Tempted by day trading? Eager to dump your deadly day job and spend your time jousting with stocks on a computer screen?
Listen first to James Lee, head of the Electronic Traders Association and president of Momentum Securities, a day-trading firm in Houston. "In your first six months," he says, "you will lose anywhere from $10,000 to $100,000 or more."
Lee is upbeat about your odds of making money, if you last long enough to learn the trade. But would you still be standing after that large a loss? Do you even understand what, exactly, day trading is?
I'll start by telling you what it's not. You are not a day trader if you join a Web chat group whose members deliberately pile into a cheap stock, to drive up its price. Here, you're perilously close to becoming an illegal market manipulator.
Nor are you a true day trader if you open an online account with a discount brokerage firm and make short-term trades in Internet stocks on your lunch hour. You're a part-time speculator, who is getting a feel for what career day trading might be like.
Trading can be expensive through discount brokerage firms. The commissions are OK, if they're $15 or less per trade. But you generally don't get the best price possible on executions, meaning the price at which your shares are bought or sold.
Day traders buy and sell rapidly, holding shares a few minutes, maybe a few hours, rarely longer than a day. They usually take profits in tiny amounts say, $25 per trade, after commissions. If they don't get the very best price for the stock when they buy or sell, a profit can quickly turn into a loss.
With discount brokers, you don't necessarily get the best price. The brokers forward your order to a wholesaler (a "market maker") for execution. The wholesaler pays the broker for sending a steady flow of orders. The payment to the broker gets tucked into the price you pay per share.
When orders pile up for a particular stock, the market maker will increase its price. Your order might be filled at a much higher price than you intended to pay.
True day traders don't go through wholesalers. Their buy-and-sell orders go directly to the market (or to private trading networks), where they can specify their price. They trade full-time, through complex computer systems at specialized day-trading firms.
For reprint and licensing requests for this article, CLICK HERE.