Chapter 19
IN THIS CHAPTER
Considering other ways to invest that suit you better
Taking into account your personality and preferences
Recognizing the hard work that successful day trading requires
Putting a damper on unrealistic expectations
Day trading is a bad idea for most people, and if I keep you from taking up trading because it’s the wrong thing for you to do, then I have done my duty. It requires a strong personality, someone who can face the gyrations of the markets day in and day out. And it also requires someone with enough attention to detail to run a business. It’s a great career option for the right person in the right circumstances. But for people who have trouble keeping cool or who don’t have the patience to learn how to trade, and for anyone who has a gambling problem, day trading can be a quick road to ruin.
In this chapter, I list eleven signs that may indicate day trading isn’t right for you right now. Take these signs seriously. Most day traders lose money, in part because a lot of people who aren’t cut out for day trading try it anyway.
Many people want to manage their own investments. Although doing so is certainly possible, you first need to take the time to learn about the basics of finance, such as the relationship between risk and return, proper diversification, and time horizons that are appropriate to your situation. In fact, there’s a great book called Investing For Dummies by Eric Tyson (John Wiley & Sons, Inc.) that can help.
Some people confuse investing with day trading, though, and these two disciplines are not the same. I list tons of information on the differences in Chapter 2, but here’s the condensed version: Day trading involves rapid buying and selling of securities to take advantage of small movements in prices. This can be a successful strategy for part of your investment account, but day trading with all your money isn’t a good idea.
Buying and selling securities on your own without being a day trader is entirely possible. Making money in the financial markets without being a day trader is entirely possible, too. And if you don’t know another good term for “self-employed person managing her own money,” just tell people you run your own hedge fund. You’ll get better tables at restaurants that way.
Fundamental research, as I discuss in Chapter 7, is the process of analyzing a company to see how good its business is and what the company’s securities are worth. Fundamental analysts crunch numbers, build forecasts, check out products, and look for stocks that are going to do well over the long term. They dream of uncovering the next Google or the next Walmart and holding the stock all the way up.
Fundamental research is antithetical to day trading. Day traders look for profit opportunities in short-term price movements. They often do not know what industry a company is in, nor do they care. If you love the fundamentals, you’re probably too analytical to be a good day trader.
Getting started in day trading is a lot like buying a small business. It takes commitment of both time and of money. If you don’t have enough time, learning technical patterns is difficult. If you don’t have the money, you won’t be able to work through rough cycles. And there will be rough cycles. That’s day trading’s only sure thing.
A decade ago, most large cities had day trading offices, called trading arcades, where traders could go each day to buy and sell securities. The big advantage these firms offered was high-speed Internet access. Now almost everyone can get high-speed Internet access at home, so there’s little need for day traders to go elsewhere, and most of these offices are closed.
Working at home is great for some people. If you prefer camaraderie during the day, like the support of a team, and want friendly faces around you, you’re likely to be miserable day trading. It’s just you and the market, and the market doesn’t have a great sense of humor.
Day traders are small-business people, and their entrepreneurial flair goes beyond making their own buy and sell decisions. They also buy equipment, shop for supplies, and maintain careful income tax records. To some, this is exhilarating. No more mean office manager who decides how many and what kind of pens must be used. No more going through hoops and bringing in letters from a doctor to get a fancy ergonomic chair. You’re the boss, and if you want it, you can have it.
But to others, all this responsibility is overwhelming. Picking out pens? Creating backup procedures? Worrying about accounting software? It’s too much. If the mere thought of standing at the office-supply store gives you the heebie-jeebies, you may want to consider trading as an employee rather than trading for your own account.
Trading seems so exciting. You’ve seen the stereotypical picture of the people on the floor at the Chicago Board of Trade, wearing bright-colored jackets and loud ties, screaming and waving their arms. It gets my blood running to just think about it. Of course, they were probably shouting out coffee orders and waving their arms in a debate over the Cubs versus the Sox. And anyway, floor trading is mostly obsolete. Most of the large stock, bond, and derivative exchanges have gone through mergers and reduced the square footage of their trading floors because of changes in how people trade. Nowadays, most traders sit in offices in front of computer screens. They have to stay focused on the little blips in front of them, and it can be deathly dull. Some days few, if any, opportunities come up to trade using your system.
If you crave excitement and have trouble staying focused, you may find that day trading is too boring for you. It can involve intense stress with few opportunities to work it off during the day.
With the frenzy of trades and the rapid-fire decisions involved, day trading may seem like a perfect career for an impulsive person. It’s all about instinct, about acting on your hunches, about pulling the trigger and seeing what happens. Right? Uh, no. To be a good day trader, you have to trust your trading system more than your hunches. Sometimes you’ll make trades when it doesn’t seem right and you’ll sit out periods even though you are itching to get in. Good day traders are quick thinkers, but they do think. If you like to act now and deal with the consequences later, then day trading isn’t a good idea for you.
Do you get a big rush out of gambling? Do you love trying to beat the odds? Does day trading seem just like a visit to Vegas without the airfare? Then you shouldn’t be day trading. Unlike at a casino, no one is going to give you free drinks or Celine Dion tickets in exchange for your massive losses.
A lot of traders like to gamble. Every trader has some crazy story about playing Liar’s Poker using the serial numbers on dollar bills instead of with cards, or about a friend of a friend who bet on whether the person walking in front of him would turn right or left. And that’s fine, if they keep their gambling in perspective and bet no more than they can afford to lose.
Trading isn’t necessarily gambling, but it can be, especially if you get carried away with the market and don’t stick to your trading and money-management systems. But remember this: In gambling, the odds always favor the house. When you cross the line, you hand your profit potential over to someone else.
Successful day traders are disciplined. They have set trading hours that they stick to and set systems they use to plan trades and manage their money. They took the time to carefully test their trading strategy (see Chapter 16 for more on how you can do that). They understand that if they don’t have a system and manage their risk, they are more likely to become one of those numerous day traders who lose everything early on.
The whole idea behind day trading is that you limit risk by closing out your positions at the end of the day. The financial markets are global, though, so in theory, the trading day never ends. If you have a hard time turning off the lights at the end of the day, you may not be the best day trader. If you resent rules, you may rebel against the rules that you’ve set for yourself.
Day traders look for short-term profit opportunities, so it follows that day trading leads to big, fast profits, right? Wrong. Day traders make money by collecting a large number of small profits. Those who make money usually do it through patience and persistence. Yeah, one or two day traders out there may have managed to make a killing in a week, but they’re the exception.
A lot of money can be made in day trading, but sometimes it seems like more money is made selling day trading training systems. Some of these systems are heavily marketed online and even through television infomercials. The sales pitch makes day trading seem like an easy, safe, fun way to make money using your own smarts. These commercials leave out pesky details about researching and testing systems, high levels of risk, and the pressure trading can place on a person. And the wash-sale rule (it’s a tax thing; refer to Chapter 17) is never mentioned.
Day trading is great for some people. But like anything, if it sounds too good to be true, it probably is. Don’t let a strong-arm sales pitch cost you your hard-earned money.