Day Trading vs. Position Trading: Part II

When we last left our two warriors -- Godzilla (position trading) vs. MegaGodzilla (day trading), the battle was nearly a draw. Position trading was a bit more profitable; day trading, far less risky. But now the fighting really begins, and this week, we'll focus on some of the more esoteric elements of trading: technology requirements, time commitment, pressure and finally, ease of use. I trust you'll be rooting on your favorite, as we conclude by crowning...the CHAMPION TRADING STYLE OF THE WORLD. Let's get ready to rumble!

Technology Requirements

Go back and read through my columns of Feb. 9 and Feb. 17. There you saw that setting up to day trade was as easy as assembling, well, a Trident submarine. Or the Empire State Building. No, unless you have your Ph.D. in both computer science and electronics -- and, by the way, did a stint as CIO at the Department of Defense -- getting ready to day trade is not easy. Data feeds, phone lines, extra software...YUCK! And that's from someone who LIKES all this computer stuff.

On the other hand, what equipment do you need to position trade? A phone. Okay, a phone and access to the Internet if you really want to get involved.

But, you're right -- maybe I didn't need all that hardware and software to day trade, and I'm just scarred from that experience. And maybe that scarring is causing me to be biased against day trading. Well, if that's so, why do a large number of day traders trade off-site? That's right: because they need a steel-reinforced, fortified bunker to protect all the cabling and water-cooled computers necessary to run all that day trading equipment! Do you see position traders running off-site to trade?? Case closed.

Technology requirements: advantage to position trading.

Time Commitment

Here's a snapshot of how long it takes me to position trade:

Research....................................30 minutes

Look at charts............................15 minutes

Enter orders.................................5 minutes

Get fills and enter limit orders....10 minutes

Total elapsed time.............................1 hour

Rest of day: goof off, play golf, tell wife I'm really "working," write, eat big lunch, nap, have snack, watch TV.

On the other hand, here's my day trading schedule:

Research....................................... 60 minutes

Look at charts................................15 minutes

Enter positions, exit positions.........10 minutes

Mindlessly watch screen waiting for something interesting to happen....410 minutes

Total elapsed time............................8.25 hours

Rest of day: What rest of day?

Time commitment: huge advantage to position trading.

Pressure

Let me know when you run across a trader who says his job is easy. Invigorating? Yes. Challenging? Sure. Interesting? Absolutely. But easy? Right. No, whenever there's money involved it's never easy. Why? Because with one screwup, you can blow a large hole in the entire side of your portfolio. And even if you bet small, a few costly mistakes can irrevocably damage that ole' ego of yours.

So we'll grant that there's a certain amount of pressure involved, but which style has more? With position trading, the pressure comes from trying to develop a methodology that can move with the market and deliver solid results no matter what the conditions. Once the methodology is developed, executing is fairly straightforward, and there should be no pressure there. However, sticking to your methodology is another story. I think I'm pretty consistent, but read back through some of my columns and you can get a good feel for the numerous times I've deviated from my game plan -- normally with disastrous results. Overall, though, on a scale of 1 to 10, I'd have to say position trading is about a 5 in regards to pressure. Kind of like the pressure the scientists who developed Viagra faced: Yeah, if the drug didn't work it'd be a bummer, but it's not like it'd be the end of the world. And the way I position trade, it's only one hour per day. That's not pressure; that's a vacation.

On the other hand, every day I day traded was like a live version of Mortal Kombat. My heart would race, and my stomach churned, with every tick of the tape. And that pounding kept on going from 9:30 a.m. to 4:30 p.m. Sure, it was a lot of fun at times, but I really felt the pressure to perform. I don't execute perfectly, and it's sayonara Gar'.

And this went on day after day, week after week. You don't show up; you don't get paid. And many times if you do show up, you still don't get paid. What a load of fun that was.

Finally, I will grant that the risk control element of day trading -- entering each day flat -- was a great relief in choppy conditions. And that certainly mitigated some of the day-to-day pressure of day trading. Still, all things considered:

Pressure: advantage to position trading.

Ease of Use

Let's say the time commitment and daily slugfest of day trading didn't bother you. Maybe you're the kind who actually welcomes that nonstop adrenaline rush. Okay, all things being equal then, which requires the greater skill level?

With position trading, you have to be smart like a scientist. I've always thought my strength was in the testing and retesting of methodologies -- the boring data-gathering that is essential to a well-thought-out system. So, if you can get past looking at the ticker all day, it's still difficult, but in a tedious sort of way.

Day trading, though, requires both the methodology part and the execution part. So, you have to be very smart and very fast. Boy, how many people can you name who are like that? Let's see: There was Muhammad Ali; uh, Jim Cramer; and...well that's all I can think of. Do you qualify? Maybe, but if so, you're rare.

Now, before you get your cackles up and say, "Gar, I've read those articles on day traders. They don't look like they have any methodology to me -- they just look like they're fast," you can forget it. Anyone who goes into day trading without some kind of thinking beforehand will get their head handed to them. Even worse, they'll end up tapped out. You don't have to be Einstein, but you have to have some rationale behind you're trading. Think you can just look at the tape and trade off that? Right, you and Jesse Livermore. And he ended up broke.

Ease of use: advantage to position trading.

In conclusion

Yeah, I know. I thought it would be closer too. But, just like in the movies, Godzilla always prevails. Position trading, with an edge in net earnings, technology requirements, time commitment, pressure and ease of use, has simply swamped day trading, which could muster a victory only in the area of risk.

Ah, but what about doing both? Nah, that'd be the worst of both worlds. You'd still have the risk, plus all those extra hours of head pounding.

So, then why is day trading getting so much attention? Why are people so attracted to it that they're willing to quit decent jobs and sit in front of a screen all day, with the assumption that they're going to make millions? I don't know. Perhaps if I were better at day trading, I'd have a clear answer. Somehow, though, I doubt it.