Trading Stocks Online

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This article was published by ComputorEdge, issue #2150, 2003-12-12, as a feature article, in both their print edition (on pages 24-25) and their website.

In the 1990s, online brokers made it easier for new customers to begin trading in the equity and commodity markets. These brokers offered discount commissions, easy Web access to one's account, current market prices, charting tools, and research. Before long, the media began reporting stories of people abandoning their salaried jobs to pursue the alluring rewards of a new profession, "day trading". During the most frothy period of the remarkable U.S. bull market, this trend of inexperienced traders rushing into the market turned into a true "bubble". For all the breathless tales of dramatic capital gains from trading high tech stocks, there were just as many sad accounts of amateur traders losing everything they had in the markets. Like all bubbles, the trading mania eventually burst, at about the same time that the U.S. stock market did the same.

Meanwhile, professional traders continued doing what they had done for decades before the invention of the Internet: coolly studying the markets, searching for trends in patterns, honing their skills, testing their strategies, and executing their plans with the care and discipline required of any serious profession. Computers, real-time prices, and news feeds via the Internet, simply made their jobs less tedious, and allowed for more sophisticated trading strategies, more thorough research, and faster trade execution.

Getting Started

Many people outside the securities industry have a desire to learning about professional trading. Some may want to develop a new career entirely, while others may be interested in trading part-time, to add to their existing income streams. Regardless of how deeply you want to dive into the world of trading, there is a great deal that can be learned from those who have gone before you. There are countless books, magazines, seminars, and of course websites devoted to this fascinating field. We will briefly discuss some proven advice that any newcomer to the game would be wise to consider.

But first consider the various attractions of home-based trading as a profession: truly being your own boss, reducing your "commute" to a few yards, possibly making more money than from your old salary, and engaging in an exciting activity that you may love. Just imagine a well-paying profession without the supervisors, meetings, suits, cubicles, and rush-hour commutes. Yet there are also potential downsides to trading: no more steady paycheck or benefits package from an employer, possibly losing money rather than gaining, and discovering that trading is too exciting (i.e., the psychological stress proves overwhelming).

There is a great deal to learn about this profession, including terminology. For instance, within the industry, the term "day trading" is more limited, namely, to buying and holding positions for at most a few hours. "Swing trading" refers to holding positions for at most a few days, and rarely over a weekend. "Momentum trading" means buying (usually at the market price) and selling just as soon as the current upswing ends. "Scalping" is done by those who buy and sell at limit prices within or at the "spread" (the difference between the current "bid" and "ask" prices). This is just a small sample of the terminology one should be comfortable with.

You could begin by reading some of the popular books on day trading, such as the two Electronic Day Trader titles by Mark Friedfertig, Trading in the Zone by Mark Douglas, and the two Market Wizards titles by Jack D. Schwager. Also look into trading software, which greatly facilitates testing your ideas and strategies. Popular products are MetaStock and TradeStation.

While many traders prefer working in the comfort of their homes using direct-access brokers, others find it best to rub elbows with fellow traders, at firms that charge commissions, but offer rows of computers with direct access to markets. These traders feel that such a focused environment is more productive than one's home, with all its domestic distractions, including the fridge… But if you have a broadband connection to the Internet, the right software, and a data feed, you can turn your laptop into a top-of-the-line trading terminal.

Strategies

One recommendation that you will find in many of the better trading books, is that for you to be successful and not wash out like the majority of aspiring traders, you absolutely must have a true edge over the competition. If you cannot articulate exactly why that edge will work in the future, and also be able to prove to yourself that it would have worked in the past, then you are essentially winging it. Trading on hunches or tips from others is not that much different from blind gambling. In fact, some critics of active trading argue that the odds against you are just as bad, if not worse, then those in a casino.

But professional traders understand that they are not simply throwing the dice and hoping to get lucky. Rather, they approach it like any other serious business. They commit the time and devote the energy to developing and honing their skills, learning from their experiences and those of others, and not taking it lightly. After all, that's how they put food on the table, and very few individuals can do that through gambling.

At some point you will need to decide between placing your trades with an intermediary broker (using their website, or the telephone), or using a direct-access broker to send your trades directly to the market, usually using their proprietary platform. The latter option is more appropriate for active traders, for whom the advantages of potential price improvement and faster execution outweigh the greater costs, namely, the commissions, the expenses of a direct line, and the rental costs for some trading platforms. If you do not plan on trading more than a few times per day, then you are probably better off with using a traditional online broker. At the time of this writing, the price leader is BrownCo, which charges $5 for market orders and $10 for limit orders. However, they do not offer streaming quotes or NASDAQ Level II access unless you make at least 50 trades semi-annually. If this sounds like more trades that you will be making, then you should consider Ameritrade or Scottrade, which provide at least streaming quotes regardless of your level of trading activity.

Perhaps the best advice anyone could give the aspiring trader is to only trade with "risk capital", i.e., money that they can afford to lose. In other words, don't trade with your nest egg or the kids' college fund, regardless of how persuasive the marketing literature of the advisory services and system vendors might be. It's just not worth the risk.

While this article does contain several warnings about the dangers of trading, it's not to say that you cannot succeed in it, either full-time or on the side, supplementing your main income. Like anything in life, you will likely get out of it what you put into it. If you strictly adhere to proven principles — minimizing trading costs, back-testing and refining strategies, selling losing positions immediately, etc. — then you could do quite well in this exciting and potentially lucrative online profession.

Copyright © 2003 Michael J. Ross. All rights reserved.

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