, why? # Can end-to-day trading be profitable? If not, why? Many academics argue that end-to-day trading, where you go long or short before opening and sell your security at the end of the day, is not profitable. Various explanations are given for this concern. For instance, - macro-economic news during the day is likely to change the course of a share that day - in that sense, there is too much noise - due to algorithmic trading, the market is efficient making all profitable profits dissapear. Still I wonder whether there exists evidence proving these statements wrong. What fo you know or think about this subject? Any good references or articles/reports on it? ## Answer by Kyle Balkissoon (score 0, accepted) https://quant.stackexchange.com/a/3656 Theoretically (EMH), No trading or active management is profitable consistently over time as all of those opportunities have already been exploited. In practice: If you reduce the problem to a gambling problem. - Equity of K - Txn cost of C - Stock S - with Price at each point of time Pt - X - Quantity of Shares Bought - Target Threshold = TT - Target Price = Pt + TT - Stop Threshold = ST - Stop Price = Pt - ST Case 1. Assume C = 0, TT = ST Enter at at Price Pt (Long at Pt) Max win = TT Max Loss = ST Risk to Return ratio = 1 The probability that makes this gamble a fair bet is 50% (prob that each side is hit first). Case 2. Assume C = C TT= ST Max win = TT -2C Max loss = TT + 2C Risk to Return here is (TT-2C)/(TT+2C) < 1 for any positive C So your probability to win needs to be large enough such that p(win)(TT-2c) -((1-p(win))(TT+2C)>1 which simplifies to 2p(win)TT-TT-2C > 1 Recall P(win) here is bounded by 1. Certainty Case P(win) = 1 2TT-TT-2C > 1 TT-2C > 1 This must hold for profitability, this long expression implies that when you win you get The threshold less transaction costs. Now to solve for the probability that which the game is fair 2p(win)TT-TT-2C = 1 p(win)= (1+TT+2C)/2TT The probability of you being right MUST be greater than (1+TT+2C)/2TT. or 1/2 + C/TT +1/2TT Where C/TT is the ratio of cost to win. So the marginal probability over 50% in a 1 to 1 bet is equal to the ratio of Cost to win, + 1/(2*TT) Some toy numbers from IB. if C = 2.50 (fx trade cost) 3.50+TT/2TT Becomes, 1/2 + 3.50/2TT So the probability of you winning is equal to 1 half + 3.50/2TT, where 2TT is the threshold. As you see here you will need to be more accurate than 50%, assume that TT = 10$ 3.50/20 gives you a "fair game" probability of 67.5%, meaning to actually make money you need to be more than 67.5% accurate. An interesting fact is if TT was 175$ 1/2+3.50/350 = 51%, however the market probably does not move far enough to generate these types of profits per trade as the WIDER your target the closer the probability goes to 50% assuming fixed transaction costs. So The lesson from this is if you aren't accurate, Have a WIDE target (in a 1 to 1 bet) as your chance of being wrong is lower, however your losses as a % of equity can be higher, given that people are more risk averse and do not have infinite capital the MAX DD's may not be tolerable. Now with the specific case you mentioned of day to close. 1/2 + C/TT +1/2TT The level of gains possible must be unrealistically high relative to transaction costs for it to be profitable. Therefore unless you have a serious edge over the market, chances are you will not be profitable.
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