Most day traders haven't a clue what they're doing, even if they're making money. So says investment consultant Ronald Johnson of Palm Harbor, Fla.

Johnson studied a random sample of trading records in a Watertown, Mass. branch office of All-Tech Investment. The study was done for the Massachusetts Securities Division, a state law enforcement agency. All-Tech, with 25 offices nationwide, was one of the earliest public day-trading firms.

Johnson was appalled by what he found. Most of the traders were not only losing money by his calculations, they were likely to lose every dime they put up, due to the way they were handling their accounts. Their best hope was to quit before they zeroed out.

Massachusetts closed that office last year, for violations of securities laws. All-Tech settled the case with no admissions, but agreed to stay out of the state for two years and replace certain customer funds.

All-Tech's president, Harvey Houtkin, blames the problems on a single bad manager. He dismisses Johnson's study as "a piece of trash, inaccurate."

Johnson believes that, as other studies of day trading are done, his own results will turn out to be typical.

Day trading is the ultimate test of market timing. Career speculators (both experienced traders and wannabes) watch their computer screens all day, following a small number of stocks. They nip in and out of the market, in hopes of nailing small, quick gains.

Some hold positions for a few hours at most. Others hold for a few days.

Johnson picked 30 accounts at random. He looked at how often the customers traded, what they paid in expenses, and their net results. (Two of the customers had multiple accounts. For part of his analysis, Johnson used one account per customer, or 26 in all.) Here's what he found:

? Trading costs were high. The average account paid 56 percent of its value annually, in fees, commissions and margin interest (that's interest on money you borrow to increase the size of your account).

Put another way, customers needed to make 56 percent on their money, every year, just to break even. Did those traders even know?

? Of the 26 customers indulging in short-term transactions, 18 lost money. That's 70 percent. Even worse, their trading methods were likely to lead to a total loss.

A typical mistake, Johnson says, was putting too large a fraction of their capital into a single trade. Given their won-loss records, the size of their bets would eventually wipe them out. Professional traders rarely risk more than 3 percent of their capital on a single throw, he says.

? The remaining eight accounts were profitable. But only three of them seemed likely to succeed, long-term. The other five were in the black only because of good results on a single trade.

Due to poor trading skills, Johnson says, these five were likely to go bust, too. As a rule of thumb, no more than 25 percent of the profits in your account should come from your largest, successful trade.

To find out which path you're on, you need to test your trading methods against a "Risk of Ruin" table, available in technical books for futures traders. If your day-trading trainer didn't explain this table to you, you didn't get good, professional help.

? Of 17 accounts with a significant number of one-day trades, only one was successful. Five were marginally profitable, thanks to a single trade. The rest were losers.

Fifteen of these customers ran a significant risk of losing all their money, Johnson says.

Bad results are not what new traders expect. The firms make you think that, after a training course and an apprenticeship, you have a superior chance of winning big. But there's no independent data to support that claim.

The National Association of Securities Dealers has proposed that new day traders meet a suitability threshold. The firms would have to determine that it was "appropriate" for a customer to speculate this way.

I asked Johnson who might be suitable. We were on the phone, but I could almost hear him scratch his head. "Well," he said, "if your house is paid for, you have a lot of other investments, you don't put more than 10 percent of your liquid net worth at risk, and don't mind losing it..."

We both had a hard time imagining that person. Johnson's conclusion seems pretty clear: "The average public investor should refrain from short-term trading." Period.

New suitability rules

Who is fiscally and temperamentally fit to day-trade stocks?

It wasn't Mark Barton, who lost more than $500,000, much of it borrowed. When he couldn't face what he'd done, he killed his family, nine other traders and finally, himself, in Atlanta.

Barton opened two trading accounts by putting up cash and declaring a comfortable net worth. It appeared that he could afford the risks he took. As it turned out, he was speculating far beyond his means.

The National Association of Securities Dealers has proposed a first-ever customer suitability rule. Before opening your account, firms would have to determine that day trading was an "appropriate" strategy for you. Each firm would decide for itself what "appropriate" meant.

Among other things, the rule would cover income, net worth, financial objectives and prior investment experience.

The NASD also wants better risk disclosure. For example, it wants firms to tell customers that they shouldn't day trade with the following: "retirement savings, student loans, second mortgages, emergency funds, funds set aside for purposes such as education or home ownership, or funds required for current income to meet your living expenses."

That would eliminate a lot of customers.

Here's another proposed disclosure that you should pay attention to: Be "cautious of claims of large profits from day trading," and "wary of advertisements or other statements that emphasize the potential for large profits in day trading."

Before the new rule can take effect, the NASD has to send it to the Securities and Exchange Commission, which will put it out for public comment. That process takes several months, at least.

The Electronic Traders Association represents more than 40 day-trading firms. Its president, James Lee, declined to be interviewed. (Lee also heads Houston-based Momentum Securities, whose Atlanta office was shot up by Barton.)

In the past, Lee has said the firms already have adequate suitability standards. David Shellenberger of the Massachusetts Securities Division disagrees. He thinks some firms routinely recruit unsuitable customers for example, people with small incomes and net worth.

In early August, the North American Securities Administrators Association released a blistering report on day-trading firms, claiming deceptive marketing and possible violation of the securities laws. NASAA, the NASD and SEC have already brought 12 actions in four states, with more on the way.

Correction: In a recent column about financial privacy, I misstated the charges brought against U.S. Bancorp by the state of Minnesota. The bank was charged with selling customers' private, confidential information to a telemarketer; failing to advise customers of the extent and types of information they provided to telemarketers; and approving the use of false, deceptive and misleading marketing scripts. The state did not charge that some customers had their bank accounts and credit cards debited, without giving permission. As reported, U.S. Bancorp settled the case without admitting wrongdoing.

Syndicated columnist Jane Bryant Quinn can be reached in care of the Washington Post Writers Group, 1150 15th St., Washington D.C. 20071-9200.

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