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Is day trading a crap shoot?
Michael Abramowitz
Some say it is, and regulators are worried
about advertised promises of "unlimited profit potential."
Day trading, the buying and selling of a particular
stock within a day's time, certainly is risky. Even day traders
admit that their method of playing the stock market isn't for everyone.
But is day trading gambling? Is it just a different
form of an online casino, or can people seriously earn millions
overnight?
MADD = Mothers Against Drunk Day (Traders)
"Day traders are the drunk drivers of the Internet,"
argues Richard Babson, chairman and president of Babson United Investment
Advisers in Watertown, Mass. "Too often, you hear stories about
day traders [behaving like gambling addicts]. Their palms get sweaty.
There's an adrenaline rush."
Babson compares day trading to a child's game, almost
a survival of the fittest. "It's Pokémon for adults. It's
like using a credit card advance at the roulette tables."
Government statistics released by the North American
Securities Administrators Association show that 70 percent of day
traders lose money. Three experts we interviewed say the number
of people losing money is actually higher.
"The fact is day trading isn't investing, it's gambling,"
remarked Peter Hildreth, president of the NASAA in an August 1999
speech to the National Press Club in Washington, D.C.
Flushing money down the toilet
Hildreth led a committee that investigated day trading,
especially looking at promises made to potential clients and risky
practices including day traders loaning each other money to make
stock trades.
The report also criticized day trading firms for advertisements
claiming "unlimited profit potential." The NASAA along with the
Securities and Exchange Commission made specific recommendations
in the report to curtail these activities.
Chris Lorenzen, a day trader for LaSalle Street Trading
in Chicago, doesn't see day trading to that extreme. But he admits
that people entering the field need to have realistic expectations.
"I hope people don't think that anyone can come in
and make a million dollars. That's when they get into trouble,"
he says. "It's a long learning process [to day trade]."
It took more than a year of losses and time spent
learning the tricks of the day trade before Lorenzen got over the
learning curve. He says people have to accept that they will likely
lose money for at least a year.
"There are some segments of day trading ... that have
tried to convince potential investors that technological advances
guarantee success and instant wealth," says Matthew J. Nestor, director
of the Massachusetts Securities Division in Boston and a contributor
to the government study. "Investors must understand that day trading
is a highly speculative activity."
Quasi day trading
Jay Patel, president and CEO of Tradeology.com, a
day trading firm in Boca Raton, Fla., admits that the brokerages
involved have not done a good job of educating the public about
the risks involved.
"There is unlimited earning ability, but the fact
[is that only a few people] can do that," Patel says. "There's money
to be made for the elite trader."
He says his firm has moved away from pure day trading
to a style of "active trading" and "position trading." This lets
the trader hold a stock longer than a day and lessens the risk.
He claims this means his firm retains more clients than traditional
day trading companies.
"I'd say very few people ought to [day trade]," advises
James Janke, assistant professor for finance at Washington College
in Chestertown, Md. "You have to be sure you're using only money
that you can afford to lose."
Janke adds that there are two risks with day trading.
One is price swings in the stock. The other is large fees paid by
the day trader for training seminars (an example we found cost $1,950
for a five-day course) and commissions ranging from $20 to $30 on
each trade. He emphasizes that day trading firms make money on every
trade, regardless of whether the stock is sold at a profit or a
loss.
Patel agrees with the criticism that day trading firms
make money -- win, lose or draw. He argues that the risks are lower
by moving to somewhat less-aggressive styles of trading with active
trading and position trading.
But these styles of investing are still short-term,
and the risk factor still exists.
Unqualified people
Patel says that the infusion of unqualified people
into day trading has caused the number of failures to increase.
When he started five years ago, the number of day traders was small
and a higher percentage of them were successful.
Janke agrees with Patel's assessment. "Perhaps because
there was so much made of the people who made a lot of money ...
it attracted a lot of people who shouldn't be there. It might have
been only the best that did it."
For most individuals, long-term investing is best,
Patel says. "Many people don't have the knowledge to time the market.
If you don't have the knowledge to learn the entry and exit points,
then by all means buy and hold -- long-term invest."
And leave day trading to only those who are drunk
with both money and risk.
-- Posted: Oct. 26, 1999
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