? 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.
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