A Hedgehog Commentary

The Day Trader's Prayer

10/9/97 - Dear Lord, if you get me out of this mess, I promise that I will never, ever try to be a day trader again. Amen.

Every few weeks I am bitten by the urge to try and do a day trade. I bought Silicon Grapics on an earnings surprise, ditto Staples. I bought ITT when Hilton raised its takeover offer for the hotel chain. I bought Ethan Allen because they announced a split and an earnings surprise. I bought Texas Instruments because the price had just dropped for no reason. I bought Just For Feet because the CEO was scheduled to appear on CNBC.

It never worked of course. Not because my reasons were poor. While buying because a CEO appears on CNBC may seem flimsy, that's how the day trading game works. When some good news comes out, you try to buy in before everyone else, then you try to get out again before the inevitable sell off happens. Track the price of a volatile stock that has just had some good news over the course of the day. The graph will bounce like a ping pong ball as the day traders move in and out. Unfortunately, for the day trader to make money somebody has to play the greater fool.

In the end, because the market was strong and I'm cautious enough to only try this on companies that were pretty good buys anyway, I made money on every one of the above stocks, except for ITT where I got out too early and Just For Feet where I'm still waiting. In all but one case, I had to hold on to what I'd bought for a week to a month, hence the prayers. Only with Texas Instruments did I make money after a day or two, but as it turns out, I would have done a lot better to have held the stock another month or so.

Why wasn't I more successful? Partly, it comes down to speed and access. By the time I get the news and can enter my order, the charge is already on. I don't have real time quotes, so I'm not getting the latest prices and I get my news feed periodically off the internet. The successful trader is going to have all this info constantly and quickly updated. They'll have a rapid connection for buying and selling. Most importantly, they'll be glued to their screens. I, like most of you, have a real job. I can't keep track of the stocks and I only have time to get a periodic update.

If you want to be a day trader you'll need all of the above and more. I've heard that Datek gives real time quotes and fast trades. Maybe, but you might want to hook up directly with S&P for a complete quote package and get a direct news service feed. You'll probably want an ISDN line for a quick, stable connection. Get on Instinet as well. This service lets you make trades at night. Lately, I've noticed that stocks that have announced earnings disappointments in the evening, after the market closes, have been lower on Instinet at night, then what they end up at when the market opens. This represents a buying opportunity.

If you want to be a day trader, you'll have to get a real feel for what moves the market and specific stocks. Believe it or not, stock splits and CEO appearances on CNBC have been kicking stock prices up. Even with all this, I wouldn't bet on success. But if you have contacts in hot companies and are friends with some analysts, day trading could be a virtual license to print money.

The Hedgehog is a guide for the aggressive investor, but we don't really recommend day trading. I read a lot of claims on the newsgroups from people claiming to be successful day traders. Well, maybe the newsgroups are just full of investment wizs, but for every successful day trader there have to be a lot of greater fools making it all possible.