Never have three words been so well-advised, especially when you put the first in italics: learn to day trade. Because if you dive in without having done your homework, somebody out there will eat your account balance for lunch.
And if that sounds like day trading is an us-versus-them proposition, a competition, that’s precisely what it is. Because for every purchase you make there’s a seller, and for every sale you make there’s a buyer. Not only do those guys believe they know more than you do, chances are they have done their homework, too.
The New Era of Day Trading
The hey-day of day trading in the late 1990s is long gone. Pretty much everyone lost their hat, not so much to smarter investors than to greed, ignorance and the context of crashing market. Knowing when you get out, even knowing when to go short, is essential in day trading, and with five years of easy money warping the collective minds of day traders who had little or no experience, the greed factor was at an all-time high.
Not only did investors take a bath, but brokerage houses with extended margin lines took a hit, too. In order to prevent a recurrence of this fiasco, the federal suits did two things to slow and monitor the day trading arena.
New Quotes, New Spreads
First, they changed stock quotes for percentages to absolutely dollars and cents. What once was quoted at 7 3/8ths is now quoted at 7.38, or 7.37. And that’s the point here – there are now one-cent increments to deal with. Spreads used to be a minimum of 1/16th, or 6.25 cents, enough for a trader leveraging a little volume to actually make money on a wash trade (buy at the bid, sell at the ask).
But now, with a one cent spread, that’s virtually impossible, and not a remotely attractive proposition given the risk. The effect was to slow the day traders down, and it worked. Now a stock needs to actually move in either direction and by a factor a five to 10 cents or more, before it’ll get a day trader’s attention.
Under Penalty of Law
The other thing that has changed is the regulatory landscape. Day traders who trade frequently – at least four trades in a single day over a five day period – are called “pattern day traders,” and are subject to tougher margin limits and trading thresholds.
No longer can someone sit in their kitchen on a laptop and fritter away the family fortune. Because now, thanks to these new rules, you must maintain a $25,000 equity balance in a margin account, for which you must first qualify with the broker. And if you don’t, your account is frozen until the balance is restored, in addition to a five day waiting period.
Learning to day trade is easy. There are online classes, books and even live workshops everywhere. It’s advisable to actually practice day trading using dummy accounts until one understands the pace, mechanics and vocabulary.
But rest assured, when there’s real money on the line, your judgment will be challenged. Because if there’s one thing that hasn’t changed since the late 90s, it’s the role of fear, ignorance and greed in the outcome of a trader’s day.
