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Day Trading: The Good, the Bad, and the Ugly

As a child I thought that life was blissful, that there was no evil in the world, and that somehow all of life's needs would be magically fulfilled. As an adolescent I was convinced that good triumphed over evil, that the more education I had the more money I would make, and that government exists to help us. As an adult I have come to realize that life is full of little disappointments, that things rarely turn out as we expect them to, and that the brutal, cold realities of life prevail.

But I have also realized that there is good news and bad news in almost every situation and every event. And futures trading is no different. Here are some of my thoughts on the good news and the bad news of futures trading. In reading my commentary, please remember the following: New traders are coming to the futures markets in droves; many of them lured to the trading arena by promises of sure profits from small investments. Take a little time and listen to the heating oil options ads on the radio and on television. Read the ads in trade publications offering guaranteed profits, and you'll see what I mean. (Before you put money into any course or trading program, make certain that they contain the proper risk disclosures.) Next time you get some futures advertising in the mail, read it carefully. Look at the claims and then reach your own conclusions about what the newcomer to trading is being told or promised.

Within this context, it's no wonder that so many people are disillusioned about what they actually experience when they become traders. But even veteran traders are not immune from the teachings of cold and hard experience with the futures markets. Here are a few of the brutal realities of futures trading as I see them. Take issue with them if you like, believe them if you find them familiar, or take your anger out on me for telling it the way it really is in the world of trading.

Most Trading Systems Just Don't Work

No matter how you look at things, the simple and painful fact is that the vast majority of trading systems work well in certain types of markets but not so well in other types of markets. The good news is that there are a few systems that have worked consistently over the years. The bad news is that their accuracy isn't very high. A system with 60 percent or more accuracy that has been a consistent performer for over 20 years is a rare find indeed.

What to do? You can abandon systems altogether and use timing methods and intuition. But this will work for you only if you have iron discipline and can take your losses when they're relatively small while riding your profits. Or, you can develop your own style.

Commissions Can Eat You Alive if Your Trading Method Is Marginally Successful

Paying reasonable commissions for your trading is important. To pay too much is to engage in a futile exercise. If you pay for service, then you must get service. If you do not need service, then do not pay for it. This is especially true for options trading. Some firms charge a percentage of option premiums as their commission.

Be very careful of these firms. If you buy an option that costs $2500 and the commission is 25 percent of the premium, then you pay $625 commission. This is outrageous! You could pay as little as $14 for that option at the right brokerage house. Even if you pay $75 for full service (which will get you a broker's input), you still come out way ahead.