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As a highly successful hedge fund manager, author Christopher Farrell has the experience to help readers make sense of this exciting but volatile arena. He instills a deep...
As a highly successful hedge fund manager, author Christopher Farrell has the experience to help readers make sense of this exciting but volatile arena. He instills a deep understanding of day trading as intellectual combat, pitting investors against institutions and each other on an electronic battlefield. Clearly and thoroughly, Farrell maps out the dangers, providing solutions and revealing dozens of insider secrets for coming out on top, allowing anyone to become a more successful day trader.
Wall Street and Las Vegas have much in common. While Las Vegas has blackjack dealers and croupiers, Wall Street has market makers,specialists, and online brokers. And, just like the casinos, Wall Street exists for one and only one reason: to take your money as quickly as possible.
There are only two certainties in the financial world: Wall Street will always make money at the expense of the investing public, and day traders will always be hated. As you may know, only in the last several years has online trading and day trading taken hold. But the animosity toward day traders is higher today than ever before. The incredible advances in the Internet and in trading technology have completely changed the landscape of Wall Street, and day trading has been the engine behind much of it. Just think about what you can do from the comfort of your own home that you couldn't do five years ago: You can place trades, get real-time quotes, and, most important, you can participate and exploit market movements as they are happening. The closed world ruled by the world's largest financial institutions is now open to anyone with a small amount of capital, a computer, and Internet access. The "little guy" has finally been let into the club. And, despite what it says, traditional Wall Street still doesn't like it one bit.
Over the last three years, the proliferation of day trading into every segment of the equity markets has become a serious and formidable threat to Wall Street's profits. When aday trader is successful, it is because he extracts profits from the market that are normally reserved for the institutional traders and brokerage firms. Every dollar a day trader makes is one less dollar for Wall Street.
Five years ago the best and most profitable firms on Wall Street had a virtual monopoly on trading profits. The only direct competition they faced was from other "member" firms, and there were no outsiders. But one of the consequences of the advance in technology has been the fact that for the first time in history, the short-term mechanics of the market have been placed under a magnifying glass. The investing public has begun to witness at firsthand just how lucrative the short-term movements of the market can be, and just how much money Wall Street has been making at its expense all these years. So the one area of the market that was kept shrouded in secrecy by the Wall Street trading firms is no longer a secret. Technology has opened the door, and the day trader has stepped in. And that is where we stand today.
In the last couple of years it has often been said that these changes in technology have "leveled the playing field" for the individual investor. But the fact that so many day traders still lose money even in light of these changes stands as evidence that the playing field is really not level. The reason so many lose when trying to play the short-term movements of the market is quite simple: Wall Street will do everything in its power to prevent the day trader from being profitable. But how does it accomplish this, and what does it do to consistently fool the majority of day traders? To begin to answer this question, we need to look at precisely how the short-term mechanics of the market work, and the ways in which Wall Street makes its money within this system.
No matter how hard the investing public tries, they always seem to be one step behind Wall Street. Think about the last time you bought a "hot stock" that was "guaranteed" to go higher, yet right after you bought it, it dropped like a rock. How about the time you were going to double your money on a quick trade, only to have your trading capital cut in half instead? These kinds of things happen all the time, and they are no accident. When Wall Street is involved, there is no such thing as easy money. No matter how great the prospects for making money may look, there is always someone taking the other side of your trade. Remember, every buyer has a seller, and there is a very good chance that the person taking the other side of your trade knows more than you do about where the stock is headed.
Look at your classic panic-sell situation. What happens when the investing public is recklessly dumping a stock? Who is there to buy it from them when they all rush for the exits at the same time? And, even worse, when the stock is so "hot" that buyers will pay any price to get their hands on it, who is there to sell it to them? As you know, it is the Wall Street trading firms.
This is an ironic situation. When the stock is up 30 points on the day and looks as if it is headed higher, Wall Street is actually selling, and when the stock is down 30 points on the day and looks as if it is going lower, these financial institutions are probably buying. While the banks and brokerage firms use rallies as an opportunity to sell stock, and dips as an opportunity to buy stock, the investing public does the opposite. That is what we mean when we say that these trading firms stay ahead of the curve by doing the exact opposite of what the public thinks they are doing: They buy stock when no one wants it, and they sell it when everyone wants it. In other words, the public's entry into a stock is Wall Street's exit. The result? Wall Street consistently makes money while the investing public loses it...