Stock Trading on the internet has shattered the exclusivity that day traders once enjoyed. Before the internet, it was only available to those with a lot of money or institutional traders. Now with the proliferation of the internet and super computer power, the volume of trading happening each day has exploded. This in turn has created a rather volatile environment for investing. Out of this volatility has creeped the concept of a ‘Day Trader’.
What are the Risks of Day Trading?
Day traders are focused on patterns and could care less about the long-term fundamentals of a company. Traders generally seek to be out of all their positions when the market closes as too much happens in overseas markets to predict the following days trend and can squeeze a trader substantially. Many traders look to make a profit within seconds or minutes and sometimes hours. Oftentimes, they trade with borrowed money. This creates an enormous risk as the luck of the trader can turn instantly and crush the account of the borrower within minutes. Day traders should never risk money that is necessary for day-to-day living such as car expenses, food, utilities, and mortgage payments. Day trading can easily be compared to gambling! It is not even close to value investing.
Day traders basically sit in front of a computer monitor and watch for trends where they feel they can make a quick buck relying on the old trader adage, ‘The Trend is Your Friend.’ It can be very difficult to sit and watch numerous screens, tickers, charts, and news items waiting to spot a trend. Many new day traders should not even have started trading and would be better off placing thier money in an ETF than to try to jump in and out of stocks. With Fidelity’s introduction of commission-free iShares ETF’s, this becomes a great way to build a nest egg.
Day Trader Beware
If you decide to purchase an expensive trading system, make sure you request how many people have actually made money and how many people have lost money. If the company is not aware, then they do not care about you. They just want your money. If there system worked so well, why are they working for the company and not trading at home according to their system bankrolling profits? Make sure you confirm their registration with your state securities regulator. You can find out your state regulator from North American Securities Administrators Association at (202) 737-0900.
Jim Cramer, Mad Money Show Host – Impossible to Follow for the Average Person
So, you’ve seen Mad Money on CNBC. Jim Cramer’s job is to ‘not just to entertain, but to educate’. He offers a service which he touts nightly for several hundred dollars. This service is called ‘Action Alerts Plus’. It’s very interesting to see how he trades. He purchases in small increments especially on down days and likes to take profits into strength while redeploying cash into value stocks on pullbacks. He appears to stay slightly ahead of the averages with his $2 million dollar plus portfolio.
However, it is extremely difficult to follow for the average investor with $100,000 or less. The number of trades he makes are astronomically difficult to follow for this size of a portfolio. This is due to the amount of commissions you’ll pay are much higher on your account than on his. Therefore, you will still lag the index and even lag Jim’s trading. So, take your money and place it into a low-cost ETF from a no-commission brokerage and you will probably come out ahead. Not to mention you’ll sleep much better and won’t have to spend 5 hours a week watching his show!