Day trading, whose popularity exploded with the advent of internet brokerages, has been met with significant controversy and profits.  By scalping nickels and dimes, day traders are often in a position for merely minutes, walking away with thousands of dollars in potential profits.

The controversy of day trading

The idea of market timing involved with day trading completely goes against the traditional efficient market theory.  Traditionally, this theory purports that the prices reflect all the information on the market and a stock.  Therefore, no one has an advantage since that information is the same to everyone.

Day trading is an extreme on the investing spectrum.  It takes the market timing strategy to the max and profits from its momentum.  So much attention has been given to day trading that many investors think that it is a sound theory; critics on the other hand retort that if the theory was solid, someone would have become famous day trading. 

Out of all the investors that have achieved fame and fortune in the stock market, not one was a day trader.  Many professionals stay away from day trading since they feel that the amount of risk that it entails is not worth the reward it can gain.

While it is controversial, momentum trading is not unethical or illegal.  It shares identical goal synergies as other conservative forms of investing.  People invest with the goal of making a profit, and figuring out how to buy low and sell high is the goal of most people who invest.

Mutual fund companies forbid short term trading, which put market timing in a negative light with some investors.  Even with the prohibition, certain clients were still allowed to do this.  This was where the strategy became unethical, since it excluded some investors and included others.

Market timing – the key to day trading

All those who have been successful in the stock market have relied on market timing to some extent.  They may make their decisions based on analysis of the market, personal intuition, or other factors, but it comes down to making the right trades at the right time.  Often, the decisions were based on buy and hold strategies done over periods of time.

For example, value investing is based on buying stocks at a price less than their true value, and selling them once they have reached their true values.  This involves some patience and thorough research, since stocks may remain undervalued for long periods.  However, it still practices the theory of buy low, sell high.

Overall, if you want to buy low and sell high, you are timing the market.  This can be difficult to do on the short-term market for very long, since many investors do not have the time and energy to watch the market on a day to day basis. 

Most retail investors will do better investing in the long-term market, where there is a better chance of being successful.  In general, it is simply easier to make a profit on an investment that you can hold onto for a long time for price increases, than on hoping to see a profit in an eight hour day.

One last word; talking heads are only reading from a teleprompter. The job of TV market commentators is to get viewers and keep them interested. Often, sensationalizing market information and making broad inferences get the job done. Unfortunately media chatter can actually move a market, albeit usually for a short time. The fundamentals of a stock are a better barometer of the company’s health. So, take those business shows with a grain of salt and never make an investment solely on what you see on TV. Remember, by the time information is made available to the general public, through the media, it is usually too late to profit from it.