Nov

10

Trading DeskLike the Jedi, the Day Traders have returned. Having all but become extinct in the low vol OIF [Operation Iraqi Freedom] bull market, the surviving Day Traders now enjoy multiple 2% intraday swings, 1% gaps and 2% per hour moves. Its like the good old days at the turn of the twentieth century when even beginner traders could follow intraday momentum and make bank. There's a definite shift in the market ecosystem favoring the fast movers. You really haven't heard much day trader talk at cocktail parties either. No one really seems to want to talk stocks anymore. That's a good sign.

The theory of evolution and theories of geological and climactic change seem to model slow moving change. But the reality is that evolution and climactic changes occur much more rapidly and with more abruptness than might seem due to the correlation effect in complex systems. When many inter-related nodes, previously uncorrelated, become correlated, whether due to stress or merely, as Alston Mabry pointed out, due to increased variance, there can be a massive and rapid shift in the system which would not be expected under a linear model. Evolution sees large regimes of mass extinction. Climate changes, ice ages, occur much more rapidly than thought.

The same might be true in financial markets. The assumption of continuity of prices itself is breaking down with the large regular gaps. The increased variance increases correlation, as pointed out in the discussions of currencies, equities, bonds, and global economics in an as yet to be quantified manner. Prior data histories provide limited guidance with numbers crossing into new territories. Rather than seeing separate exchanges and markets in different countries might the new paradigm be one big global interrelated market? What new relationships might be uncovered there? So much data, so little time.

James Lackey writes:

Before daytraders come here and start telling us that all we need to do is buy the Nazz limit-down or wait for 2pm every day to buy, let me remind you we had this bashing in 2001. I was disassembled in 9 months. It took meeting Vic and Laurel over a year later to get me profitable. For this I am grateful.

I would like to point out that there are daytraders reading this site. There are guys who have profited all these years. These men are one in a million. To have the temperament, the financial backing and years of not profiting to learn how to trade this way is too much for the others to learn. Two nights this week I was up at 1am and traded all day.. 

Ken Smith adds:

During the daytrading mania, reporters from the television show 60 Minutes interviewed daytraders, and to show contrast and to demonstrate how little guys get smoked, interviewed the head trader at a major firm, I think it was Goldman. The head trader sat down at his screen saying "If you stay at your screen you will lose" and promptly put in a large order to buy on a stock headed down. Immediately ten thousand daytraders had to cover their shorts. He then sold his inventory as daytraders climbed aboard. The next trade he made jerked thousands of daytraders around to sell what they had just bought.The Big Players can place a billion dollar order, a 5-billion dollar order. Daytraders were playing around with their parents' mortgage money — and lost it.

Guys like Lackey used to make 200 trades a day, taking quarter points, even less. That's a lot of work and one mistake wipes out the profits from 200 wins — sometimes. Trader has to begin life all over.

Traders with a niche, Vic and Laurel for instance, are not trading by the minute, I suspect. On the other hand, traders can mix up their activity according to the analyisis of 24 symbols on their screen. I really can't say much on this — nothing worked for me for very long, in the short term bull ring.

Bo Keely worked in the Vic and Laurel trading room off and on, whenever they could get him out of the closet he lived in under the stairs at the mansion. Keely told me once, "Money is made slowly, lost fast."

Kim Zussman recently pointed out a similar strategy. Bought on August 16 and held — didn't say when he made his exit, but I have confidence it was a profitable one. Buy and hold, that's the ticket. The secret of that trade is not the buying, it is how long to hold. Not to buy and hold forever, but to hold, like you hold an amorous relationship until it wears thin. 


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