Kind Words For Day Trading

And now a few good words about day trading

As everyone now knows, some state regulators issued a report this week slamming the business of day trading.

Day traders are “amateurs” (they’re not paid by brokers or dealers) who have the same tools as professional stock traders and do their work via Internet-linked terminals. They use the same “NASDAQ Level II” screens as the big boys, but trade on ECNs (Electronic Clearing Networks) like Archipelego and the Island. This means they spend their days watching the actual bid and asked prices offered by brokers and, if they get between them in the right way, they pocket some profits.

I spent time with some Atlanta day traders for Salon back in January. I learned it’s not an easy gig. I learned most day traders lose money. I also learned I’d never do it — I don’t have the nerve.

But I left knowing that those with talent and discipline can day trade profitably. Trying to halt day trading is like telling journalists they can’t write unless they’re working for an outfit that kills trees. Today, if you couldn’t join Bear Stearns working at their trading desk, you can set up on your own and beat ’em. Here’s how.

You must understand the chart patterns that work for you. You must dump your wrong guesses quickly. You must never “take a flyer” on something stupid (I’ll betcha Yahoo tanks today) or hold a trade overnight (I’m almost even, it’s just one night). You should never waste your day trading capital on “investment” trades (Ciena might double in the next three months), and you must have a cast-iron gut.

If you get scared watching the World Series of Poker, don’t day trade. But if you’re smart, if you learn the game, and that $1 million pot of Texas Hold ‘Em looks like fun, you can play with the big boys and win.

Critics forget the important role day traders play in today’s market. They get inside the games brokers have long used to ream investors; the quarter and half-point “vig” they’ve taken on every trade for decades. They keep the fish tank clean and don’t let the sharks get all the meat. They force Wall Street to make its money the old-fashioned way, by earning it.

Why should Merrill or Goldman or even Charles Schwab take that half point between the bid and the asked when you want to buy a stock “at the market?” If day traders can narrow that spread down to a few pennies, they’re making you money.

So, let’s see. Smart traders make money, they help you make money, and they make the big boys earn less money — this is bad?

Sure, it’s hard work, lots of people crash and burn, and the guys who run these shops need incentives that ensure their folks don’t burn the home equity (even if they come in every day smiling). Some traders need to get fired before they lose it all, just as some compulsive gamblers can’t be let back in the casinos. Hire better pit bosses.

Just don’t bring the Wall Street monopoly back. Bull market or bear market, I’m tired of getting fleeced.

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