Day trading / by kevin murray

Never underestimate man's greed, especially when it comes to a country that celebrates and idolizes people with money as much as the United States.  The trading platform for equities changed when the fixed commission structure that brokerage firms charged was terminated in 1975.  As you might suspect, the higher the cost of a commission to buy a stock the more serious and long-term oriented an investor would be.  It took a while for brokerage firms to recognize that lower commissions could equate to higher commissions in aggregate if the investors would simply trade more, and trading volumes have risen exponentially since 1975.  Additionally, the door for individual investors became wide open with the advent of the internet and the additional competition that online brokerage firms brought to the forefront.  Now, unfortunately (depending on your point of view) individuals have the power to exercise their own trades at their own discretion without using a full-service broker.  Not too long afterwards, some "genius" came to the conclusion that trading in and out of stocks rapidly was the path to untold riches with their attitude being why wait all year to get a paltry 15% annual return, when by making the right moves you might get 15% in one month, month after month!


The advertisements for day trading classes hit their peak over a decade ago but those classes and advertising still exist today but not with the same in-your-face prominence.  The lure, the line, the song and dance, are still beckoning however, because who wouldn't want to sit in front of their computer screen and with a few clicks of their mouse, make thousands of dollars each and every day.  Now that really is the good life!  The problem with this fantasy is that reality helps to clarify everything.


The structure of day trading is setup in such a way that the opportunity for you to lose a lot of money in a very short period of time is hiding in plain sight.  First off, to make the real money you need a margined account which essentially means that you can leverage up your cash deposit with your brokerage firm.  For instance, if you deposit $50,000 (and day traders that margin investments must have a deposit of $25,000 or greater in order to margin) you are allowed to make trades of up to 4x your investment amount (i.e. $200,000) as long as your close out your positions at no more than 2x (i.e. $100,000) before the end of the trading day.  Because of that leverage, moves up and down, are much more pronounced when compared to the actual money deposited with your firm.


Also, keep in mind, that while day trading you have costs that will accrue against your account each and every day.  The commission cost of the trade, the margin cost of the money you are borrowing, and the tax costs for all of your trading.  Still each and every trading decision is yours to make.  You have the flexibility to invest using a real-time ticker into highly leveraged ETS, common equities, options, and you can short those investments too, thereby making it possible for you to play either side of the table to your perceived advantage.


The problem with day trading, however, is that you are an amateur with no insider information, trying to beat professionals and insiders at their game in which they have all the tools and connections.   That, I submit, is a very hard nut to crack.  It's the lure of that easy money and the belief in your own infallibility that gets you into the game, and once in it's hard to get out, not without an almost complete beat-down.