One of the most amusing side effects of the recent non-stop, free-liquidity, forced-covering rally, is a deja vu flash back to a decade ago: a surge in day traders. The New York Times presents a romantic look at this rare breed of traders which emerges every time the market is in melt-up mode, be it in the dot.com days, during the credit bubble, or now. And, just like so many times before, as soon as the market peaks, and subsequently crashes, these various "traders" evaporate, and the assorted business models associated with catering to the day trading clientele, be it heatmapping services by every discount broker, or assorted Twitter services, go the way of the dodo. Until the next bubble re-emerges. As for the fabled secrets behind day trading technique, the NYT is laconic: nothing more than Newton's First Law of Motion. Alas, this is recipe for unmitigated disaster, when one considers that day traders are at the bottom of the information and transaction latency pyramid. And when one factors in transaction costs (sorry day traders, soft dollars work for hedge funds when the trading is with other people's money; in your case money talks and BS walks). Of course, in the meantime, this strategy, just like any other concoction to suit the times, could very well be profitable. Until it isn't. Then again, profitability instills a false sense of security. and the conviction that one will pull the plug on winning trades ahead of everyone else. Good luck.
While the full NYT article deserves the once over, here is the most amusing part:
“A common phrase in this business,” says Mr. Lindloff, “is ‘the trend is your friend.’”
The more you listen, the more you realize that for all the high-tech
gadgetry behind Today Trader, at its core is a Newtonian principle
formulated more than 300 years ago: a body in motion tends to stay in motion.
The problem is that stocks aren’t bodies and their motion is subject to
forces Newton could never have fathomed. Some of those forces are hard
for the Today Trader duo to fathom, too. Mr. Gomez says that day
trading has become far trickier in recent years because of the rise of
robo trading — the use of computers to automatically buy and sell huge
numbers of shares in superfast bursts, based on algorithms.
Big, muscular Wall Street veterans like Goldman Sachs
have the money, smarts and brute power to dominate this computerized
battle, and many day traders may not even be aware how outgunned they
“It’s not something we fully understand, but algorithms don’t have
emotions,” says Mr. Gomez. “It’s like these machines can smell a human.
They can smell the fear of a discretionary trader. Stocks will still go
from Point A to Point B. But what used to be a waltz is now more like
Daily hand-to-hand combat with a bunch of robots? It seems kind of
crazy. But is it any crazier than leaving your money in the same place
where it languished for the last decade?
This is a not a simple question.
The NYT article's conclusion is symptomatic of the problems facing the entire current generation of daytraders:
Mr. Gomez trades his own accounts but spends much of his time answering
questions posted in the chat room. One is from a subscriber, Rick, who
asks, “What do you guys do to stop kicking yourself (emotionally) about
“The only thing you can control is your attitude,” Mr. Gomez replies
into his microphone, moments after the question is posted. “Not looking
back, not kicking yourself for not catching the whole move. You’re
never going to be perfect. Nobody is going to be perfect.”
Not even Today Trader. By the end of the day, Mr. Lindloff has traded
60,000 shares and is up $165. It would be a satisfying return, but
commissions on those trades cost $300.
In the meantime, the big boys keep reaping the rewards of the gambling mania that has spread among the trading community as it pursues guaranteed riches before the Schwab screen.