Day Trading Wizards? Or Just Newton's First Law

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 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 now are.

“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 mosh pit.”

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 missed opportunity?”

“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.