Dark Days for Day Traders

Some day traders have thrown in the towel, while others thrive on the volatility

Three weeks ago, the Dow Jones industrial average traded at 14,000, a record high. It has fallen 761 points since then, marked by several big swings in both directions along the way. With the collapse of the subprime market and credit risks galore, volatility has reached levels that haven't been seen in years. In some ways, it's reminiscent of the trading conditions in 2000, when volatility ruled the day.

During the late 90s, day trading was glamorized and sensationalized as unstoppable Internet and tech stocks raced their way to new highs on the backs of imaginary businesses. Then the Internet bubble popped and day traders faded from view. Despite appearances, however, they never went away.

But 2007 hasn't been the best year for day traders. In fact, it's been quite tumultuous and many successful traders have given up. The New York Stock Exchange's hybrid system, which has virtually removed specialists from the trading process, had an enormous effect on day traders who traded the NYSE. By automatically routing large orders, it made the market friendlier toward big institutions such as mutual funds and hedge funds, at the expense of individuals.

Keeping Score

The rise of program trading, or black boxes, which are faster than any single trader can possibly be, created its own problems. The large program trades have been more fierce in the last couple of weeks, creating big moves that leave many investors more anxious and confused about what's causing the action. Many longtime traders, seeing their "P&Ls" (or profit and loss), a trader's scorecard, at zero or worse, finally gave up.

But some are hanging in there. Aliza Schakler, one of the rare successful female traders in a male-dominated market, is sitting on the fence. In the nine years she's been at it, she's never seen a market quite like this one. "It's out of control," she says. Schakler describes herself as risk-averse—a claim belied by her longevity—and she's trying to find less risky stocks to trade, but she admits to struggling in this new environment.

Some traders, however, are enjoying the recent volatility. Under normal conditions, volatility is a day trader's best friend. Stocks move hard and fast, and a good day trader can hop on for the ride. But these aren't normal conditions. Prices change so quickly that traders go from in the money to out of the money "in the blink of an eye," says Adam Wasserman of Wasserman Capital.

Signs and Advice

Wasserman is a veteran day trader who manages a group of 60-plus active traders in offices in Miami Beach and Los Angeles and in individual locations. He's what's known as a tape-reader: He watches stock quotes for a sign—any sign—that will tell him whether it's likely to move up or down. Until just three months ago, if a stock was up and the market was gaining, Wasserman was content to take a large position and let it ride. But that all changed.

"Now, you can find yourself in a situation where the market's strong, the stock is strong, and you lose money on the trade," Wasserman says.

He has one piece of advice for those under his command: Manage your risk. How does he do that? He's more likely to sell portions of his long position on the way up to lock in profits. Pricing, too, is more important than ever before. Getting in early means capturing more of the upside and also protecting himself if the trade goes bad.

Still, recent market conditions don't keep Wasserman awake at night. In fact, he's actually enjoying them. "The markets are so cyclical and I've been trading for so long," he says. "I'm used to it by now."

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