Trading the
Days Away
Trading the
Days Away
by Rajul A. Mathur
Personal Finance
Making
money in the market is fast becoming one of the biggest sports in the country.
People are actually giving up their regular jobs in favor of day trading
stocks, hoping to double or triple their current incomes.
Day
traders, as they're called, follow the market all day through computerized
networks, and usually buy and sell several securities within the space of
a few hours or even minutes.
This
ease of switching from one hot stock to another is one reason why there
has been so much volatility in Internet stocks, whose trading action has
been dominated by day traders. Many day traders claim volatility is their
best friend. But bear in mind: Trading losses accrue faster when volatility
is high.
Day Trading's Basics
Day
trading is made possible by having complete and inexpensive access to prices
and quotes on the market. The most prominent source of access for day traders
is the SOES, or the Small Order Execution System, which the Nasdaq sponsors
to trade stocks on that exchange. This system allows small traders to get
the best price for their trades.
Other
systems include ECNsElectronic Communications Networks which provide quotes
with which you can trade. The combination of ECNs and SOES allows a large
community of day traders to play the market, and this competition actually
makes markets more liquid.
If
you become a day trader, you'll be faced with several choices, including
whether to outfit yourself with a day trading computer system or whether
to join a day trading brokerage operation, where you'd be in the company
of many other day traders. For novices, the latter is probably the best
choice, although working alone at home suits many traders who don't want
to be distracted by the commotion of the trading floor.
Many
day trading brokerage firms require no up-front money to get into the business.
The only money you need is the trading capital you start with, which is
typically at least $25,000. The way day trading brokers make their money
is by adding a fee to your commission.
Many
day traders avoid the pitfall of losing everything in the first few months
by spending a full month or so just paper tradinggoing through all the motions
of making a trade but not actually executing the trade and putting money
at risk. Some day trading brokerages will take new traders under their wing
and help them develop the attitude and strategies necessary for such trading.
Day Trading's Dangers
Many
more people lose money from day trading than make money.
Day
traders face two major obstacles: spreads (the difference between the bid
and the ask price) and commissions, which eat into profits particularly
if you trade a lot.
For
day traders, competition with market makers for orders is a big challenge.
Market makers are people whose job it is to buy and sell stocks wholesale
from investors.
Day
traders try to take the market maker's place, buying and selling from other
investors before the market maker can do the trade. Because market makers
have been around so long, the war between them and day traders more often
than not leads to financial casualties among the relatively inexperienced
day traders.
Another
downside of day trading is that many traders follow the same stocks, so
they wind up competing against each other. Sometimes this results in exaggerated
moves in the stock, and occasionally it results in traders not being able
to get into the stock at the price they want because so many others are
doing the same thing. Eventually, competition may result in a shakeout in
the day trading community.
Strategies Used
The
essential strategy for most day traders is to trade "flat"to close
out all positions by the end of the trading day, so that you start the next
day with just cash in your account. That way the trader isn't exposed to
jumps in the open price due to news released after the closing bell or the
next morning before the opening bell.
In
trading with so short a time frame, gauging momentum is critical to day
traders. Most day traders try to go with the trend, aiming to profit on
fast-moving stocks after just 1/8 or 1/4 point moves. Gauging short-term
trends tends to be more an art than a science, which explains why some traders
are remarkably successful and others go broke.
Some
day traders hop from one stock to the next, riding the momentum that has
built up that day. Others specialize in a group of stocks, learning how
these stocks act and capitalizing on short-term trends that they can identify
after carefully studying the historical price and volume movement.
Frustration
is probably the biggest hazard of day trading, so if you choose to enter
the arena, make sure you have a viable career to fall back on.
Editor's Note: Rajul A. Mathur is an associate editor of Personal Finance,
P.O. Box 3808, McLean, VA 22103. 1 year, 24 issues, $69, and editor of Mathur's
Options Daily, an Internet and fax-based options trading service.
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