Understanding Stocks

78 UNDERSTANDING STOCKS
Day traders can trade from their home or trade stocks at a day trading
firm, which provides high-speed telephone lines and customized
trading software. Although there have always been day traders, this
strategy became particularly popular during the late 1990s. In fact, so
many people were trading stocks from home that they were called
online traders.
An online trader can use a number of short-term strategies besides
day trading. For example, swing trading involves buying a stock early
in the week and selling it a few days later. Another short-term trading
strategy, called position trading, is to buy stock and hold it for a few
months. Some traders follow the trend of the market, buying when the
market is trending up and selling when the market is trending down.
Even with the best equipment and software, however, only a small
percentage of people are actually able to make money consistently by
day trading. First, it takes an incredible amount of discipline, trading
capital, and knowledge to be a successful day trader. Most people don’t
have the patience to sit by a computer all day and watch stock positions.
Although day traders can make money on occasion, it is an extremely
difficult game to play unless you have the power of a bull market
behind you. (It was no coincidence that just before the Nasdaq topped
out at 5000, thousands of people quit their jobs to become day
traders—a clear signal that things were going to end badly.)
Market Timing: A Controversial and Difficult Strategy
If you thought day trading was hard, imagine being a market timer.
With market timing, you predict in advance where a stock or the market
is headed. Then you make your move before the market does. For
example, if you believe that the market will rise in the next week, you
will shift your money out of cash or bonds and into stocks. The idea is
to shift your money to the most profitable investment before it goes up
(something that is easier said than done).
Market timing is a risky strategy that can cost you if you make the
wrong bet. To be a successful market timer, you have to know not only
when to get into the market, but also when to get out, which is why so
few traders are successful market timers. Timing the market is difficult