The reason I’m writing about day trading, although it contradicts the basics of what we’ve been covering so far, is to give the reader an idea about something that’s out there. An investment instrument that has been around for quite some time. It sheds more clarity on the original topic when you talk about its opposite.
So what is day trading?
A day-trader, as the name implies, starts and finishes his or her trades within one market day. An NYSE market day, for example, starts with the market bell at 9:30 AM EST, and closes at 4:00 PM EST.
A day-trader relies on the minor changes in stock prices throughout the trading day. In other words, he/she rides the fluctuation waves of share prices.
Let’s take an example. Suppose the day-trader got information that RIM is going to fluctuate a lot today. The expected scope of fluctuation is $2. So RIM’s share price will hover, say around 58-60 (remember, this is still a pure speculation, the price might take a different course altogether).
If the trader wants to ride the wave downward, he/she speculates that the price will go down from the time he/she buys the share. If the trader wants to ride the wave upward, he/she speculates that the price will go up from the time he/she buys the share.
Let’s, for the sake of explanation, say that RIM’s share price was 58.5 at 10:00 AM. The trader “expects” the price to go up, so he/she buys a 1000 shares based on that expectation. If the stock makes it up, and reaches, say, 58.7, the trader can sell the 1000 shares and make $200 profit. If, on the other hand, Mr. Market was in a bad mood that day, and wanted to punish RIM for some reason, and slams the price down to 56.87, oops, the day-trader has just lost $1,630 in less than an hour! Of course if he/she was nervous enough to sell.
Here comes the difference between a day-trader, and a value trader. For the latter, that drop in price is only a reflection of Mr. Market’s mood changes, and it means nothing next year, or even next month. The fundamentals upon which the value trader had made the decision to buy RIM (if he did) should still hold.
In conclusion: Even if a day-trader beats the market in a few trades, most of the time, at the end of the trading day, the house wins. This kind of business takes patience, discipline and a long-range view. Fighting Mr. Market on a daily basis, expecting big profits by riding price waves, reflects a micro-view, and ends in a lot of wounds..
I should also mention that day-trading is not restricted to the stock market. It could be done in a variety of markets like energy, metals, commodities, etc. Usually it’s referred to as future trading.
Till the next article, never lose money 🙂