A Critical Look at PayTrading

I am no longer using Paytrading.

What is PayTrading?
PayTrading can be referred to generically as rigidly timed upgrade trading for short-term gain in a long-term construct based on the historical tendency of fundamentally qualified, upgraded stocks to present relative lows at a specific time in the trading day. (from thefounder, Eric Shawn’s site). A unique method of investing in which one gains 1% over an average of 8.4 days. (my description)

Where can I learn how to PayTrade?
You can get a brief summary of PayTrading at the above link. Or, you can download a PDF with a detailed description at this link: PayTrading PDF

PayTrading seems almost to good to be true, doesn’t it? Eric Shawn states that with just $2000 one can accumulate $1,000,000 in a span of just 10 years. This is assuming a 1% gain per trade over 625 trades. As some people on the Download.com page for PayTrading say, with a $20 commission any gains would be wiped away by commissions.

As I suspect most people are that visit this site or download the PayTrading eBook, I was quite fascinated by the prospect of securing an consistent 1% gain per trade. However, I am quite analytical and was not going to trust my money to this stock trading scheme without evidence that it worked. So, I paid the $5.99 fee to access the TipSheet. Besides providing the PayTrading picks for each day, the TipSheet also gives access to the archives of picks since it began back in July 2001. Unlike many of the trading systems that are out there, it has been in use since then and was not recently made to “fit” historic data. So, over the course of a month I made a spreadsheet of the entire archive and went through stock by stock to determine how long a 1% and 1.5% gain took. This way I could see the legitimacy of Eric’s claims.

What I discovered was quite startling. On average, a 1% gain was achieved every 8.37 trading days and a 1.5% gain every 11.06 trading days. (Weekends were not counted). For a 1% gain, the mode holding length was 1.00 days and the median was 1.50 days. The average is also most likely inflated. Many of the stocks reached the 1% gain on the first day but then closed below that. Consequently, I could only count a stock selling on the first day if the close was greater than the 1% sell price. I was unable to find historic intraday stock prices I compensated for this by indicating the length as including a fraction of a day. For example, a stock that might have sold the first day but then not until 30 days later, would have a holding length of 29.5 days. So, as you can see, the average hold length is too high if anything. Also, if you had put an equal dollar amount into each PayTrading pick at the time it was chosen and elected to hold until 2/4/2005, there would have been a cumulative change of over 11,670%.

Paytrading Spreadsheet
Just a sample of the spreadsheet available below.

Assuming approximately 400 trades since July 2001 and $2000 invested each time, the total cost would have been $800,000. I certainly don’t have that kind of money but assuming that you could put that much into each stock, the total account value today would be $1,033,400, a gain of about $200,000 in a little over 3 years.

But, the purpose of PayTrading is to make “quick” 1% gains and not to buy-and-hold. See below for the data that shows PayTrading is profitable: Historic PayTrading Data and Hold Lengths [PDF 86.2KB]

You will notice that a number of the picks were not included in the average. This reason for this is indicated here: PayTrading Discrepancies

I’ve also made some spreadsheets that you can use to keep track of your profits in the PayTrading system. On February 15, the OpenOffice version was updated to make it much easier to use. I doubt I’ll have time to attempt to update the Excel version the same way. Some fields are locked from editing so that they can’t be accidentally overwritten. The password for unlocking them is: paytrading

Excel PayTrading Spreadsheet [864KB]
OpenOffice Calc Spreadsheet [71.1KB]
(contains a macro for automatically loading current stock prices)

Discussion on Google Groups Investing in the Stock Market

Karim’s analysis (in OpenOffice format) can be downloaded here: karim.sxc

33 thoughts on “A Critical Look at PayTrading”

  1. Karim

    Hi Scott,

    I also did a similar analysis of paytrading. I found historical intraday price data by using a free trial of tradestation and looked at how long each pick in the tipsheet took to close. I have all of the data in a SQL database where I ran some queries to fine tune the model. I tried to determine if there is a way to avoid being “stuck” in one pick and what is the overall impact if I was to take a loss on those picks.

    Anyway, I wanted to know if you are still using this system and what results are you seeing.

    Thanks

    ps. It’s amusing to see someone else’s backtesting of this system.

  2. Scott K

    Karim,

    I am no longer using Paytrading. There were two picks that I had to sell for a huge loss. (They are down another $10.) I am now trying Gorilla Trades and Decision Point. You can read about those here: http://www.illiteratewithdrawal.com/stock-market/gorillatrades/

    But, I would be very interested in seeing the results of your analysis. Do you have a website where you posted this analysis. I might actually pay the $6 to have access to the Paytrading database again so that I can see how it has been performing in the time that I’ve been away.

    BTW, I’ve shut down the old page and moved the Paytrading page to correspond with my new layout. I’ve moved your comment here….

  3. Gary

    Dear Scott

    I have not yet started trading the paytrading system yet but it occurs to me that to avoid taking huge losses a stop should be set at say 5% or maybe a 30 day limit to sell. After 30 days one should just sell. The basis for this is that the broker recommendation has long been gone and forgotten so the original reason for buying is no longer valid. If one splits the capital up into say 5 lots of $2000 then holding one share for a longer period wouldn’t affect the overall average as presumably the others would still be working well. I don’t have all the data or programming knowledge that you obviously do but it would be interesting to know what effect this would have if you were able to do it.

    Best Wishes

    Gary

  4. Karim

    Scott,

    Sorry, I do not have a website but I can send you an excel spread sheet with my results if you are interested.

    My analysis was for paytrading picks from 07/27/2001 to 07/29/2004. I played around with different variables such as buy time (10:00, 10:30, 11:00, etc), percent gain (1%, 1.5%, 2%), commission cost and when to exit a loser.

    My results showed that for example, if you started with $10,000 and paid a commission of $10 for each trade ($5 for buy and $5 for sell) and sold if the pick returned 1% or sold the pick if it lost 2% or was held for more than 7 days then after 2 years you would have a LOSS of 6%. However, if you were able to find a free trading account and paid no commission, then the results show that you would acutally gain 28% over the same 2 years. Because paytrading requires so much commissions to be paid, I can’t find a model that actually has a positive return.

  5. Mike P

    Karim, I’d love to see your analysis. I’ve been with GorillaTrades and logged great returns – 26% overall for last year – I can count on their stocks to follow through with volume. I don’t play every pick, I follow things up with my own due diligence, but have found their parameters to be solid when I personally sign off on the pick as a whole. Send your analysis to mikepurcell3000@gmail.com if you can. I’m most interested in seeing how they fair in comparison to the others…

    Thanks in advance

  6. Satbir

    Karim, can you please send your analysis to sstalwar@yahoo.com as well. Also, can some one shed more light on “when to exit” strategy?
    Paytrading would assume you never exit until got your 1% profit. Thanks in advance.

  8. Brian

    I have used paytrading since 2/05, the end of your analysis. My first trade went well, I just added in the 14 dollar commission (Scottrade) and made my 25 dollars (started with 2500) On my second trade, ATVI, all would have gone smoothly but I bought with unsettled funds and had to wait an extra day. The stock then plunged 25% and I had to wait until July (5 months) My patience paid off, Activision came back and I took my 1%. After 4-5 more months of gaining my 1-2% per trade, I realized that I could cut my time and increase my profit if I watched, through the archives, for stocks that did not gain 1% on the first day and then dropped. Since the stocks he picks are upgrades, many have inflated prices that first day and follow this pattern. I then pick a time to buy, when the stock is down from the tipsheet buy price, and immediately put a sell order in for what the 1% would have been had I bought when he recommends. This way, I make more and hold on to the stocks for less time. I am able to get around 5% each trade, which is amazing. My 2500 dollars is now over 4100. I dont care if I’ve paid him 78 dollars when I’m up 62% for the year.(Really since July)

  9. Jonathan

    I started paper trading the PayTrading system on January 9, 2006. I modified the strategy using 10k instead of 2k. Instead of investing the entire amount on one stock I invested 1/5 of my account balance (cash and stock value). This allowed me to get into a trade every day and not have everything stuck in one stock. Had I not done this I would still be stuck in my Feb. 8th trade. I assume a commission of $5 per trade (I use Lowtrades.com, their commissions start at $5 and decrease depending on the previous months volume). I have been tracking the info everyday with real time numbers so as to have an accurate picture. I typically round the buy price up to the nearest 10 cents – 25 cents. Using this method I am showing a 10.34% gain from 1/9/06 to the present (3/3/06). So far the longest I have been in any stock is 19 days (i am still holding it), but most sell withing 1 to 2 days. I have not kept a record, but it appears as though I could have sold most of these for a 2% gain rather than 1%. I may also adjust my investment to 1/4 of my balance because I have yet to have more than four positions open at once.

  10. Scott K

    Brian and Jonathan,

    Nice results! I’m glad Paytrading is working for you. Sounds like I stopped using it too early…

  11. Bernie L

    Scott, I found your site from researching on GT and found out about Paytrading instead. I think PT is a very interesting idea. The best part of it is not so much about getting 1% profit on each trade (most daytrading site will tell you how you make gazillion dollars by making 1-2%/day every day), rather it’s the approach of using upgrade to fine buying candidate. It seems quite accurate with their stock picks without doing TA on hundreds of stocks to screen for a stock to buy. I just subscribed to PT and start using the system. I will start a blog on this at some point, so I can share the finding with others who are interested in PT.

  12. Mike

    Folks, I’ve been papertrading this system for months now, and I’d have to say, aside from a few wrong moves on my part, this system seems to work for me.

    I’m interested in starting a PT club. Nothing too serious, but I want to keep tabs on how others are doing. It’s a great confidence builder.

  13. Bernie L

    Mike,

    I will be interested in having a PT group as well. I have been using PT for about a month now, so let me know if you have something setup.

  14. Mike

    Bernie,

    I don’t have anything setup yet, but I plan to sit down and sketch some ideas. I do not subscribe to the Tip Sheet, however, I do follow the eBook plan.

    Where are you located?

  19. Mike

    Guys.

    I’m finally doing this for real. I’ve set up a blog with my day-to-day trades.

    Made 4 trades to date with real money.

  21. Steve S

    I started Paytrading in late August, 2006. I started with approximately $2,700 into my first trade; later I added approximately $3,000 to my account and initiated a second Paytrading “stream.”

    Below are results so far for my closed positions. The percentage gains are *after* commissions.

    The relatively long holding time on some of these are due to two reasons: 1) The 3-day “free rider” rule preventing me from selling when my target is hit right away; 2) My attempt generally to realize 1.5% gain rather than 1% in order to overcome the commission bite ($14 round-trip at Scottrade) at this dollar level.

    CI – Bought @ 115.58 on 8/30 – Sold @ 117.70 on 9/13 – 1.22% gain
    MNST – Bought @ 39.68 on 9/13 – Sold @ 40.28 on 9/18 – .92% gain
    ORCL – Bought @ 17.9899 – Sold @ 18.28 on 10/5 – 1.09% gain
    FCX – Bought @ 51.82 on 10/6 – Sold @ 53.35 on 10/12 – 2.46% gain
    ASML – Bought @ 23.95 on 10/12 – Sold @ 24.4801 on 11/14 – 1.74% gain
    ERIC – Bought @ 38.95 on 11/13 – Sold @ 40.09 on 11/16 – 2.44% gain
    CSCO – Bought @ 26.6399 on 11/15 – Sold @ 27.0501 on 11/21 – 1.08% gain
    AMAT – Bought @ 17.8699 on 11/16 – Sold @ 18.2801 on 11/22 – 1.82% gain

    In raw dollar terms, I have netted $360.6835 (pre-tax, of course), for an average gain of 1.623%.

  23. Mike

    Steve

    I hate that free-ride rule. They will limit you to trading with settled funds on a cash account.

    I’m at Scottrade also. How do you like them?

  24. Steve S

    Yeah, the free-ride rule puts a bit of a crimp in using the Paytrading method, in my opinion. Not so much as to kill it, but it makes it virtually impossible to follow the pristine Paytrading steps exactly. The only way around it, that I can see, is to have extra cash sitting in your account at all times, or to use margin. When I’ve done (modified) Paytrading long enough to feel confident in it, I might apply for margin with my Scottrade account.

    Mike, I like Scottrade very much. I like their web site, the way it’s laid out, and the amount and type of information available. The $7 commission per trade seems quite reasonable, although I know it’s not the rock-bottom lowest out there. It became more attractive when they started applying the flat $7 commission to limit orders as well as market orders. I forget what limit orders were before, but having the commission for limit orders now be the same as market orders fits well with the Paytrading system.

    Also, there’s a Scottrade branch near me. I rarely go in there, but when I’ve needed to, the people have been very friendly and helpful.

  25. Mike

    I’m still getting use to the Scottrade site. More so in the way I need to get around in a hurry. The $7 is a good thing. I was trading with an older, more traditional, broker at $15 a trade. That will kill any commission on the low end of the 1-2% profit range.

    I’m still posting comments on the blog. Let’s keep in touch.

    http://paytrader.blogspot.com/

  27. Slamjammer

    Check out my Wiki site, devoted to my Pay Trading.
    Just started earlier this month. I will post daily, weekly and monthly results.
    Real money, real trades.

  30. Patrick

    I’ve been experimenting with Paytrading using the 3x ETF’s – gains have been over 3% on average. As there are 20 of these 10 bull, 10 bear, I stay in all 20 and keep re-buying them and reinvesting the gain. Made over $6800 the first month – note not real money but a watch folio at foliofn.

  31. John

    Is anyone still using PayTrading? Would anyone be interested to establish a blog to compare notes and ideas? The system works for me but there are a few things that could be developed. Anyone in contact with Eric Shawn?

  32. spjuliman

    Hi Paytraders,

    I got my fingers on Shawns’ paytrading book 2 days ago, read it and immediately had some thoughts what could be done with his idea to set up a more sound approach. There is no way that I would risk 100% of my account to make 1% on a trade, that’s really a crazy thought => conclusion, there must be some kind of risk stop! The second thing, I would not want to get stuck in a single trade for months => so there must be a time stop as well! The good thing about Shawn’s idea is his high success rate (he claims “no losses” … until it happens 😉 And this success rate is what I would like to take advantage of – but with reasonable risk control … so lets see:

    1) I made some rough assumptions about a likely stop-out rate (including time stops and risk stops) and estimated the success rate to 40 winners /12 losers (in a total of 52 weeks = 1 year). This estimate need to be revised based on the spreadsheets I found in the earlier discussion above. Important will be to extract a time curve of how 1%-winners we get after a certain time span, e.g. 60% after the first day, 70% after 3 days, 80% after 7 days, 90% after 2 weeks and 99% after 2 months … or so. I will try to generate this curve from the table in this post, but additional, more recent data would be very welcome 🙂 This curve will be very important for piking the right expiration for stock option, something I will describe below.

    2) I also assumed that I would do five trades in parallel risking up to 1/5 of the account size in each trade instead of putting on one single trade and risking the full portfolio amount (as Shawn suggests). So if one of five trades gets stuck (until the time stop hits, e.g. after 1 month), I am still in the daily and weekly game with the other four trades. From the table I figured that there aren’t so many longer-running trades. So it would be rare to get two laggards in the same week.

    3) Stock options are great tools that can be used to limit risk and to push returns. However, I have no clue how many of those stocks in the paytrade lists have options? Any ideas? I have my favorite option strategy that works perfectly for any system with a high success rate, playing a simple “risk 1/make 1” game. Volatility, time decay and other option-typical worries do not play a role in this technique. With the technique you can adjust your risk per trade to, e.g. to 5% of your portfolio, but you then at the same time you also have a 5% profit target (on a 1% move of the stock). So instead of risking 100% of your portfolio to make 1% per trade (Shawn’s original idea) you will risk only 5% of your portfolio to make a maximum of 5% per trade … sounds like a better deal to me. This the idea of a perfect binary option, with equal risk and return potential.

    Based on the above, I run some calculations assuming that 5 trades could be done per week (trading them in parallel as described before) or 260 per year (if you have real world experience please provide me with some ideas if this is realistic – thanks). I started with a $10000 account, assumed $500 risk/trade (5% of the portfolio) and came up with a return-on-capital of +100%/year using the above success rate of 40 winners /12 losers (or the equal ratio 200/60). If a better success rate of 220 winners /40 losers could be achieved, the return-on-capital increased would increase to +240%/year. Sounds too good to be true? … for me YES … but I still haven’t found any convincing arguments why it shouldn’t work. I will further investigate this, but I would appreciate if some of you experienced paytrading folks could support me in my efforts. Thanks!

    The blog paytrader.blogspot.com has its last entry in 2009 (apart from some comments) and here on this blog it shows 2010. Should we start a new blog or could we revive one if the old ones? Would be nice to revive this interesting idea and maybe even make some money with it 🙂

    Cheers,
    spjuliman

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