Is Day Trading Still A Thing?

In April of 1998, Serge Milman graced the cover of Forbes magazine:

day trader forbes


Image/Source: Forbes

He was a 25-year old import from Saint Petersburg. Partaking in a relatively new profession–called electronic day trading.

It was the Wild West back then, later to be remembered as the dot com bubble. During that period, young guys like Serge were making thousands of dollars daily, flipping in an out of hundreds of trades…in pursuit of the almighty dollar.

Day trading became a thing. So what if valuations on these companies were ridiculous, or even if management was competent enough to run them? It didn’t matter. They weren’t portfolio managers, their goal was to get in and out for a profit–the quicker the better.

Yahoo Stock

Image taken from:

Heck, at the height of the dot com bubble, Yahoo, had a valuation of $100B. Today, it sits at a valuation well below $50B.

Fortunes were made. Fortunes were lost. But one thing no one can dispute is that there was a real opportunity for ordinary people to make a whole lot of cash.

But what about now?

After the dot com bubble popped, we later had another bubble take its place. The mortgage market collapsed. Bernie Madoff swindled investors out of billions. And let’s not forget, in October of 2008, the Senate passed a $700B ball out for Wall Street banks.

Many Americans developed a feeling of disgust during the great recession.

During that period, the structure of the markets started to change. Trading started to become centered around ultra-fast speeds and automation. High-frequency trading was replacing the roles once held by humans. To this day, high frequency trading, accounts for about 50% of the trading volume in equities.

Trading became man vs. machine. Thus far, the machines have been kicking ass.

Nothing illustrates this point better than a split screen shot of the UBS trading floor circa 2005 (on the left) and 2016 (on the right).

UBS trading floor

Source: Twitter

But that is only part of the story.

The bank bailout caused the central bank to take a more involved role in the markets. By keeping the federal funds rate near zero for eight years, their policies were “stock market friendly.”

That said, this marks eight years that we’ve been in an equities bull market. Great for investors. Not so great for day traders.

You, see the one thing day traders need the most in order to make money went desperately missing-volatility.

A quick look at the VIX chart (The Fear Index) and you’ll see that volatility has been sucked out of the market the last couple of years.

VIX Chart

Source: TradingView

This begs to ask the question…

Is Day Trading Still A Thing?

 The short answer: YES

However, the game has gotten a lot harder. However, there is still hope for those who aspire to make a small fortune… all in the comfort of their boxers.

So what do you need to know to get started?

 Barrier Of Entry

 Now, FINRA rules define a “pattern day trader” as an individual who executes four or more day trades within five business days, provided that the number of day trades adheres to more than 6% of that individual’s total trades in the margin account for those same five business days.

In other words, individuals who are deemed “pattern day trades” must have at least $25K in their accounts and can only trade in margin accounts. You can thank FINRA for those rules.

That being said, if you want to be able to flip in and out of stocks on a daily basis, make sure you have an account with at least that amount. You’ll get flagged by your broker and have your trading account temporarily suspended, if you violate this rule.

 Expenses Involved

 Let’s start with the obvious, internet and a computer. Now, depending on how sophisticated your trading platform is, you may need a supercomputer like the ones gamers use… however, most people don’t need anything fancy, if they are using a retail broker like ETrade or TD Ameritrade’s ThinkOrSwim.

Everything else really boils down to your trading style. For example, here are some tools day traders rely on : real-time news feed alerts, chat rooms, newsletters, research,  charting software and execution platforms.

For professional day traders these expenses can add to up a couple thousand dollars a month. By no means should you feel that you need to shell out that kind of cash to compete. However, your trading strategy should take into account the limitations you have, whether it’s technology , or lack of real-time information.

 If volatility has been more or less sucked out of the market, what are some stocks to day trade, and what kind of strategies do they use?

 It’s true, the volatility in the overall equity market has been relatively low. However, you’ll see some “intraday” action on a specific sector of the markets– small caps.

Small cap stocks generally refer to companies that have a market cap between $300M to $2B dollars.

ETF vs Russell

Source: TradingView

Check out the comparison above between the ETF’s for the Russell 2000 Index (the benchmark for small cap stocks) and the Dow Jones Industrial Average. The candlestick chart represents the Russell 2000 ETF, while the line chart represents the Dow Jones Industrial Average ETF.

Despite both showing impressive returns, small caps have performed considerably better.

Small caps just offer greater upside potential, greater volatility, and greater opportunity.

For example, on April 5, 2017, Plug Power Inc. issued this press release:

Plug Power Inc.

Source:  Plug Power Inc.

The stock price was up over 75% and trading at a 52-week high.

Plug Power Chart

Source: TradingView

Now, let’s flip the script for a second. What kind of headline would Amazon, a company with a market cap north of $400 billion, need to see its stock price double?

There’s more.

A company like Amazon, has an army of analysts who cover the stock. That said, small cap stocks tend have less coverage. So when a headline like the one in Plug Power hits the tape, it takes a while to digest the information and figure out the impact it will have on the stock.

On that day, Plug Power traded in a range between $1.91 and $2.40. Now, that might not sound like much to you, but that’s a 20% swing from the high to low. Something you’d probably never see if you were trading The Walt Disney Company.

April 13, 2017 was the day before Good Friday, a market holiday. That said, the markets tend to be slow around any major holiday. However, there was still volatility in individual stocks, specifically small cap stocks.

chart 1 finviz

chart 2 finviz

Source; finviz

Out of the top advancers and decliners listed, only two companies had a market cap greater than $2B.

Generally there is a catalyst that drives day traders into a stock, like the press release Plug Power had.

Opposing opinions is what creates a market. That said, one side is buying the stock riding the momentum up–while another is shorting the stock because the move seems overdone.

It’s true, day trading is not what it used to be. Day trading has gotten more difficult due to the emergence of high frequency trading and central bank policies killing market volatility. However, there are still some out there finding opportunity, mainly in the form of trading small cap stocks.


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