»● Day Traders Take a Fast and Costly Route

by Stanley W. Angrist, The Wall Street Journal

Every day is not a payday for most traders. Day traders are investors who open and close market positions within the same trading day. They hope their market insights, trading skills and speed of action will allow them to take some profits home each day. In reality, most day traders find that what looks easy on paper is hard to do in the market.

Consider Jeffrey Needleman, a wholesale stamp dealer from Ann Arbor, Mich., who has been investing for 25 years, most of that as a day trader. He says that during the past 10 years he has run a $10,000 account into more than $100,000 in a few months 7 or 8 times but always manages to collapse it back to below its starting value in a few weeks.

When you have 30 or 40 winning trades in a row you begin to believe you are onto something and so you start to overtrade and the market takes it all back, explains Mr. Needleman.

Most market professionals shun day trading, arguing that the costs of getting in and out of trades that usually produce only small profits and some inevitable losses will eventually deplete the equity in the accounts of all but the most skilled.

But traders like Mr. Needleman don't much care about expert opinion. He says he is neither a high liver nor consumed with a desire to have great wealth. What he likes, he says, are the big video game aspects of day trading. When brokerage firms ask what his goals are, his stock response is that I just want to have a wonderful time losing my equity.

Other investors explain their affection for day trading in more expected ways. Kent Taylor, an Austin, Texas, investor who traded stock options before he began day trading futures full time in August 1992, says, I like to go to sleep at night and not worry about the market 'gaping open' against me. An opening gap is when market prices begin the day at a substantially higher or lower level than the previous day's close.

Two things determine whether an investment is attractive to day traders. One is liquidity, or the volume of trading. The other is volatility, or the size of price moves. When the volume of trading is heavy the bid-ask spread for an investment is small, meaning day traders can profit on small price moves.

The second requirement, volatility, means the investments must move enough during the day so that the traders will be able to overcome their costs and still be left with a profit.

More than any other individual investors, day traders see their activity as a business. They believe that if they do their homework they will spot a significant move in the market before the rest of the trading world, capture a part of that move, and then exit with a profit.

Anthony Eck, 39 years old, who trades out of his home in Austin, says that getting out quickly is an absolute necessity. So is a strict control system that limits both profits and losses. Trading mostly currency contracts, he will risk no more than $125 a contract. His average loss generally is no more than $50 and his average profit is a minuscule $62 per contract. While many traders would scoff at such numbers, Mr. Eck says that 71% of his trades have been profitable since he started trading about a year ago, making his trading profitable overall.

Tom Meadows, who has been day trading full time only since March, hopes he can make a living doing it, but so far his losses exceed his profits. Mr. Meadows, 50, a former software manager in Austin, says day trading is appealing to him because I like the idea of having my finger on the pulse of the American economy.

Day trading requires constant attention. In addition to the frequently changing bid-ask spread, day traders also must cope with the time differential required for brokers to fill their orders. It's a business where seconds count.

Mr. Taylor, who trades mostly currency and the S&P stock futures, says he places his orders by phoning clerks stationed in booths along the periphery of the trading pit. He says the clerks can execute an order and report the price to him in less than a minute from the time he picks up the phone to place his order.

Although all day traders claim they kiss the losers good-bye fast, the general lack of success for most suggest they might be a bit slow on the exit.

David Morse, trades from his home in Atlantic City, N.J., says he has been far more successful at the blackjack tables, which he visits after the markets close, than he has been in day trading. After 10 years of trading, I would give a pint of blood to be able to trade successfully, he laments.