Saturday, March 14, 2009

Day Traders are Misunderstood

Day traders are highly misunderstood, and have a bad reputation as being gamblers or fools (or both!) due to the high popularity of this niche field in the late '90s tech boom (and bust) where most day traders who originally were making a killing were wiped out as market conditions changed and they failed to change their trading strategies. My goal with this blog is to demonstrate that through technical analysis (analysis of market geometry, supply/demand, time and human psychology), risk/money management and discipline it is possible to generate consistent profits in any market conditions and that market movements are somewhat predictable rather than being "random" or completely unpredictable as many (most?) people believe (including certain Nobel Prize winning economists).

The growing popularity of retail electronic trading (more participants), electronic exchanges, regulation and trading technology has leveled the playing field for those of us who "screen trade" at home. Due to higher market volatility and whipsaw in recent times, day trading is actually a more lucrative method of generating income lately than the long term investment strategies held by conventional wisdom to be where smart people invest their money. Although the tech crash and changing market conditions of the late 90's wiped out many day traders, it also wiped out the vast majority of other participants. Day traders are uniquely suited to adapt to changing market conditions and keep a leg up on less nimble longer term investors because we do not hold positions overnight. Recently, it has been acknowledged on financial news networks that market conditions are such that only day traders are making money in these volatile whippy markets. A small bright spot in the public perception of day traders (or traders in general) is that technical analysis techniques which we day traders rely upon to earn our daily bread seems to be gaining wider exposure to the public and acceptance in its validity. Shows like Fast Money and Jim Cramer's Mad Money on the CNBC financial network are highly popular shows and spotlight technical analysis segments at least occassionally. Although Cramer derides technical analysis on a frequent basis he grudgingly seems to acknowledge its importance/relevance sometimes. So at least people who follow these types of shows and have some sort of enthusiasm for stocks and financial markets are more open minded to the fact that price movements are not completely random/chaotic in nature and can be anticipated/projected to a certain point.

Admittedly if you want to be a day trader the learning curve is steep (plan on taking several years to learn at least, as if you are going back to college to get a degree in an unrelated field) and the vast majority of people give up on being traders in general. I have heard anecdotal evidence that it is a 80 percent dropout rate for people who attempt trading as a living. These people of course return to their day jobs and previous mundane existence, which is perfectly understandable as I felt like quitting several times myself. I believe strongly that I have no natural genetic aptitude for trading and that day trading is a skill that can be taught and learned by anyone who has the determination to succeed at it. Follow my blog if you are in the camp that feels it can not be done or even if you are just curious. I will try to diligently post my trading results and analysis on a daily basis for a year or more's time.

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