Should You Day Trade Or Position Trade?

Have you ever seen the show “Wall Street Warriors”? If not, I recommend going to www.hulu.com and watching the “Open Outcry” episode. It illustrates the massive disadvantages of position trading versus day trading.

Larry is a floor trader in the orange juice pit. During this episode, everyone in the pit is waiting for a major number. This major number is a prediction put together by “authorities” in the orange juice business. It’s an estimation of the amount of oj that will be made the following year. It’s in millions of boxes. Larry thinks the number will be somewhere between 140 million and 155 million. He has a position on which essentially makes him net long. He’s currently up $150,000 on the day.

So on this morning, there is a group of people in a private meeting talking about how much orange juice might be produced the following year. These people are probably in Florida or California since that’s where most of the orange juice comes from. These “authorities” cannot predict the weather nor the damage caused by insects nor how efficient each grower will be but they are still going to make a prediction and traders in New York are going to buy and sell based on what will inevitably be an incorrect prediction.

The orange juice traders of the world are risking ridiculous sums of money on an estimation that’s made by people who have no real, vested interest in their own estimation. Humans are quite an interesting bunch.

The number was way, way off of what the floor trader thought it would be and the market went limit down. His $150,000 profit turned into a $900,000 loss. Want to bet a cool million on heads or tails?

Most people think that day trading is gambling but position trading is not.

Yeah. Right.

I can tell you what I’m going to have for lunch today but I have no idea what I’m going to have for dinner three weeks from now. Do you see the correlation?

If you have some kind of inside information, then maybe you can call it right. But you better know something about the fundamentals and you better have a lot of capital with which to trade. Just look at what happened with oil over the last several years. Even if you predicted the move up and down, you would have needed a lot of money to hold on either way and of course, if you were the guy thinking it was going to $200 a barrel, we know where you stand now.

If you’re an oil man, like Boone T. Pickens, then yeah, maybe you can predict the future of oil…up to a point. Boone is in his 70s and has been in the oil business for his whole life. He has a bit more knowledge than you do.

Even if you’re talking about a company, a business with assets, unless you can see the real balance sheets, you have no idea what’s going on with that company. Not to mention, a company’s stock tends to rise and fall with the general market so you might own shares of a profitable company but the stock may be going down due to market conditions…or you might own shares of an unprofitable company but the stock is overinflated due to market conditions, a la the Nasdaq boom/bust. Warren Buffet is not a billionaire because he’s good at predicting what other people are going to predict. He’s a billionaire because he’s good at researching companies. He knows how to tell whether or not a business is going to consistently turn a profit. He can do this because he does a serious amount of homework before “investing” and when he invests, he becomes the majority shareholder. He buys the business. He’s not looking for a three month play. He’s looking for consistent yearly returns.

Day trading is risky, to be sure. Position trading is riskier, in my opinion. Although, if you can comfortably afford to lose whatever money you risk, position trading is certainly less stressful and less taxing on the eyes. Still, holding a position into a major number is not risky…it’s stupid.

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