Commentary: Day trading is popular again, and as controversial as ever.
With the huge volatility in the stock market during the last year, day traders are back. Or maybe they never left.
In the 1990s, day trading was all the rage, especially using risky strategies like scalping, where you’re in and out of hundreds of stocks in seconds or minutes, aiming to make small but quick profits. Scalping was profitable until decimalization, and the 2000 crash, when many once successful traders got wiped out.
A few years later, people switched to day trading houses. That lasted until the 2008 housing crash, when many once successful homebuyers got wiped out.
More recently, high frequency traders (HFT), the ultimate day traders, use high-speed computers to scalp for pennies in nanoseconds, which adds up to billions of dollars in profits every year.
Although retail traders can’t compete with these million dollar computers, many lone day traders have returned to the stock market.
Eight reasons not to day trade
Nevertheless, the controversy over day trading strategies hasn’t stopped. Last year, two successful traders, James Altucher and Timothy Sykes, had a blogging war over the benefits and risks of day trading. Dozens of comments from readers appeared on their blogs, attacking and defending.
Altucher threw the first punch in a blog he wrote, “8 Reasons Not to Day Trade.” Link to article here: http://bit.ly/h028VG
Here are a few snippets:
“Everyone wants to be a day trader. Let me tell you the best days. You get in at 9:25 a.m. You make the trade your system tells you to make at 9:30 a.m. And by 9:45 a.m., the trade is done, profitable, and you’re done for the day: $1,800 richer and happy about it…but it’s all a lie to yourself…” In the long run, Altucher says he has none of the qualities of a succ essful day trader. “And neither do you,” he concludes.
Here are the eight reasons why Altucher says you shouldn’t day trade:
1. Suicide 2. You’ll overeat 3. Your eyes go bad 4. Social life 5. Blood pressure 6. Nothing productive 7. No career 8. It’s impossible
Twenty-four reasons to day trade
After Altucher’s blog was published, successful day trader Sykes immediately responded with an article, “24 Reasons to Day Trade.” Link to article here: http://bit.ly/9n1C1h
Here are a few snippets from his blog:
“When I read James Altucher’s article, I couldn’t help but feel anger, and within a few hours of reading it, I experienced many of the symptoms he described, although in a slightly different context…I rubbed my eyes to see if his post was even real, somehow thinking it was impossible that he could write such blasphemy…”
According to Sykes, day trading is thrilling, exciting, mentally challenging, and educational. “Day traders talk faster, think faster, and do things faster. We get more out of life because day trading is a fast-paced job.”
He admits that day trading can be unhealthy, so he suggests hiring a personal trainer to lose weight. And yes, he says, your eyes can go bad, so get a glare protector for your computer. In addition, if your blood pressure is rising, it’s a clue to Sykes the trade is bad. He uses his body as an early biological warning system.
The cure for most trading losses, Sykes suggests, is cutting losses quickly. Learning how to cut losses can also help you in life, real estate, and relationships. Another way to survive the day trading battlefield is to enter a trade with nothing less than a 3:1 risk reward ratio.
It’s easier than ever to be a day trader because of technology, he claims, and you don’t have to be a genius. Ironically, he says he is terrible at math. Sykes says if you’re willing to aim for less profit, you can make a good living as a part-time day trader.
Finally, Sykes suggests that if you’re part of the magical 10% that succeed at day trading, the freedom it provides is worth the effort. And even if you are socially incompetent, he claims, money makes up for it.
The modern day trader
Hopefully, people have learned from past mistakes — when unknowledgeable traders quit their jobs and cleared out their 401(k)’s to day trade. Many modern day traders trade less frequently and are choosier about the trades they make. Although day trading is not for everyone and is still controversial, it can be a viable strategy during certain market conditions.
But don’t dare start day trading without first understanding all of the risks. The first question you should ask yourself before making that first day trade: “What’s the worst that can happen after I place this order?”