Day trading, foolhardy

From Adam Hamilton, Zeal Intelligence, Wisdom of Jesse Livermore

(Chapter II) … "There is the plain fool, who does the wrong thing at all times everywhere, but there is the Wall Street fool, who thinks he must trade all the time.  No man can always have adequate reasons for buying or selling stocks daily – or sufficient knowledge to make his play an intelligent play.  I proved it."

Wow!  This wisdom is sure controversial today!  Jesse Livermore, one of the greatest speculators of all time, flat-out says that day trading is foolish.  He points out that there are never "adequate reasons" to buy or sell stocks constantly, and that someone who tries to play the game of trading all the time is a "Wall Street fool".  Interestingly, Wall Street loves these suckers as their constant trading racks up enormous brokerage fees whether the speculators win or lose in the end.

In my own evolution as a speculator, I tried the day-trading game in early 2000 as the tech bubble was topping.  I was primarily trading biotech and genomics stocks, entering and exiting single trades within hours or sometimes even minutes.  Thankfully I emerged unscathed as I was blessed with modest profits after a couple months of this, but I will never forget the fantastic lessons I learned.

First, trading is stressful.  The markets are a hard teacher.  Every single time you have an open trade with your precious capital exposed to the markets, you burn some crucial psychological capital.  Having open positions is always an emotional burden, sometimes it is light and sometimes it feels like a mighty lead anchor chained around your neck crushing you into powder.  In day trading the ultimate stress and psychological capital cost is immensely higher because the volume of trades is so much higher.  Today I prefer tactical speculations with multi-month time horizons, as far fewer trades are necessary so they are vastly less of an overall psychological burden.

Second, as Livermore wisely points out, there is no way to have "sufficient knowledge" to consistently intelligently day trade.  Especially in the young Information Age today, speculators trying to absorb the torrents of financial information available are essentially trying to drink from a raging fire hose.  If a speculator is buying or selling every couple hours every day, he or she cannot possibly have studied each trade enough to fully understand its risks and implications.

Third, the ultra-short-term intraday markets are inherently unpredictable and capricious.  Any speculator can make an educated guess about whether the markets will be higher or lower a few months from now, but since information flow and general sentiment can shift so incredibly rapidly no one has a clue whether the markets will be up or down tomorrow.  The shorter the expected time horizon for a trade, the more it resembles pure Vegas-style gambling and the less it is like intelligent speculation.

Fourth, a day trader is a slave to the computer.  They must constantly be hunched among computers painstakingly watching minute-to-minute market movements and attempting to divine what on Earth will happen a half hour later.  Day traders are always exposed and can seldom take mental or physical breaks.  In sharp contrast, a tactical multi-month speculator can relax and enjoy life, virtually ignoring the markets for weeks at a time, once their capital is deployed and in position.  

Finally, the typical profits in day trading are usually trivial.  After commissions, a day-trading scalper is lucky to earn a few percent on each trade on average.  Why face the monumental stress of day trading to earn a measly few percent on your capital while risking much larger losses?  Conversely, a multi-month tactical speculation played out right can earn profits in the hundreds of percent, such as our current open QQQ options plays outlined in Zeal Intelligence now have the potential to achieve. 

Chapter II) … “The desire for constant action irrespective of underlying conditions is responsible for many losses in Wall Street even among the professionals, who feel that they must take home some money every day, as though they were working for regular wages.”

 

This classic Jesse Livermore quote picks up just where we left off in the first essay, on the perpetually popular game of day trading.  Livermore was not fond of day trading and he touches on the great dangers of it many times in his discourses.  He advocated a much more patient strategic speculation approach.  This broader perspective and slower pace of trading helped him to ultimately harvest far higher profits and avoid the immense stress and pitfalls of ultra-short-term speculation.

 

Livermore believed that a speculator should diligently study the markets and then patiently stalk any potential trades.  He felt that speculators had a much greater probability of succeeding if they intelligently defined a potential entry point in advance through careful research and then patiently waited for it to actually come to pass in the real-world markets.  This led to staking intelligent positions and eliminated the possibility of the dangerous unthinking “impulse trading” so common in day trading.

 

Once his carefully-planned positions were deployed, Livermore advocated the strategic side of short-term speculation, holding carefully targeted positions through an entire bullish or bearish swing of the markets.  Sometimes these swings lasted weeks, usually they lasted months, and occasionally they lasted more than a year.  Over and over Jesse Livermore emphasizes that these strategic-oriented position trades had both the highest probability of success and the highest potential profits as rewards for being right.

 

Today’s speculators can learn a great lesson from the Livermore quote above.  The really big wins in trading don’t come out of daily scalping, but out of diligently riding entire major bullish and bearish market swings.  Jesse Livermore wisely points out that those who “desire for constant action” and trade regardless of underlying big-swing market conditions face “many losses”. 

 

Speculation is like a grand real-world game of chess, a thinking-man’s strategy game sprawling out into the unknown future across weeks and months.  If you want to have a shot at growing into an elite speculator, you are best off ignoring the small gains and losses of day trading and holding out for the really big wins possible by riding entire bull or bear swings.  Speculators are not “working for regular wages” and don’t need small daily wins, all we really need are the enormous Big Trade wins that usually appear several times a year or so.