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Day trading earned a much-deserved negative reputation during the Nasdaq bubble in the late
1990's. Then you could find many day trading schools and trading rooms that tried to make day
trading look like easy money, mostly with video arcade style trading applied to Nasdaq stocks.
Most of those rooms and methods are now gone. But replacing the Nasdaq day traders are a new
crop of on-line trading rooms and trading schools that focus on stock index futures and forex.
Is this the same madness of nearly a decade ago? Is day trading a viable approach to making
money in the markets?
Among the investing establishment, day trading certainly has a negative reputation. When I am in
a debate with a typical investor I hear comments such as: "I've never met a day trader that made
any money. The costs of commissions and data eat up any profits. Day traders are chained to
their computers all day while I am at the golf course. And of course, the really big money is made
in the long term and day traders miss all those big trends."
These are all good points. I'll take them one at a time. Of course most people I meet near where I
live have never met a day trader that made any money. I live in the Pacific Northwest, far away
from the pits and trading floors in New York and Chicago. Most of the traders on the floors of the
pits and exchanges are in fact trading in and out of the markets all day long. The are day trading.
They are creating liquidity in the markets. They insure that the spread between contract months is
in line and liquid. They are there to take the other side of the retail paper that comes into the
market. The markets could not exits without the day traders who are professional and make their
full time living from the small, numerous trades and small profits they take out of the markets. With
new technology and lower transactions costs, off the floor, screen based day traders also
contribute to this liquidity.
Are transaction costs and equipment a detriment? It was difficult to overcome transaction costs
just a few years ago if you were an off the floor trader. Today commissions are practically
negligible, and some of the best charting and data packages are essentially free with a minimum
of trading activity.
And what about being chained to a computer all day, while your friends are out playing golf. It is
true that to make money day trading one has to monitor the market during the trading day. I guess
one could also say that to be a surgeon one has to spend some time at the hospital, and if you
were a baseball player you would have to spend some time at the baseball field. It is hard to
comment much further if anyone is going to criticize someone's career for actually having to be
there while working at it.
Day traders certainly do miss some of the big moves. However, the big moves are rare. More
common is the daily up and down pulsation of the market, and day traders are able to capture
many up and down swings during the day, while the longer time frame trader has to sit through
seemingly endless back and forth chop. In fact, markets spend most of their time trying to find
trend direction, with much of that time spent in sideways patterns that make it difficult to make
money on a position trade basis. Also, what information does the longer-term trader have to
suggest a profit in that time frame? The day trader can more easily see what is there and what is
happening right now. It is much more difficult to look out into the future and to make an
assessment of what conditions might prevail a year or two out. A day trader doesn't rely on
information disseminated by an analyst. He merely trades what is in front of him. He trades what
he sees; not what he is fed by outside, non-market-generated information that may be
questionable.
And what about the really big, wealth building kind of money that is the objective of the very long-
term investor. Warren Buffett has made some really big money, and he is about the longest-term
investor you could use as an example. I am quite sure he wouldn't advise day trading. Of course
his ability to place large trades is made much easier because day traders are doing their job. It is
true that in the very long term, if you are very good at seeing the big picture mega-trends, and use
the power of compounding, truly spectacular gains can be had in the very long-term time frame.
But even Mr. Buffett has a difficult time maintaining his own track record. Very few portfolio
managers can keep up with the broad-based indexes for more than a year or two, let along better
them. But the very long term does take advantage of the overall bullish trend of stocks over long
periods of time. The same cannot be said for commodities, although to some degree they can
keep up with inflation. While short-term day trading can be stressful, long-term investing can try
your patience. Can you sit through twelve or more years of no returns or even negative returns?
That can happen to the long time frame investor. The market may have long stretches of sideways
movement, but the day trader still has the opportunity of many up and down trends available
nearly every day.
There are some additional points to consider before considering day trading. It should be obvious,
but some people just cannot make decisions quickly enough to day trade. Some people require
more information and confirmation by looking at many indicators. With day trading, there just isn't
the luxury of time to consult with many indicators, especially if a very short time frame is being
used. It is better to use few or no indicators. A certain amount of intuition about the market you
trade will in time, with enough experience, begin to emerge, which may take the place of looking at
many indicators.
For many the biggest obstacle to day trading is the stress level. Concentration often must be
maintained for long period of time during sometimes inhospitable market conditions. The stress
level can be magnified as the time frame shortens. The stress can be intense while in a trade if the
equipment and technology break down. You can have a backup computer, a backup high speed
internet connections, a backup power supply, and backup brokerage accounts. Even with
everything backed up the exchange order entry or data feed can go down at just the wrong time.
With electronically traded contracts the only thing that can be done is to try to hedge in a similar
market, if one is available. Even when all the technology seems to be working, there can be
deceptive delays in data during sudden fast market conditions that can introduce slippage that
wasn't apparent during testing.
After having traded in many time frames and trading styles, I think the most important issue is to
find a trading style that fits the personality of the trader, and not rule out day trading because of
misconceptions. There is not a right or wrong answer to the question of the feasibility of day
trading. But it must suit the individual trader. For some traders long term investing is totally wrong,
and day trading is a better fit. One will only know after trying, and keeping realistic expectations in
mind. Also, I think it is a good idea to stay out of the crowd and chose a time frame very short or
very long. It is difficult to take profits from the market if you are looking at the same information as
the masses. Often either a day trading approach or a very long-term approach will prove to be a
less beaten path.
Doug Tucker has a blog with daily commentary on stock indexes, precious metals, and other
markets. There are many articles on technical analysis and indicator design and interpretation. To
visit go to: http://tuckerreport.com/
Article Source:
http://EzineArticles.com/?expert=Doug_Tucker
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