The Sinful Pleasures of Day Trading

Just as teenagers are going to find out about sex, adults are going to find out about day trading.

Say this for the kids, at least they're using condoms.

It's the thrill-seeking grownups we need to worry about. Many were once content to hope they would someday sell their screenplays to Hollywood, or patent some fabulously clever kitchen device.

Now they dream of rolling out of bed at 9, settling down in front of the computer in slippers and sweats, and deftly siphoning five grand from the yen, soybean or Nasdaq markets before lunch.

What a life! For some, of course, it's no dream. There are at-home traders who make that kind of money on average every day.

But not many. And for every winner there are far more losers who will profoundly regret the day they gave up their boring jobs, rotten wages and two-hour commutes for a shot at easy street.

I've known both kinds, since the daily newsletter I publish is geared to traders of stocks, commodities and options.

One of them, a guy I'll call Ken who took up the game just six months ago, wrote to tell me he's up $173,000 so far. He just put $60,000 of into a new kitchen.

That's not bad for someone who was driving a cab when he arrived in San Francisco and who more recently was selling real estate.

I wish I could say it was my advice that changed his life, but I'm just one of a half-dozen advisors that he follows. In fact, he's outperformed me by far in recent months and could probably teach all of us gurus a thing or two.

It's not beginner's luck, either, but a potent combination of brains and diligence that has made Ken a successful trader in the space of a few months.

Never have I known anyone more committed to profitability. During the short time he has been involved in the market, he evidently has read and absorbed the contents of a small library of books on trading, incorporating their most valuable ideas into his daily regimen.

He also has mastered the vast resources available to traders on the Internet and could probably tell you exactly how many seconds it takes to place a trade using any online broker.

Ken has never been tested by a bear market, though, and that is why his unflinching confidence is as yet fragile and immature. "I can't see how investing in some of the most successful companies in the orld could be risky over the long term," he says.

Historically speaking, he's right, of course, but it remains to be seen whether his deep faith in history will abide the stock market's next grizzly inquisition. But as long as share averages keep rising, naiveté will surely be his magic charm.

Lest Ken's success tempt too many of you from the warmth of the corporate womb, here are some cautionary thoughts of my own that have evolved over the 35 years I have been a student of the stock market, a trader and an options market-maker.

• In the zero-sum game of day trading, patsies do not long survive. The competition eats nails for breakfast, flies to Vegas at least twice a year to play poker or gin rummy, and knows the point spread for each and every NFL game.
   
• Forget about paper-trading, because it'll be the easiest million you've ever make. Put up real money, trade small, then try to figure out as fast as you can how those gin rummy hustlers have contrived to take a piece of your stake every day.
   
• Pick a trading system, any trading system, and learn everything you can about it. Some say they don't work, but the fact is they all work to the extent they enable us to methodically observe and record in revelatory detail the behavior of stocks, futures, indexes and commodities.
   
• If you discern a pattern that can make you money, exploit it while it lasts. The supply of simple but effective tricks is constantly mutating and therefore inexhaustible.
   
• Before you start trading electronically on the Internet, use a human broker, who can catch the mistakes you are certain to make as a novice. And if the broker should make you money, stick with him or her until one of you dies, and the hell with the Internet.
   
• Tune out the boasts of at-home traders who claim they made $40,000 last week, because either they are lying or they lost $50,000 the week before.
   
• Shun the strip-mall tickertape parlors that are proliferating like kudzu to accommodate growing hoards of rookie traders. Most are after your commission income and will encourage you to overtrade.
   
• Have an escape plan for that day when brokers are too shell-shocked by market history in the making to pick up their phones. That day is surely coming, and you don't want to be groping blindly for an exit when it does.