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Successful Daytrading Takes Tools, Training

If you want to make money, you have to treat your trading like a career, not a hobby.
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Last week's

column used a lot of virtual ink to make a simple point: To succeed at daytrading, treat it like a career, not a hobby.

Now let's look at what that means -- after, of course, the obligatory disclaimer:


caters to a fast crowd, and some of you can, no doubt, ignore the following, sit down at a terminal and make a fortune at daytrading. I know at least one guy who's doing this (of course, he spent the previous decade on a Wall Street bond-trading desk). I want to hear your stories, and I'll use some of them in future columns. But your good fortune won't change the fact that Joe Sixpack has about as much chance of daytrading successfully without the right preparation as he has of practicing law without a degree.

That said, here's how most successful daytraders get that way:

They use the best tools.

Last year, while hanging out at a daytrading office in Virginia, I noticed a few traders standing around a terminal and laughing, and I asked what was so funny. "Internet traders," one of them said, pointing to the onscreen ticker, a scrolling column of numbers indicating completed trades. Seems the customers of online brokers like

Charles Schwab





were being suckered by


market makers (the Wall Streeters whose job it is to buy and sell a given stock) into stampeding in the wrong direction. "It's like they're blind," the trader said.

His point was that real daytrading systems give you Level 2 quotes, which show what the market makers are doing, and instant order execution through electronic communication networks, or ECNs, which give your orders the same status as those of market makers.

Traditional online brokers, on the other hand, show only the current bid and offer on a given stock, which tells you nothing about the pressures building up outside the spread. And they rout their orders through market makers, guaranteeing execution on the unfavorable side of the spread.

This distinction won't last, of course. Online brokers are already starting to bundle Level 2 quotes into their premium service packages, and in a year or two will no doubt have state-of-the-art daytrading capabilities. Right now, though, the best systems are still found at the major daytrading firms (






and a few others, identifiable at, and some smaller shops with good off-the-shelf systems.

For a few hundred dollars a month (falling to zero for traders who generate enough commissions), you can use one of these firms' in-house terminals. You can also access some of these systems from home, though to do it right you'll have to spring for a dedicated, high-speed line. For current news and reviews, check out or

They rarely trade on fundamentals.

Few successful daytraders use those "real-time stock recommendations" furnished by chat-room gurus and huckster Web sites. The best daytraders are only generally aware of what a company does and couldn't care less where it will be in a year, a month or a week. Instead, they focus on the width of the spread, the behavior of the players on either side and, occasionally, one or two favorite technical indicators. They make most of their money by buying at the bid and then selling at the offer, often in a matter of seconds for as little as a sixteenth of a point. This is known as "grinding," and it's the safest, surest way to make consistent money.

They admit it when they're wrong.

This, say veteran traders, is where the vast majority of novices blow it. By refusing to cut their losses, they tie up capital and eventually get killed by big negative moves (like when


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goes down by $15 in an afternoon). Or they end up with so many long-term positions that they drift into "investing," which for a trader is a kind of death.

The best traders, on the other hand, bail the second a position moves against them. Many of them say that the most important stat isn't the number of winning trades vs. losing ones, but the average profit on good trades vs. the average loss on bad ones. The smaller the relative average loss, the more money they make in the long run.

They trade in a shop before going it alone.

Like anything else, daytrading is best learned under the guidance of a successful mentor. So before they move to Santa Fe, N.M., and wire up their balcony, most good traders spend time in the office of a legit daytrading firm, watching, listening and imitating.

I once interviewed the manager of a daytrading shop who kept interrupting our talk to ask every departing trader, "Are you square? Are you closed down?" He was teaching them to live by the cardinal rule of daytrading (and of life in general, when you think about it): Don't take losers home overnight.

They start small, with tiny positions in easy stocks.

The pros trade thousand-share lots of eBay and

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, but most of them started (or wish they had) with smaller positions in liquid, slow-moving stocks. They move up to the big leagues only when their game is world-class.

They like multiple trends.

If the goal is to buy at 50 and sell at 50 1/8, then you want a strong market, strong sector and strong stock, all at once.

They don't have to trade.

Sometimes trends are contradictory, stocks behave oddly or market makers act suspiciously. Good traders are able to let this pass and wait patiently for a pitch they can hit.

One last piece of advice: Be very cautious about after-hours trading. Thin markets are easy to manipulate, and one trader friend of mine is already licking his chops at the prospect of "being on both sides of a $1 market." If you know what that means, you know it's bad. If you don't know what it means, then stick to daytime trading until you're good enough to be the predator rather than the prey.

John Rubino, a former equity and bond analyst, writes a column on mutual funds for POV and is a frequent contributor to Individual Investor, Your Money and Consumers Digest. His first book, Main Street, Not Wall Street,was published by William Morrow in 1998. At time of publication, he had no position in any stocks mentioned. While Rubino cannot provide investment advice or recommendations, he invites your feedback at