So I watched my first episode of Wall Street Warriors last night and I saw something happen which explains why I’m not an advocate of position trading. You can watch it for free on www.hulu.com. It’s the “Open Outcry” episode.
This episode features a floor trader who has a major position on going into a number (a.k.a. waiting for a number to be released). The number is an estimation of the amount of orange juice which will be produced next year. I repeat, it’s an ESTIMATIOIN. A prediction made by people in the orange juice business. Before the number comes out, the floor trader is up $150,000 for the day.
Somewhere in the world there are a group of people in a closed door meeting and they are making a prediction about orange juice. These people have no idea what the weather is going to do next year and therefore, their prediction is meaningless. Yet, it’s not meaningless because traders are going to make predictions based on this prediction and traders are going to buy and sell based on their prediction as it relates to the “authority” prediction.
Traders in New York are gambling millions on a prediction made by people who don’t gamble at all.
The number came out at 200 million, the market instantly locked limit down and Larry finished the day DOWN $910,000. He may as well have put it all on red or black.
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.
Stocks aren’t any different. In fact, they are worse because it’s relatively easy to cook the books. Enron…need I say more. Even if a company is doing well on paper and in real life, stocks tend to fluctuate with overall market conditions so if you buy right before a bear market sets in, most likely you’re losing along with everyone else. The billionaire Buffet man does not estimate based on other “professional” estimations. He looks at the books himself. If they look good, he buys the company. His investment is a real investment made with huge amounts of capital that can actually affect the company’s bottom line.
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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