REAL WORLD

Read This To Avoid Unpleasant Surprises
Retail Trading Myths

by Don Bright

Besides being licensed, you have other hurdles and benefits to be aware of in trading with other people's money as well as your own.

Last time, I outlined some of the primary differences between professional stock trading and retail stock trading. This time, let's explore some of the myths behind retail/online trading.

Let me clarify a few things. In general, trading for a living involves 25 to 200 trades per day, and a daily share volume of around 60,000 and up. In contrast, retail investing is when you make five to 20 trades per week. Investing online is fine, and is actually the preferred way to get into or out of a particular stock. However -- and this is an important distinction -- investing is not trading. Investors try to get a good return on their investment dollars and try to outperform the market. Traders make money trading based on their skills, efforts, and time.

TRADING

When a trader has $25,000 in a trading account and makes $1,000-$5,000 per day using the capital he has in his account, he is being rewarded for his talent in manipulating his capital, not the amount of money he has in his account. Can you imagine stating that you get a 10% per day return on investment? That would be ridiculous.

A retail trader with $25,000 in his account may be able to use a margin of $50,000 during the trading day. To have a chance to make a living by trading, you really must be able to trade in blocks of 2,000 shares or more. Most professionals trade stocks in the $50-$150 price range. With that in mind, do the math. Even 2,000 shares of a $50 stock requires $100,000 of trading capital. Many traders who have traded online tell me horror stories of having to sell one stock before they could buy another.

A trader should be able to watch three to five stocks at one time, and trade each of them. A professional trader cannot be concerned about margin or watching the money flow from one stock to another. He must be able to buy strong stocks when the market is going up, and to short weak stocks when the market turns around. Many of Bright Trading's traders use $1 million or more of capital with only $25,000 in their account. They can do so because they are traders, not retail investors.

Don't misunderstand; the trading capital is only a tool that must be available. It is not like giving a retail customer excess margin (which can be dangerous!). This is myth no. 1: Trading on customer margins can be profitable. It's not likely, and the numbers prove it.
    ...Continued in the April 2001 issue of Technical Analysis of STOCKS & COMMODITIES

Don Bright is with Bright Trading (www.stocktrading.com), a professional equity corporation with offices around the United States.

Excerpted from an article originally published in the April 2001 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2001, Technical Analysis, Inc.


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