Global Financial Crisis affect the Day Trader

During the last two decades most markets were in long term bullish up trends.

We day traders could have been forgiven for becoming defensive about our craft as, week after week; we read sober articles exhorting investors not to "fall into the trap of trying to time the markets". Do not, they were told, act like day trading cowboys.

Instead of trying to time markets, clients were advised to take the Warren Buffet approach. Buy great companies and hold the stocks long term.

[Ironically, we now know that some of the organizations promoting this advice to clients were actually trading highly-leveraged, under-secured derivative instruments around the world. In comparison, most day traders act like pin-striped conservatives.]

Buy-and-hold is sound advice in a rising market. It is bad advice in a falling market, as countless unfortunate investors have found to their cost. It is especially bad if you are forced to liquidate holdings for any reason - to meet margin calls, for example.

When markets rise for years, buy-and-hold can become the default wisdom for all occasions. People are hypnotized into thinking the strategy will ride through occasional "downturns" and, when hit with a full blown recession, they sit and watch in horror as profits erode and turn into massive losses.

I believe day trading is inherently much safer than buy-and-hold investing for three reasons:

• The day trader makes money in rising or falling markets. Short term traders have the skills, tools and techniques to work with long or short positions. Unlike the buy-and-hold investor they are not locked into a world view that profit can only be made if prices go up.
• The day trader holds capital on the side lines most of the time waiting for a trading opportunity, then moves in for a quick strike. (I am rarely exposed to the market for more than an hour each trading day, often it is just a few minutes.) In contrast, the buy-and-hold investor is exposed to "event risk" twenty four hours per day, week after week, year after year. When war, natural disaster, or economic catastrophe strikes, the buy-and-hold investor takes the hit and hopes the markets will recover.
• A day trader is a disciplined risk manager. (Otherwise he or she will not last long in the business.) There is a plan for every trade entered, and if the trade does not work out a small loss is taken without emotion. in contrast, the average buy-and-hold investor has no risk management plan, other than to hold on and hope the markets will come back.

I am not being quite fair here. I am comparing an average buy-and-hold investor, a person who decides to buy some shares, with a competent day trader. But even if the long term buy-and-hold investor is a sophisticated operator, they are still more subject to unexpected event risk, still less flexible for short trading, and still find risk management (portfolio protection) more complex.

I trade the grain futures markets each day. During the last two years, prices in these markets rose relentlessly to record peaks, before plunging by more than 50%. That is the macro view.

However, the macro picture makes absolutely no difference to the way I approach my daily trading activity!

I go through the same routine, make decisions on the same basis, whether wheat is $10 per bushel and going to the moon, or $5 and collapsing.

This stability, this consistency of approach through all market conditions, this capacity to prosper in all market phases; these are the things I truly enjoy about day trading!