Day Trading

A day trade is a position entered and liquidated during a single trading day. The techniques of time of day and daily,patterns, are put to use by the day trader. Day, trading requires extreme discipline. excellent planning, anticipation, and concentration. The need for a fast response to changing situations tends to exaggerate any bad trading habits as in other fields. the shorter the response time, the greater the chance for error. We will extend the idea of class-trading to systems and methods that may also be held overnight, but expect to limit the trade to about 24 hours.
To keep mistakes to a minimum, each day’s strategy must be planned in advance. It should focus on the most likely situations that might occur based on the nature of the current price movement. There should also be a contingency plan for the extreme unexpected moves in either direction. Making spot decisions during market hours m-ill cause more frequent errors.
Computers have caused the number of day traders who rely on systems to increase. and have created an entire class of screen traders. The steady- increase in automated exchanges, led by Germany’s DTB and followed by France’s conversion of Matif. is sending a strong message that electronic trading will dominate the future. The availability. of intraday price feeds and system development platforms, such as Omega’s TradeStation. have greatly increased the number of day-trading participants. Only, 10 years ago the best one could expect was to display standard indicators and moving averages on a real-time price chart. Now you can fully program complex trading strategies that combine more than one market and more than one time frame into a single package and display bus, and sell signals on the screen as well as record a historic log of trades. All of these tools have greatly increased competition among individual and commercial traders.
For the arbitrageur, computers have had an even stronger impact. Sophisticated systems at banks and large financial institutions consolidate data feeds that bring current transactions on every type of interest rate vehicle in even- maturity and major currency. Analytic programs can find issues that are outliers and show which combinations (called strips) can produce a riskless profit. For the individual trader. few of these opportunities are available, although they add liquidity to the market. Individuals, however. find it much easier to create spreads of different deliveries -within the same market as as spread between two related products. Stock traders can create sector baskets or look for performance differences within a sector. Spread trading and formulated values. such as the energy crack or soybean crush, can be improved using similar displays, Many of the opportunities that now seem so easy to see would previously. have been missed. This faster. more systematic response to the market allows traders to improve profits and reduce risk in anyday-trading method.

Investor Constraints

In addition to attitude toward risk, an investor’s investment strategy will be affected by various constraints. We discuss five of the most common and important constraints next.
RESOURCES
Probably the most obvious constraint, and the one to which many students can most easily relate, is resources. Obviously, if you have no money, you cannot invest at all! Beyond that, certain types of investments and investment strategies either explicitly or effectively have minimum requirements. For example, a margin account must normally have a minimum of $2,000 when it is established.
What is the minimum resource level needed? It depends on the investment strategy, and there is no precise answer. Through mutual funds, investments in the stock market can be made for as little as $500 to start, with subsequent investments as small as $100. However, since there are frequently minimum commission levels, account fees, and other costs associated with buying and selling securities, an investor interested in actively trading on her own would probably need more like $5,000 to $50,000.

HORIZON

The investment horizon refers to the planned life of the investment. For example, individuals frequently save for retirement,.where the investment horizon can be very long depending on your age. On the other hand, you might be saving to buy a house in the near future, implying a relatively short horizon.
It is true that stocks outperformed the other investments in the long run, but there were shorter periods over which they did much worse. Consequently, if you have to pay tuition in 30 days, stocks are probably not the best investment for that money. Thus, in thinking about the riskiness of an investment, one important consideration is when the money will be needed.

SPECIAL CIRCUMSTANCES
Beyond the general constraints we have discussed, essentially everyone will have some special or unique requirements or opportunities. For example, many companies will match certain types of investments made by employees on a dollar-for-dollar basis (typically up to some maximum per year). In other words, you double your money immediately with complete certainty. Since it is difficult to envision any other investment with such a favorable payoff, such an
opportunity should probably be taken even though there may be some undesirable liquidity, tax, or horizon considerations.
A list of possible special circumstances would be essentially endless, so we make no attempt to produce one here. Just to give a few examples, however, the number of dependents and their needs will vary from investor to investor, and the need to provide for dependents will be an important constraint. Some investors want to only invest in companies whose products and activities they consider to be socially or politically suitable, and some investors want to invest primarily in their own community or state. Finally, some investors, such as corporate insiders, face regulatory and legal restrictions on their investing, and others, such as political office-holders, may have to avoid (or at least ethically should avoid) some types of investments out of concern for conflicts of interest.