01 Jan Review of TradeHero – Virtual vs Reality
TradeHero is a new virtual trading app on the iPhone and iPad. Although we have known about simulated trading games and competitions, it is unprecedented in a way as TradeHero combines trading and social network. If you are a good stock picker and top the charts with high Return On Investment (ROI), players can opt to follow you by paying US$1.99 per month. You will get to pocket half of this fee by giving people a glimpse of your trades. Or, you can pay US$1.99 to see the top traders’ trades and try to mirror them in your real money account. Essentially, TradeHero wants to serve as a platform to determine the best traders through a social network. I have participated in mirror trading programs like Tradency and I have heard about Marketocracy. But these programs involve real money and require good understanding about trading and investing to begin with. TradeHero is easy for anyone to participate and accessible on-the-go with your phone.
Before we delve deeper into the review, we have to understand TradeHero a little more.
- Every player starts with a capital of US$100,000 (virtual money)
- You can trade securities from 14 exchanges
- NYSE (USA)
- SGX (Singapore)
- NASDAQ + PINK (USA)
- HKEX (Hong Kong)
- LSE (London)
- MLSE (Milan)
- TSX (Toronto)
- TSXV (Toronto)
- AMS (Amsterdam)
- BRU (Brussels)
- PAR (Paris)
- LIS (Lisbon)
- ASX (Australia)
- Long-only positions. No means to short.
- Prices are real but delayed.
Can we make real money with this app?
Recently, Jon was telling me about buying Digiland at the lowest possible price on the Singapore stock exchange. Digiland is trading at $0.001 and it is not possible for it to go any lower than this price (unless it delist). I was not keen to participate as I expect a lot of sell orders at $0.002 since everyone wants a 100% gain. Nonetheless, it is a practical trade with limited downside and great upside if you are able to sell at$0.002. See chart below:
I tried out this strategy on TradeHero and I managed to buy at $0.0001 and sell at $0.0002 and earn a quick US$30,000 in the process. I realised there is a way to game TradeHero – just keep repeating this 100% gain until I top the charts. Just as you think you want to repeat this feat in real life and become a millionaire in 1 week, I will tell you the reasons why it is not possible:
Absence of demand and supply
Prices are determined by demand and supply. In real life, there is a fixed number of shares in the free float. Every shareholder has a different idea about how much Digiland is worth and how much they are willing to sell. Likewise, buyers also have different opinions about how much Digiland is worth and how much they are willing to buy. There must be enough buyers and sellers agreeing on one price and volume in order for a transaction to go through. In TradeHero, the law of demand and supply is absent. You can buy or sell any quantity you like. Moreover, transactions can also be completed any time, even after market hours. In other words, transaction is guaranteed without the need to consider demand and supply.
I don’t blame TradeHero for this because it isn’t easy to replicate demand and supply in this game. Even if the developers could, it will be expensive and this virtual trading game will re-create its own demand and supply microcosm that is eventually different from the real stock market.
Chart toppers made it through sub-pennies
Curious, I went to check out the traders who topped the TradeHero charts and I realised most if not all, got to the charts through trading sub-penny stocks like Digiland. For example, Sunmoon Food Company (S$0.002), Annica Holdings (S$0.002) and Pacific Gold Corp (US$0.0002). Here are some statistics:
- No 1 trader had 2 Digiland trades amounted to about US$800k profit
- No 2 trader had 2 Digiland trades amounted to US$100k profit, 1 Pacific Gold Corp trade (+US$99k) and 1 Sunmoon (+US$24k)
- No 3 trader had 1 Digiland trade (+US$30k), 2 Annica trades (+US$38k)
- No 4 trader had 3 Digiland trades (+US$200k), 1 Sunmoon trade (+US$14k), 1 Annica trade (+US$48k)
- No 5 trader had 1 Digiland trade (+US$100k), 1 Annica trade (+US$10k)
- The list goes on…
These traders have gamed TradeHero, either deliberately or unknowingly. I love the financial markets and technology so I want TradeHero to succeed. But if the app wants to help me find the best trader so that I can follow and make real money, it does not look like it at this moment. This is because the genuine stock pickers yielding 15% will not rank high if traders can game it through sub-penny stocks with 60% ROI. Money grows through the compounding of 10-30% return per year. Any ROI above this range of return is dubious or unsustainable.
Nonetheless, TradeHero has taken a bold step and I believe they are on the right direction. They just need find a way to separate the real stock pickers from the gamers and it will be a valuable advisor to stock investing.