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Still Some Life in the Trenches: Daytraders Sound Off

Mark Ingebretsen

What can I say, other than that occasionally this column really strikes a chord with readers? Last week's topic, Return of the Daytraders?, was definitely a case in point. I'm grateful to have received well over 100 emails in response to my two questions: "How has the culture of daytrading changed since the crash?," and "How has the crash forced you to change your strategy?"

My special thanks go out to many of you who sent back some incredibly insightful and well-thought-out answers. I'm only sorry we can publish just a few. Those responses appear below.

Before I share these, though, a few general comments. The volume of email convinces me of two things. First, active traders are still very much a part of the market landscape. And many continue to succeed, though they have to work harder at it than ever. Second, there's a real desire on the part of active traders to share information and learn from it. For that reason, I hope that in the future, this column can serve in part as a sounding board for your views and concerns.

But enough meandering. What's it like out there for daytraders right now? Which strategies work best? Here's what some of you had to say. (Note that I've included only first names, because many of you asked to remain anonymous.)

Tales of Carnage

If there was one consistent theme, it was this: It's bloody out there. There's a lot of angst, and a lot of fear. Evan's email was typical. "Trading isn't fun anymore," he writes. "The only thing I feel is anxiety as to whether the position will turn against me." One 23-year financial industry veteran recounts how he took up daytrading back in '98 at a brokerage that let traders work from its offices. There were 12 traders in the room with him when he started out. Today, he's the only one left. A woman who used to teach daytrading in filled-to-capacity classrooms now only has three pupils. Another trader I'll call Jim writes, "When I started in '99, the message boards were full of traders eagerly discussing the latest news. Now, they are little more than electronic ghost towns."

The Easy Pickings Are Gone

Few traders like to admit it, but they make their money at the expense of those with less experience. As a couple of you pointed out, before the crash there were perhaps hundreds of thousands of neophyte online traders who probably should have kept their money in mutual funds. Like newcomers at the high-stakes poker game, they lost big-time to the pros. Now the neophytes have largely gone into hiding and savvy traders find they must compete with each other. One trader put it more bluntly: "This is a bad market for investors and daytraders," he writes. "But the only reason it is bad for daytraders is because of the lack of dumb money in the market."

Playing by the Rules

Many traders wrote that they've survived the tough times by sticking to a strict set of rules. Rules force them to stay focused, they say. And taken together, they define a strategy. Deborah, for example, sent along a list of 11 rules, among them: "Never trade before 10 a.m., the market no longer seems to settle into a direction much before 10 a.m." Rule No. 5: "Do not trust a short-term trend to be longer than two days."

Other traders report they use rules to hone in on just a few promising stocks. Bob, for example, writes that he keeps no more than 10 stocks on his watch list. "I will only trade two at a time and 2,000 shares is the limit," he says.

Meanwhile, Tom focuses on just one stock, the Nasdaq 100 Unit Trust(QQQ - Cramer's Take - Stockpickr), an exchange-traded fund. "I had to trade something that was still familiar, not overly exposed to the vagaries of chance, and above all, incredibly liquid," he explains. But why just one stock? "As a solo trader with no support, I need to know a stock's habits, tendencies and idiosyncrasies. I only have the intellectual bandwidth to watch one player."

Changing Ways

While some traders stick with rules, a changing market has prompted others to change their styles. Over and over, traders told me they now deal in smaller size lots, which of course cuts down on profits but also on losses. Many also say they've switched to swing trading, a strategy that involves holding positions for days instead of hours or minutes. Their reason: With the market slowing, intraday moves simply aren't big enough to produce profits. Several traders even say they've begun aggressively trading mutual funds instead of stocks, something that likely won't endear them to the funds' managers. In all cases, these traders say changing strategies is what kept them in business.

As Pam explains: "I used to trade six stocks that I knew very well. I used to look at the oscillations on a chart and buy every dip. I found out the hard way that some dips turn into unbelievable downhill runs, lost a bunch of money and became intent on developing a style for this nauseating market. Now I trade in all sectors, use technical analysis to identify overbought/oversold issues and sector trends. And I mix my trades between swing trades and daytrades. I also short stocks much more frequently to hedge my long swing positions."

Similarly, the bear market forced Doug to venture into less familiar territory. "Since the tech sector crashed, I've had to widen my scope," he writes. "I still have a hard time believing I traded coal stocks earlier this year."

Another trader I'll call Ted writes that he did well over the winter "because the market direction [down] was easy to discern. Shorting the upturns and any intraday overbought situations was easy money." Now, he says, "the indicators are much harder to determine, let alone trust. I have used many more overnight positions than I used to, simply because many stocks only make big moves before the open, leaving the daytime charts flat and ungamable."

One Size Doesn't Fit All

Sure, these styles are drastically different -- even contradictory. But the important thing is that the traders using them claim they work -- at least for now. Maybe these strategies work because they somehow complement that trader's personality. Or maybe their edge lies in the fact that few other traders are using precisely that style at that moment.

A swing trader I'll call Pat puts it more succinctly: "The message is adapt or die. My advice to traders is to find something outside the mainstream. I made a fortune in the energy stocks when everyone else was getting killed in tech, and I made 30% in the restaurant stocks when others were piling into overpriced banks, brokers and retail." Most recently, Pat's been trading the stocks of disk-drive makers.

Coming Up

Yes, I realize this is all once over lightly. In future columns, though, we'll look more closely at particular styles. For example, we'll look at how many traders are combining options strategies with their stock trading. Also coming up: A look at SuperSOES. The new order-routing system test launched this past Monday could be Nasdaq's response to the private trading networks (or ECNs) that have been stealing its market share. And we'll check Securities and Exchange Commission-approved regulations regarding margin account minimums, scheduled to go into effect in late September, that may further cull the ranks of active traders.

Til then. Hope you'll keep reading and writing. The address is Mingebretsen@yahoo.com. I try to answer every email I receive. Please let me know if it's okay to use your name in this column.