The phenomena of Day Trading is not new. People could go to the stock exchange and make trades directly through any number of brokers while watching the numbers change directly. Today however, with the advancement of internet brokerage houses, people can get real-time quotes and make trades faster than ever before. This advancement has made Day Trading more popular and more dangerous.

The concept behind day trading is simple. Buy low, sell high, cash out by the end of the day. There is no room for gains to be made over the course of weeks or months, all gains or losses happen the same day. It is a speculative sport which relies on trades large enough so that small increases results in profits measured in fractions of a percent.

Now profits on the order of 1/4% don't sound like great excitement or all that much, but compound that over the approximate 250 days that the stock markets are open and the return is more like 85% for the year.  Throw in the phenomenal returns of this last year in the internet stocks where prices have jumped between 5 and 250 percent in a single day and you can now see why so many people have tried to get into day trading.

The drawbacks however are in both the losses and how the cards are stacked against the small investor. Numerous investors feel that they can day trade using free systems where quotes are delayed 15-20 minutes. They also continue to use internet systems that use an intermediary to place the trades rather than using direct systems. A third drawback to day trading is in the markets where a large number of traders put their trades, the over the counter bulletin board. And lastly is the way in which trades are placed.

The impact of delayed quotes is obvious. If a day trader is only taking a 1% increase as their profit, 20 minutes can mean the difference between a profit or a loss as other investors have placed trades that the day trader is unaware of.

Some online brokerages do not use direct to floor systems but instead rely on a system where a broker must approve the trade prior to it's execution. If a large volume of trades are being made all at the same time, then these delays can be as long as 1/2 hour. Especially when dealing with OTC or pink sheet stocks, or when the trade involves special handling considerations such as an 'all or none' restriction.

The Over the Counter Bulletin Board provides it's own set of challenges. The exchange normally holds small cap stocks trading under $2/shr. Market makers regularly manipulate the stock price and are not bound by the same rules of reporting as the larger stock exchanges. What reporting systems are available are updated at the discretion of the market maker and there is no requirement for them to be honest about how many shares they are prepared to buy or sell.

For example, if the last trade on a stock was $1.50/shr and the next bid is at $1.25/shr, the Market Maker doesn't have to update the reporting system of the lower bid price. He only has to report the last price a stock actually sold at. Considering the market maker gets paid based on whatever spread he can get between the buying and selling price, there is no incentive for him to update the reporting system but instead wait for someone to place a sell order at market. The Market Maker may then buy the stock at $1.13 and resell to the other waiting shareholder at $1.25.

Using the same example, the next bidder used what is called a limit order to avoid being trapped in this situation on the buy side. A limit order is one where you offer to buy a stock up to and including the limit price, or sell a stock down to and including the limit price. The advantage of the limit order is that a trade does not execute at a price which you were unwilling to accept. The disadvantage is that limit orders are only placed after all market orders have been filled.
Some day traders place all their trades at market in order to ensure that their orders get filled. At the end of the day, this may be the only way to clear the account back into cash unless the trader is willing to sit on the stock until the next trading day. With a bad stock pick, this could mean disaster.

Another bad trading method is in the incorrect use of the 20% rule. The 20% rule has incorrectly been interpreted to indicate a selling point of 20% below what the stock was bought at and although this may be good advice for a declining stock in any situation, this is not what the 20% rule was meant to address. The 20% rule states that a stock should be sold once 20% of the profits have evaporated. So a $1.20 stock that goes up to $2.20 and starts to slide should be sold at $2.00/shr (20% of $1). It provides a mental note to self that profits are okay and are meant to be collected rather than sat on. Something many traders who sit too long on stocks have problems believing in.

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