Day Traders: Investing by the Hour
Aired August 15, 1998 - 9:11 a.m. ET
CNN
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
MILES O'BRIEN, CNN ANCHOR: Buy and hold; that's the classic advice for the average investor in the stock market. But there are some not-so-average investors whose idea of a long-term investment is six hours. Often using their home computers, these so-called day traders jump in and out of stock issues, hoping for quick profits. But is this an investment strategy or glorified gambling?
For more on this we're joined by the author of "Electronic Day Trading," Marc Friedfertig. And he is also a leading trainer for day traders. He is joining us from New York, along with Gary Smith, a freelance financial writer and stock trader.
And Gary, let me begin with you. Welcome to you both, gentlemen, by the way.
GARY SMITH, THESTREET.COM: Thank you, Miles.
O'BRIEN: Gary, in your column, in TheStreet.com, on the Web, you have been critical of the concept of day traders. Tell us why?
SMITH: Well, that's a great set-up with Marc right here in the room. I do think, though, that a large majority of people going into day trading are riding a bull market mania right now, if you will -- and that they might not be prepared for just how difficult and expensive day trading is.
So if they're going in thinking they're leaving their great job that they have now and they're going to be millionaires within six months, I think the expectations might need to be reset.
O'BRIEN: So, Marc, it's all about expectations. I presume if day trader goes into this hoping to make millions, they may be sorely disappointed.
MARC FRIEDFERTIG, CO-AUTHOR, "THE ELECTRONIC TRADER": Well, I think you bring up a good point: Expectations is something that -- unfortunately, the industry has created some unrealistic expectations. People that want to go into this field and do it full-time and do it for a living shouldn't expect to make money right away. I think that it's likely that it would be a good six months before people have any opportunity at all to make money. And it's certainly common for people to make money getting started.
But, on the other hand, if you are the entrepreneurial type, this is the type of business that I think that you can get started, in a sense, with little risk. If you were going to open up a restaurant, so to say, and went out and spent hundreds of thousands of dollars on equipment and had to sign a lease for space -- if you were in it for two or three months and decided it wasn't for you, it would be very difficult to shut down and recover or recoup your money and get out of the business.
In day trading, if you get started and in two or three months you decide it's not for you, you pull your money out of your account and you go on your way.
O'BRIEN: Gary, tell me: what are the differences between day trading and just outright gambling?
SMITH: Well, that's a good point. I think for -- let me put it like this: I think there is a lot of aspects in day trading, or any kind of trading, that is very similar to gambling. But I like to give the illustration that if you're a successful trader, day trader or otherwise, you're more like the casino.
So I'm sure that a very good day trader, or a trader like myself who takes a little longer time horizon goes in and only makes trades when the odds are on your side. So I know that if I'm the casino and someone walks through the door -- as long as I have enough people walking through the door, I'll be successful 70 or 80 percent of the time.
I think a lot of day traders are probably on the other side of that percentage -- that they might only be successful 20 or 30 percent of the time. But, quite frankly, there are a lot of similarities between gambling and trading -- day trading or otherwise -- if someone does not approach it as a business.
O'BRIEN: Marc, would you agree? Is it like gambling?
FRIEDFERTIG: Well, I think for a lot of individuals -- that are opening up Internet accounts and doing an occasional trade -- Gary might be correct.
I think what a lot of people fail to realize, and what's becoming more and more prevalent today, and what we specialize at Broadway Trading in Manhattan, and what we write about in our book, "Electronic Day Trader," is that today's technology actually allows the individual to participate in the market just as a professional does. And I think that most people recognize the professionals on Wall Street -- the market makers, the specialists, individuals on trading desks at some of the top firms, have long made fortunes on Wall Street.
And at our brokerage firm, we provide individuals with the technology -- that it's very similar to what a market maker would use. And in our book, the "Electronic Day Trader," we provide the strategies that allow individuals to trade just as a market maker would. And, as a result, we're getting phenomenal success stories. And, granted, that it's not easy. But we have people that are making consistent returns. And, as Gary said, for the individual that's out there doing it a little more casually -- that's sort of picking his spots -- if he's not careful, not selective -- yes, it probably is a lot more like gambling.
O'BRIEN: Gary, these market makers, these so-called market makers -- essentially what we're talking about are middle men or middle people
SMITH: Right.
O'BRIEN: Are these people worried?
SMITH: Are the market makers worried?
O'BRIEN: Yeah, are they worried that the day traders are going to pass them by?
SMITH: Oh, no, I don't think so. I mean, there are a lot of ways to bypass market makers. But, you know, I think it'd be -- if I were a Goldman Sachs, or a Merrill Lynch, or Morgan Stanley acting as a market maker, I certainly would not be worried.
I guess the only time I would be worried is if the market went flat. I mean, whether it goes up or down, a market maker is certainly going to make good money. And as the overall trading volume increases, they'll continue to do quite well.
O'BRIEN: All right, Marc, in the time we have left -- because I'm sure we've got some people at home who are thinking, "Geez, I could do that," tell us what's the basic bottom line essentials to start out using your time as a day trader.
FRIEDFERTIG: Well, I think it's essential that individuals recognize that there is risk in this. And I think the number one reason that people fail at this is they do not control their losses. So I think it's really important that people, when they do do a transaction, that they ask themselves what they're willing to risk and they stick to that.
In addition, I think it's important that people keep themselves informed; they make sure that they're dealing with a reliable system, if they're trading on the Internet. And, if they do so, they have a reasonable chance of making some money at this and, of course, limiting their losses.
O'BRIEN: All right. How big a stake do you need to get started, you figure?
FRIEDFERTIG: Well, you can open up an Internet account with a firm such as DayTech (ph) Online, with as little as three-thousand dollars. If you do want to do this for a living, and you want to come down to Broadway Trading in Manhattan, we do look for a slightly higher account. We look for a $75,000 minimum account.
But we really cater to individuals that want to do this for a living. And, as a result, you need more money if you're going to be able to pay your bills with the money you're going to make doing this.
O'BRIEN: Gary, should anyone be betting the mortgage money on this kind of investment?
SMITH: Well, I would not bet the mortgage money on any kind of trading, unless you've already had a lot of your mortgage paid off and really approach it as a business. I think people can make money trading -- day trading or otherwise. But if they're going to take their mortgage money, I'd just assume them put it in an index fund or a good mutual fund. I mean, this is a business; and it's a hard business like anything else.
O'BRIEN: So these people at home, with their home computers, sitting there in their boxer shorts or whatever, they're moving the markets these days?
SMITH: Well, I think a lot of people that Marc has -- day traders might be certainly giving a boost to the market, once the momentum gets going one way or the other.
I still think a lot of the markets, though, are moved by big institutional money.
O'BRIEN: Marc, would you agree with that?
FRIEDFERTIG: I agree with Gary. And I think in the long run, no one really moves the market. I think the market's going to go whichever direction that it's going to go.
O'BRIEN: All right, gentlemen, thanks very much. We appreciate your insights. Marc Friedfertig and Gary Smith giving us some insights on the world of day trading.
SMITH: Thank you, Miles.
FRIEDFERTIG: Thank you.
O'BRIEN: All right. Thanks for being with us. |
