Day Trading
Is Not for the
Faint of Heart
Day Trading
Is Not for the
Faint of Heart
by Andrew Leckey
Welcome
to the jungle.
Jim
Wille, of New Canaan, CT, joined the daredevil ranks of day traders two
weeks ago, and now commutes to New York City's financial district to conduct
electronic transactions at the trading room of EDGETrade Securities.
"I
sit on the train with professional traders coming down to Wall Street and
they're all complaining about day traders," relates Wille, who has
two children and an understanding wife with a full-time job. "But the
market is going to do what it's going to do and I don't think we have any
real impact in the long run."
Day
traders, accounting for up to 25 percent of the volume on Nasdaq and more
than $5.5 billion in transactions daily, by definition open and close their
positions in the same day, jumping in as soon as they have a sense of the
day's action. They claim they make the market more efficient, while critics
contend they contribute to its volatility.
Unlike
someone trading through most on-line brokers, such as E+Trade, where an
order goes to a wholesaler who then fills it, professional day traders trade
their own accounts. That makes it possible to take advantage of sophisticated
computer tools that include direct access to Nasdaq's private electronic
computerized networks, some of which are Instinet, Island and Bloomberg's
Tradebook. These give detailed quote information previously available to
only market makers.
One
strategy tries to buy on the bid and immediately sell on the ask, using
the ability to execute split-second trades to turn an immediate profit.
Other strategies attempt to take advantage of volatile stocks, buying on
dips and selling minutes later when momentum resumes.
Some
day traders are risk-takers working from home, others former Wall Street
pros with unlimited resources and the remainder semi-pros working out of
day trading shops. Traders study news reports, fundamentals, technical analysis,
newsletters, chat rooms and Nasdaq trading data.
Day
trading shop EDGETrade requires a minimum of $25,000 in capital for an aspiring
day trader to get started, though it strongly recommends $50,000 to $100,000.
It also requires a $2,500 three-week training course, while Wille completed
last month. While there are usually about 30 traders at its office, EDGETrade
also has remote traders who access the trading screen via Internet.
"I
decided to get training and do my trading here instead of doing everything
immediately over the Internet because of disaster stories I heard about
people blowing through their money in a month," explained Wille. "I'm
looking to do this as a full-time profession, though, truthfully, if I go
right through $10,000 and have a two-month period without consistent winning
days, I'll have to re-evaluate this decision."
Regulators
estimate no more than 10 percent of day traders actually make money. The
Electronic Traders Association, an industry trade group, maintains more
optimistically that one-third turn a profit, another one-third stay about
even, and the rest lose money.
"Normally,
day traders hold a position seven to eight minutes on average, so it's trading
and not investing," explained James Lee, president of the Electronic
Traders Association and founder of Houston-based Momentum Securities. "The
two elements of day trading success are a good decision support system that
tells you when to buy and sell, and a good grasp of mechanics involved in
trade execution."
The
average day traders makes 30 to 40 trades per day, involving about 700 shares,
said Lee. Three percent of day traders account for 60 percent of volume.
If you don't view day trading as a "career path," Lee believes
forget bout it. Frequent trading is expensive even at Online rates, it's
difficult to move as fast as real professional investors, you must always
cover your losses, and you can be felled by computer breakdowns.
Those
making less than five trades a day should stick to the Internet rather than
working through a day trading firm, according to Lee. Someone starting with
$100,000 must be prepared to lose $30,000 to $50,000 as part of the learning
curve the first six months, he warned. Day trading makes most sense for
someone "in transition" between jobs or with time to spend at
home, Lee thinks, not someone intending to quit a stable $75,000 to $100,000
job in order to get started.
"Day
trading is like any other entrepreneurial venture in that people don't just
walk in and make money, but must first read about it, talk to traders and
see who is making money," pointed out Marc Friedfertig, managing member
and founder of New York-based firm Broadway Trading and author of the books
Electronic Day Trader and Electronic Day Trading Secrets (McGraw-Hill).
Start
with lower-priced, less volatile stocks to test theories with as little
risk as possible and control your losses, Friedfertig advised.
"Concerns
about day trading involve prospective traders not being told the risks or
difficulty and not understanding they'll be independent contractors without
the typical protections investors have," concluded Peter Hildreth,
president of the North American Securities Administrators Regulators and
director of securities regulation for the State of New Hampshire.
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