So You Want to Daytrade

Take this reality check first.
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A lot of readers might look upon the life of a commodity daytrader with envy. After all, the job offers independence, self-made hours and apparently limitless success.

Unfortunately, some are trying to prey on people with such a rosy view of this career. Given that it's my life and my job, I'm going to use this column --

and this video -- to set you straight and hopefully prevent you from making some mistakes.

Almost every day, as I'm watching late-night cable with my diet soda and bag of Pepperidge Farm goldfish, I'll often see an infomercial for a "foolproof" daytrading system being sold by some ex-trader that's being demonstrated at the local Marriott on Sunday. For right now, these systems seem to concentrate on the forex (short for "foreign exchange") currency markets, but I expect the offers will soon include other commodities, relying on the tremendous growth still taking place in that space.

A Reality Check

Oh, it's everyone's dream: quitting your job, dumping the commute, working from home, making your own hours and buying that boat. Now, I'm not here to rain on anyone's parade or to tell you not to chase your dream, but a little reality about daytrading systems and the life of a daytrader might be useful right about now.

Let me start by saying that I haven't seen most of the systems that are being sold out there. The ones I have seen are based on very simple technical indicators and rely on momentum to generate buy and sell signals. Markets need to move in waves, as we all know, and a large number of technical indicators try to measure when large waves are about to be interrupted by smaller, opposite-flowing waves. Literally hundreds of such indicators exist.

The $495 software systems for sale attempt to mechanize two or three of these indicators into a trading system and make it as simple as possible: Choose your time frame (how fast do you want to make money?), your trading level (how much do you want to risk per trade?), and off you go. A red light means sell, and a green light means buy.

If only it were so simple. Momentum trading, in general, will have a high rate of success -- perhaps as high as 75%. It is, however, that fourth trade that becomes a real problem, as the losses that swell from that stinker will often swamp the gains from the previous three winners. Not so surprisingly, the systems that are being touted do not have a simple mechanized system for managing the risk of these losing trades.

The Special 'Secret'

You see, professional traders always show their true mettle in the management of losing trades. This is the "secret" that every great trader knows but cannot teach to anyone else. In the end, every successful trader relies on a unique combination of bravado, fear, instinct and luck, usually created through experience, long hours and a bit of insanity.

Anecdotal case in point: me. Throughout my career as a trader, I would often (very often) have bad positions. I would trade in and out of them most of the time in a very measured, controlled way. But once in a while, some unconscious alarm bell would go off and I would need to dispose of the position as quickly as I could, irrespective of losses. Like a maniac, I would make outrageous offers (or bids) in very illiquid markets and be out of the position in a very short time.

Inevitably when I would "bail out" of a position in this way, my instinct would be proved right, and the original position would subsequently get much, much worse for others who stayed in. What causes those alarm bells to go off inside good traders? I have no idea.

It has never been easy to make money trading, and it was certainly never mechanical for me. In fact, I've had many losing months and even one losing year. Keep that in mind if you're considering my career. How would you like to get up in the morning, go to work every day and end the year with less money in your pocket than when you started it? It's a tough feeling, let me tell you.

My day now starts at 6:30 a.m., when I check the overnight markets and news and map out a strategy (or at least a preliminary one) for the day. I light the screens up about 7 a.m., and they stay on at least until 4 p.m., with time for lunch. Depending on my overnight positions, I need either to keep track of the markets or to trade them actively a few times until I go to sleep. In other words, the hours that most successful traders and I keep aren't so easy or so few.

You

can

do it. I don't have any special talents that you don't, and I've seen every type of person succeed as a trader. I've been able to find no particular set of characteristics that guarantees success. But expect to spend long hours, have many moments of doubt throughout your career and even lose money in the first few episodes of your apprenticeship. And never believe that any mechanical trading system can entirely take the place of the most important thing that you bring to bear upon your trading -- you.

Of course, here's the most obvious reason why you shouldn't spend $500 on a piece of software. If it were such a foolproof money-making system, why would they be selling it to you?

Dan Dicker has been a floor trader at the New York Mercantile Exchange with more than 20 years' experience. He is a licensed commodities trade adviser. Dan's recognized energy market expertise includes active trading in crude oil, natural gas, unleaded gasoline and heating oil futures contracts; fundamental analysis including supply and demand statistics (DOE, EIA), CFTC trade reportage, volume and open interest; technical analysis including trend analysis, stochastics, Bollinger Bands, Elliot Wave theory, bar and tick charting and Japanese candlesticks; and trading expertise in outright, intermarket and intramarket spreads and cracks. Dan also designed and supervised the introduction of the new Nymex PJM electricity futures contract, launched in April 2003, which cleared more than 600,000 contracts last year alone. Its launch has been the basis of Nymex's resurgence in the clearing of power market contracts over the last three years. Dan Dicker has appeared as an energy analyst since 2002 with all the major financial news networks. He has lent his expertise in hundreds of live radio and television broadcasts as an analyst of the oil markets on CNBC, Bloomberg US and UK and CNNfn. Dan is the author of many energy articles published in Nymex and other trade journals. Dan obtained a bachelor of arts degrees from the State University of New York at Stony Brook in 1982.