The problem of getting a fill from market makers makes profitability even more difficult. In fact, for the newbies out there, I will list some of the things with make profitability very difficult:
hardrightedge.com
1) The SOES system is virtually worthless. You will not get a fill using the SOES system, unless the stock is poised for a quick reversal, which will make you out to be a sucker. I would strongly caution people to realize that the SOES system gives market makers the tools needed to take advantage of you.
2) The SelectNet system is also virtually worthless. See #1, above.
3) Market makers are now allowed to quote as little as 100 shares on a stock. It is extremely difficult to be profitable without sufficient liquidity to enable a day trader to get in and out of 500 to 1000 shares at a time.
4) Market makers are allowed to keep their quote posted for up to 17 seconds after they fill a measly 100 share order, then they can back away from their quote without filling any additional orders. Note: This is after they have delayed the market for 17 seconds with their fictitious quote posted on Level II.
5) Commissions: Day trading commissions of $15 to $25 per ticket add up fast. Assuming you only trade 10 round turns per day, you will generate $2000 per week in commissions. That is over $100,000 per year!
6) The Spread: Assuming you make 10 round turns per day, and give up an average of 1/16 of a point for the spread on each 1000 share trade, you will be losing over $3000 per week ($160,000+ per year).
7) ECN's: Many people believe that using ECN's are the only way to profitably day trade. I will not argue with this. However, one challenge that this creates in that you may end up getting a fill for less than your full order. It can be frustrating, and loss creating, when you get filled for 58 shares out of 1000 ordered.
These factors and others make day trading very difficult. It is much harder than non-day traders would ever realize. If you are very fortunate, you will break even, or only lose a little, until you have gained the knowledge and experience to day trade profitably. Recognize, however, that there is no guarantee that you will ever become profitable. Once I found out that you couldn't get a fair shake from the market makers, I realized that I had to succeed in two ways:
1) Develop a day trading strategy which is profitable while paper trading.
2) Determine whether this system will be profitable in the 'real world'.
Why paper trade? Well, I can assure you that a system that loses money paper trading is destined to lose even more money in 'real' trading. Why waste money by testing a system using real money? The goal is to conserve your capital until you have the knowledge and experience to be profitable.
For me, it took many, many months to develop a profitable system. I feel fortunate that I lost somewhat less that 20% of my trading account before turning the corner. Since then, I feel fortunate to have been consistently profitable. Despite this, I have been working the past three months to develop a second successful system. After numerous false starts, I have yet to implement another successful system (although, I'm on another optimistic start of a new system now).
Anyway, I began "Trading for a Living" full time this month, after resigning from my former engineering career effective March 5th. Day trading is a very exciting profession, but stability is not one of its strong points. I am happy to report that my day trading career has been successful (so far) and that success is a realistic hope. However, recognize that everyone is not made to be a day trader and that most 'jobs' do not include the risk of losing money.
Be very careful and cautious before you jump in.
Good luck!
TRADING FOR A LIVING
A Special Report by Eric Patterson
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Eric is a full time day trader from Virginia. He specializes in automated day trading using his computerized platform to monitor all Nasdaq stocks for trade opportunities. Once identified, his trades are initiated by instant automated order placement and exit trade monitoring.
I began my day trading pursuit by developing an automated day trading platform over a year and a half ago. This past September, I began working only part-time last September to enable more focus on my trading and hopefully determine whether I could be a successful day trader before giving up my job as an engineer. I would strongly recommend this to others considering a career in day trading. DO NOT give up your career on the hope of 'making it' as a day trader. Most people lose money day trading. Repeat: Most people lose money day trading. Do not burn any bridges at work, or even leave your full time career unless you are confident you can succeed at trading. Propose to work part-time, or take a leave of absence, if possible, to allow yourself to explore day trading.
Respect the fact that the odds are against you to succeed. With this in mind, explain to yourself why you think that you will be able to succeed despite the odds. If you don't have some reason or edge that will help you succeed, then you will probably fail.
For me, I believed that computerizing and automating my trading would give me the speed and reproducibility to have an edge in the market. If I could develop a successful trading system, automation of my trading would allow me to reproduce my results without the stress and difficulty of making split second decisions consistently the same week-in and week-out. In addition, I had been 'paper trading' several momentum systems, and they were consistently profitable while trading 40-100 trades per day for several months. Therefore, I took a big step and went part-time from my job.
It didn't take long to find out that there is a huge difference between 'paper trading' and real trading. I thought that I was being conservative in my paper trading by assuming $25/ticket commissions and giving up the spread on every trade. However I learned that the biggest challenge in momentum trading is actually getting filled! Market makers will not (often) fill you at their posted price when you want to buy in a rising market. This was not intuitive for me; I assumed, incorrectly, that a posted price would be honored and that my orders would be executed against. NOT!
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