By Mike Lee with John Darsie
Here is my response to the recent article that appeared on Wall Street Cheat Sheet and ZeroHedge claiming 'Day Trading is DEAD':
Q: Any opinion on the article (recently seen on ZeroHedge that says day trading is dead)?
A: Jen, I am glad you posted that link so I can get a chance to comment. First of all, I am living proof that that statement is incorrect. Let me critique each point made in the article.
- The Best in the Business Exited the Business: The author highlights the Schonfeld letter to its traders, calling it evidence that the ‘best in the business’ have moved away from day trading. Actually, the letter from Schonfeld says the exact opposite. From the Schonfeld letter: “Sadly, however, we are re-thinking the notion that less skilled and less successful traders can be here forever without producing sufficiently for themselves and the firm.” I agree with that statement, that less skilled traders should probably move on from the business in its current state. Schonfeld was not saying that the company is leaving the day trading space, but that there was no room for mediocrity in its ranks. Day trading has its ebbs and flows, and right now, in general terms, it has been more difficult for less skilled individuals to make consistent money. This will lead to a retrenchment within the industry, and the traders that survive will be those that adapt and become more sophisticated.
- The Insurmountable Challenges: In regards to computer trading, black boxes have made day trading more difficult, especially for those strategies relying on the level 2. I only use the level 2 to identify areas of concentration I can potentially get out of a trade that goes against me, and that has continued to work for me. In terms of firms being exposed to a greater deal of risk due to SEC v. Tuco, all I will is that, more than ever, firms need to be diligent. You need to educate your traders in regards to risk management and get rid of delusions of grandeur that plague new traders’ minds. As a firm you need to exercise tighter risk controls. Poor market structure is an issue, but that is an issue for everyone. You could hold a company for a year and watch the price appreciate, and then watch all those gains get washed out due to a flash crash, for example.
- The Scary Shape-Shifting from Trading Firms to Training Firms: I think that when you explore getting a formal trading or market education, you need to look closely at what you’re buying. The day trading industry is full of shady characters who make unrealistic promises of instant success and easy profits. That is your first red flag. Someone who over promises success or guarantees anything should not be taken seriously. At this point, almost all firms out there that make those promises or operate under that false premise are out of business, plain and simple.
- Success as a day trader is not probable and it is not easy. It takes a certain kind of person to have success in the stock market, and even then it takes a great deal of time to develop the ‘feel’ that drives the success of the top traders in the industry. At T3, I periodically teach a trading course along with Steve Levay that I wholeheartedly believe in. That being said, it is not for everyone; our style of trading is not for everyone. We try to teach all of the concepts that make us successful and consistent in the markets, and then try to guide students through the execution process. Trading is a performance skill, and you learn by doing. Nothing happens quickly, if at all, and you have to be realistic with yourself. ‘Day-trading’ has a certain connotation that is unfair; there are still certain intraday strategies that work.
- The Industry and Its Future: My general response to the questions raised in this section is that you have to be in the right stocks at the right time. You can’t come in and trade AAPL, GOOG, BIDU and GS everyday and hope to gain any sort of edge. You have to do your homework, find emerging sectors, stocks with news that drives volatility, and look for opportunities, based on technical analysis, to jump on board those stocks early in keeping with the prevailing trend.
- Speed Trading and Order Flow: Pure speed trading, certainly, is dead. That would have been a more accurate article. Due to computers, spreads have tightened and it is no longer feasible to try and capture them. Tell me something I don’t know.
- Order-Flow Traders: In the same vein, strategies based completely on order flow and the level 2 box no longer work because computers are better than you at your own game. They are in and out of trades in a shorter time frame than it takes the synapses in your eye to communicate what you see to your brain. Thanks for the insights, groundbreaking stuff again. Next.
- Relative Strength/Weakness: I agree, the cave-man style use of relative strength/weakness principles does not work. Computers have erased any ‘lag’ time that existed. The only way I look at stocks in the same sector as another is based on volatility and volume. Generally, if a solar stock, for example, sees a volume spike, others in the sector will see more action, too. We recently found REE after noticing MCP in the rare earth space, and while we did not trade them off each other in a primitive sense, we traded each alone using momentum and technical principles.
- Intermarket Price Discrepancies: Same idea, don’t try to do something that computers are better than you at doing, which is exploiting short term ‘inefficiencies’. The markets are manipulated by computers, don’t fall victim to that manipulation. Trade stocks where you have an edge, and use good money management to hold onto profits when they come.
- Technical Analysis: I’m glad the author at least acknowledges technical analysis as the “last man standing” because it will always have a place in the markets, in the same way that psychology will always have its place it medicine. TA is based on the effects on price of human emotion, so as long as humans still have a place in the market it should still be a part of any investment strategy. And if humans no longer have any place in the market, then every type of investing is dead; the markets could be utter, random chaos. That is not to say you buy every bull flag or short every overbought reading. TA is a timing mechanism, and a way to identify stocks that will have heightened volatility and, thus, opportunity to make money intraday. I always trade with the overall trend, and use technical analysis to quantify risk. TA is not a be-all end-all, but nor is any strategy. It is simply another tool, and it will always have significance because of human nature.
Call me a small timer, call me a dying breed, but I am alive and well. To say day trading is dead would be to deny my existence and my success. I have had my best month in a while, and it is because I have focused on trading the rare earth stocks, which fits the bill in terms of the types of stocks that still allow me to apply my skill-set. This article was a gross generalization, and the author chose to have a sensational title so he could get picked up on sensationalist blogs like ZeroHedge. Effective blogging PR, mind you, but ineffective analysis. The truth is that day trading is becoming more difficult, and it takes a higher degree of education and skill to succeed. I don’t think anybody can deny that. It is the same thing as saying ‘buy and hold is dead’ because the DOW is flat over the last decade, a premise that fails to take into account the idea of being a prudent stock picker and trend analyst.
Disclosure: No Positions; I'm a day trader