At no time in history has technology provided us the ease with which we could so effortlessly and cheaply make a stock trade as it has today. Part of the mentality that previously guided the long-term investor was dictated by having to go through stockbrokers and market makers, the “guardians at the gate.” They were the only ones who had access to information and the means to actually make stock trades.

The cost of trading was prohibitively high for individual investors to think about frequent trading. How could you think about holding a stock for only a few weeks or a few days (let alone a few hours or minutes) when you were paying $150 to $200 or more to make a trade? How could you think about active trading when you had very limited information, and no access to quotes to even know where a stock was trading?

In the old days, if you wanted stock quotes, you had to literally sit in front of an overhead electronic ticker tape at your brokerage office, inhaling the stale second-hand cigar smoke from wealthy retired men. I can remember watching the ticker tape as a teenager when visiting my stepfather on the brokerage floor. He worked for many years at Bache, in the pre-Prudential days, when it was a whole different investing world than it is today.

The hierarchy of the game heavily favored traditional brokerages, like Bache, and their brokers, who dictated how much information would be shared with clients. If there was any churning of accounts to be done, they’d be the ones to do it¡ªnot you, the investor. You gave away your own decision-making power in favor of the greater knowledge, experience, and access to research information and execution possessed by your broker.

So, unless you were a trader on the floor of one of the exchanges or an institutional money manager, your opportunities to trade more than occasionally were very limited. And this almost dictated a buy-and-hold approach to investing.

Companies were viewed as slowly growing their revenues and (to use a term that wasn’t in existence) their “bottom line” over many years, with the investor holding stock and profiting as the company slowly grew to maturity, full productivity, and prosperity. You looked forward to a nice annual dividend if all went well, and maybe an occasional stock split. You married a stock for good times and bad, in sickness and in health¡ªoften literally until you died.

In some ways, it was like becoming attached to the hometown baseball or football team, in that you identified with the company and rooted for its success. And when you left this earth, the stock was finally sold and the gains were distributed to your heirs. The obituary of a typical investor might have read: “He was a good husband, father, dutiful son, and a dedicated employee. He was a God-fearing man who went to church and a loyal member of his local Kiwanis Club. He was also an astute investor, a life-long holder of 200 shares of Standard Oil.” It was a perfectly adequate model for the 1960s, 1970s, and even into the 1980s.

But we’re in a new cybergame for a new millennium¡ªand obviously the rules have changed. And anybody who doesn’t see the changes as they are occurring and accommodate them will simply be left behind. The Wall Street parade will have passed them by. Instead of being on the forefront of the curve, they will be bringing up the rear.

As usual in the Age of Information, the key is being an early adopter. You’ve got to have access to the information, choose to pay attention to it, and then skillfully apply it. And, of course, you’ve got to have the capital to invest. One result for those who feel they have not gained their fair share of the pie has been an outbreak of a particularly virulent strain of envy.

How have these changes in the securities markets influenced the way investors look at their options today, in a cybermarket? What does trader’s-mind (that is, the typical way traders tend to think) have to offer longer-term investors? How can longer-term investors improve their return by incorporating some of the thinking and methods of short-term traders?

Let’s state one generalization that is easily overlooked in a high-flying market: It is one thing to be able to make money in a great bull market as we saw in the 1990s. It is another thing to be a disciplined trader who can make money when the market is more choppy or takes a prolonged downturn, either as a major correction or an outright bear market. The concepts presented here are offered to help broaden our thinking, so we can perform under varied market conditions, not just in a hot market when almost anything you pick stands a good chance of going up.

Balance has been the watchword throughout our exploration: Balancing different aspects of personality and trading approach; balancing isolation and information overload; balancing fear and greed, intellect and emotion, euphoria and shock; and balancing trading excitement and disappointment. We also need to balance and utilize the complementary forms of self-control. And we do this while walking the razor’s edge of excellence without falling into the perfection trap. Is performing all this too much to ask? Not for the serious disciplined online investor, it isn’t!

That’s what the whole concept of discipline is really aimed at¡ªnot becoming rigid robots, but staying on a steady path that is always trying to balance upside and downside, and staying with a preset plan, not being unduly influenced by what others are doing. And not losing sight that when the see-saw goes too far up, the dynamics of market psychology demand that, sooner or later, it come back down. But when it’s heading for the moon, the wishful fantasy is that it will last forever. And when it is going down week after week, it is tough to remember it will recover.

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There are some fundamental differences between short-term trading and long-term investing. The difference in time horizon has traditionally made for different styles of thinking and behavior. While we don’t need to focus on these differences as they have conventionally been viewed, we will mention some of them in passing as reference to illustrate our points. And we can think of these differences as broadly defining what we may refer to respectively as investor ’s-mind and trader’s-mind. Investor’s-mind, then, is the mind-set traditionally associated with long-term investors, while trader’s-mind will refer to the typical thinking of short-term traders.

What is becoming increasingly clear is how the technology of cyber trading and the heightened volatility of the market have forced us to question some of our long-held assumptions regarding these two mind-sets. Both the rules of the game (the advent of deep discount brokerages and of electronic trading) and the playing field itself (the exchanges, ECNs, after-hours trading) are obviously changing rapidly; this requires that our thinking keep pace.

As a result of these changes, some of the thinking of short-term traders may be usefully applied to the longer-term online investor. Let’s flip it around and ask what active traders can gain from investor’s-mind. Does investor’s-mind have anything to offer the trader?

To begin with, the popular notion of the short-term, and especially the day trader, is rather narrow. When everyday investors hear about short-term trading, all they hear is how much it’s like gambling. They hear that traders are being set up like unsuspecting sheep being led to slaughter; how they all are losing large amounts of money.

In addition, when it comes to day trading they don’t understand how any money can be made scalping an eighth here and a sixteenth there. They don’t know why anyone would possibly want to “burn tickets” by compulsively trading in and out of positions all day long, paying so much in commissions, along with short-term capital gains on whatever profit may remain. The public certainly doesn’t view this kind of trading as having anything to do with a profession¡ªunless you want to call it professional gambling.

Like almost any subject that is handled in a cursory manner by the media for its sensational news value, the story is not so simple or one-sided. And I say this making it clear that my bias is against scalping, fully aware of how difficult it is to consistently come out ahead in day trading.

Yesterday, while visiting the local trading firm, I was told about one of the hyper traders on the floor who has been known to trade up to 500 times per day, or 250 round-trip tickets. The guy pays a gradually lower commission rate the more he trades, from $20 per trade down to $8. Sometimes he’ll make $9000 per day. When he subtracts the $4000 he pays in commission costs, he still has a net gain of $5000 for the day, before taxes.

Now, while large numbers of day traders have no particular interest in (and are not suited for) this kind of hyper trading, who’s going to argue with a guy able to earn $5000 for sitting at a computer terminal for a few frenzied hours hitting buy and sell keys on the keyboard? If this guy can consistently make large amounts of money, it makes sense to ask: at what point does the element of gambling decrease and the element of knowledge, instincts, and execution increase? How long would he have to earn good income before we entertained the notion there was something else happening here besides gambling luck?

While, as we have already discussed, there most certainly is an element of gambling involved, that element can be reduced with thorough knowledge of the stock one is trading. In watching the movement of a stock very closely over a period of time, you can learn the patterns that tend to occur at certain periods of the trading day. And with experience on a Level II screen, you become reliably able to anticipate and predict very short-term movements more often than not.

My point is that day traders who have no idea about the company they are trading are at a distinct disadvantage compared to the traders who know their stock thoroughly. They have studied it day after day and traded it often enough to be confident of their moves in and out of it. For them, the element of gambling is going to be less than for the traders who couldn’t care less what company is behind the stock symbol they are trading.

As a group, professional day traders appear to be maturing in their thinking. They are becoming more flexible and more knowledgeable in their approach to trading. They are borrowing some of the thinking of institutional money managers who are active traders. In the last two or three years, those who followed blindly the instructions to begin trading 1000 shares before they even knew what they were doing lost a lot of money. But they also generated a lot of revenue in commissions to the firms with which they were trading.

The movement is now away from pushing day traders to generate lots of commissions through trading. That is not where the money is now being made. After all, we’ve already reached the point where a sufficient account balance means free trading. The shift today is toward better education of traders before they are allowed to have a seat on the trading floor. And even those who choose to trade in the comfort of their own homes are interested in getting an education before they start risking their capital. Some seek out programs in day trading firms and then go back to their homes to apply what they have learned.

The short-sighted inadequacies of the past in allowing traders to begin trading with poor training and no supervision are trying to be corrected. And although the risks continue to be high for large numbers of day traders, the media does not tend to give the public the whole picture about the more positive direction the industry is moving.

Week-long courses cost $3000 and up. Some firms, like Online Trading Academy, require a second advanced course, also a week, that costs another $3000. This means you will have made an investment of at least $6000 before you are allowed to hit the trading floor and make your first trade. Obviously, your motivation has got to be pretty strong to hang in for two weeks of daily training plus the substantial costs involved.

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There are a number of rather dry economic indicators that astute traders pay attention to, some more carefully than others. Again, investors should be aware of them because they may affect the movement of the market when they are released.

Here are some of the indicators: Consumer confidence, consumer price index, consumer credit, employment cost index, employment report, existing home sales, gross domestic product, National Association of Purchasing Managers (NAPM), new home sales, producer price index, retail sales, and others.

The indicators that affect traders most heavily tend to be the following: Consumer price index (CPI), released about the 13th of each month at 8:30 A.M. EST; the Employment Report, released the first Friday of the month at 8:30 A.M. EST for the prior month; the report from the National Association of Purchasing Managers, released on the first business day of the month at 10 A.M. EST for the prior month; and Retail Sales, released around the 13th of the month at 8:30 A.M. EST for the previous month.

These four reports are most crucial to short-term traders because if there are any surprises that suggest a strengthening or weakening of the economy, the bond market reacts, which then affects the S&P futures trading, which affects the stock market.

Most casual investors have come to understand how important the meetings of the Federal Reserve Board are because of their effect on all the securities markets. Although usually of lesser impact than Fed decisions, these main economic indicators are still worth knowing and considering for the online investor. This is where having CNBC on in the background is very useful, as they are sure to be focusing on any timely economic data.

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Generally, active traders who are watching and trading the market all day tend to break the trading session into three broad divisions, each lasting about two hours. Both the first and last segments are characterized by heavier volume, while the middle two-hour period is relatively light. If we want to refine the stages a little more precisely, we can break down the trading day into five stages, each one having a particular event that characterizes it.

The first stage is what is called the clearing stage at the open of the market. It usually lasts about 20 minutes into the new trading session. It is during this time that the market makers on the NASDAQ and the specialists on the New York Stock Exchange must execute all the orders that have accumulated since the close of the market on the previous day. The opening of the market is usually a particularly volatile time, with strong volume¡ªoften the strongest volume of the day¡ªand not considered a good time for inexperienced investors to try and trade.

One reason for this volatility is that the market makers have a distinct information advantage over the casual investor, who has no idea what kind of orders have accumulated overnight and are stacked up, waiting to be executed. Because of this, the unaware and naive investor can be caught in a ” whipsaw” effect wherein he or she pays too much for a stock, not knowing what the market maker does: that the price will be brought down as soon as the accumulated orders have been executed.

In other words, the opening bid and ask prices may be set artificially high so that market makers can clear their slates of waiting orders, and then bring the stock back down. When you watch Level II quotes or even Level I quotes from premarket trading up until the time the market opens at 9:30 A.M. EST (6:30 A.M. PST), it is easy to see how bid prices are often inflated. This gives the impression that the stock has been bid up in premarket trading and that it is going to jump upon opening. Sometimes this is an accurate reading of what is happening. But often, it is not. Since the bid price has been artificially jacked up, the offer price gets inflated, too.

If you jump in to buy at this early point, you will often be paying too much for the stock, only to see it drop quickly within the first 20 minutes or so of the opening. So it is not the time to buy. But it can be a good time to sell, often representing the highest bid price of the day.

Short-term traders who hold positions overnight like to take advantage of these inflated opening prices. They may buy stock at the close, in hopes of seeing it “gap up” at the opening. They sell their positions before the market makers bring the stock back down. So, for experienced traders, the opening of the market can be a good time to sell stock. And it can be a good time for casual investors to sell a position as well, either by having a limit order in place, or by watching the action closely and then “hitting the bid” when they see a price they are happy to sell at.

Again, just to emphasize: the opening of the market is a terrible time for the casual investor to try and jump in to buy stock. Putting in a market order to buy at the opening is one of the most common and foolish mistakes that inexperienced or unknowledgable investors make. The simple rule here for investors is: Never try and buy any stock with a market order at the open. And, in this case, never really means never! You are guaranteed to pay the highest possible price the market maker can get you to pay and cursing yourself for your mistake an hour later.

The cliche in trading circles is that the first hour of the market is called the “amateur hour” because all the beginners make all the wrong moves for all the wrong reasons in this first hour. Investors need to sit back patiently and watch how the action unfolds. They need to see what the trend for the morning will be. It is usually unwise to try and buy anything during the first hour unless you are an experienced trader who knows how the market gets manipulated during this period.

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The following statements of affirmation should be repeated frequently during the day (either internally or out loud) as an aid in transforming perfectionistic thinking to excellence thinking. Affirmation statements put into positive words those beliefs that lend direction and support to a chosen goal. Obsessive-oriented perfectionists often do well with affirmations, because they tend to repeat various statements to themselves anyway in the effort to maintain self-control.

After reading the following list, choose one affirmation that feels right for you to focus on. Repeat it whenever you find yourself standing in line, driving, waiting for something, and other moments when your mind is not occupied. Sometimes, if you repeat it many times, you may find that the affirmation begins to repeat itself without any conscious effort on your part. Repeat the affirmation you choose for at least two or three days and then choose another one to focus on.

The value of these affirmations is that they may slowly begin to counter your unconscious, negatively programmed beliefs and help instill new, positive ones. Use these affirmations only in a constructive manner¡ªdo not become obsessed with any of them, keeping in mind they are only mental tools.

• Perfection is impossible; I will be satisfied with excellence.
• I am entitled to feel satisfaction without having to be the perfect investor.
• I will allow myself to feel deeper levels of satisfaction and pleasure.
• I will be open to and accept the feeling of being good enough.
• I will not judge others harshly for failing to live up to my standards.
• I will not make my self-worth depend on my performance.-
• I will note and neutralize as quickly as possible all critical self-talk.
• I will counter all critical self-talk with positive statements.
• I am a unique human being of value; my value can never be taken away.
• Since there is nobody in the world just like me, I need not compare myself to others to feel special.
• I need not compare my trading record with others to feel good.
• I am special simply because of my uniqueness.
• No matter how much I enjoy the profits I make from trading, I will not make my self-worth dependent upon always making more.
• Enjoying material comforts and possessions has nothing to do with my value as a human being.
• I am not less just because I might have less; I am not more just because I might have more.
• Momentary perfection comes as I settle into the present and accept myself as the best person I can be.
• I will continue to grow toward wholeness in every way possible.
• The pursuit of trading excellence will help me feel a sense of self-respect.
• I vow to give my best and most conscious effort to everything I do.
• When I fall short of good enough performance in trading, I will remember that I have still made my best effort.
• I will not feel guilty in investing or anything else unless I know that I haven’t made my best effort.

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Taking risks requires what the perfectionist dreads the most – the fear of the unknown and of failure. So it is important to “put your head into the lion’s mouth,” directly to dare to take some risks that you know will challenge your image as a perfectionist. This means doing some things that you know you are not very good at, and letting it be OK to be a beginner. Allow yourself to be a vulnerable beginner with the attitude of beginner’s mind, the mind of fresh appreciation, where everything is approached with keen interest, as if for the first time.

For example, try making a short-term trade if you’ve never done it before, cooking a simple meal if you never liked to cook, learning a new dance step, traveling to a distant city or foreign country that seems too far away and scary for you, or sitting down and writing a passionate letter, essay, or short story if you’ve never liked writing. It doesn’t matter what you choose – the idea is to take a risk.

Along with trying risky activities that are new for you, try some activities that you know you like but have avoided because you don’t think you do them well enough. Let yourself recapture the interest and excitement you had with these activities before you cut off your excitement by turning it into the fear of not being good enough.

Think about the number of activities and projects that you have started but never completed because of a fear of never being good enough. Go back to those dance lessons, learn that instrument, or take that language class. Give yourself a new chance, with an attitude of allowing for mistakes but enjoying it anyway. Approaching an activity with a new attitude, you may experience much more pleasure than you previously allowed yourself.

You must be willing to face your own embarrassment of not measuring up and your need to be in control at all times. The more you see that you can cope with being out of control and manage your embarrassment at knowing little or nothing about what you are doing, the more you will be ready to accept that good enough performance is, indeed, something worthy of feeling real satisfaction from. This understanding puts you squarely on the path toward transforming your perfectionism to the healthy pursuit of excellence.

The emotion of embarrassment is important in another way. The recognition of your uniqueness, instead of being a good reason to love yourself, is turned against yourself negatively in the form of embarrassment. If you are going to find “perfection in imperfection,” as Zen encourages us to do, you have got to be at peace with your own uniqueness. This means overcoming your embarrassment of your individual differences.

Perfectionists have a deep fear and mistrust of their individual differences. While they want to stand above others and be recognized as superior to them, at the same time they fear standing out because it makes them feel different. For example, you might be embarrassed by a body part that is not perfectly proportioned, your voice, manner of speaking, or style of walking. Each of these examples may be experienced as making you different and therefore out of step with others¡ªor it may be experienced as an expression of who you are that need not be altered for the sake of pleasing others. One sign of healthy adult maturity is coming to accept, appreciate, and honor one’s individual differences rather than be embarrassed by them. This is taking the risk of allowing yourself to truly be yourself. To do so you must view your individual differences through the lens of an attitude called appreciative mind.

Appreciative Mind versus Judging Mind
It is possible to transform judging your behavior, others’ behavior, and the world in general, to a non-judging appreciation of things just as they are. While a judging mind likes to focus on differences that lead to evaluating and comparing everything and everybody, the appreciative mind allows things to be left alone just as they are without comparison.

One way to work with the concept of the appreciative mind is to walk around for a day with one simple idea in mind: that everything you do and everything you see others doing is to be appreciated, just as it is. To appreciate something means to take pleasure in it or receive satisfaction from it and to honor and respect it. The way to appreciate your own behavior and that of others is to view it as perfect in its imperfection.

For one day, see everything that you do as just right in its imperfection. Begin to notice how you can switch your perception from judging and comparing to appreciating all behavior as uniquely perfect just as it is.

Popularity: 5% [?]

One or more of the false beliefs presented here are commonly part of the self-talk that maintain perfectionistic thinking. Often they are unconscious and unchallenged by the perfectionist and therefore continue to exert considerable influence. In pointing out each falsely assumed belief, the point is to make them conscious and to fully acknowledge that they are not true and thus should be substituted with true counterbeliefs. In this way, we can begin to dismantle the assumptions which support perfectionism. In addition, you may want to pick an affirmation from those given earlier that supports a specific true counterbelief.

False belief #1: Perfectionism means following the rules to the letter, never deviating from what you’re told. Counterbelief: It’s OK not to take things too literally; it’s OK to think for yourself and find creative solutions without relying strictly on rules and regulations.

False belief #2:1 will be punished if I don’t always try to be perfect.

Counterbelief: I will be punishing myself if I keep trying to be perfect.

False belief #3:1 ought to feel guilty if I don’t perform perfectly. Counterbelief: I need not feel guilty as long as I try my best. False belief #4: Thinking like a perfectionist makes me more perfect.

Counterbelief: Thinking like a perfectionist makes me more miserable.

False belief #5: Being critical of others helps me feel superior to them.

Counterbelief: Being critical of others only reveals my own need to feel superior to them and my underlying insecurity that goes with it. Anybody can be critical.

False belief #6: People can be as perfect as smoothly running machines.

Counterbelief: People are more like machines that continually need to be adjusted, tuned, and periodically given complete overhauls.

False belief #7: Trying to keep things frozen in a state of stability will make for a more perfect life.

Counterbelief: Without change, there would be no room for growth and new possibility.

As we all sooner or later become painfully aware, the very nature of life is constant change. According to Eastern philosophy, it is the ability to skillfully surf the waves of this ongoing change that is viewed as being in the perfect flow of life. Do you let yourself become part of this perfect flow or do you struggle to swim upstream, against the flow? Healthy striving for excellence means using all of one’s skills and talents to make creative adaptations to this ongoing flow¡ªnot struggling to fight the changing nature of life¡ªor the securities market. So traders are fond of saying: “Don’t fight the tape.”

While stability and security are legitimate and powerful needs in our life, they are only one side of the coin. We must confront our fear of the other side of the coin¡ªthe side that represents the need for new stimulation, surprise, change, and even disruption, chaos, and transformation. And, of course, part of the excitement of online trading is that it never fails to deliver all of these conditions!

One way this acceptance of change is experienced by those striving for excellence is in their ability to enjoy the process of getting to the goal, not just focusing on the goal itself. The perfectionist tends to forget that it is the process of getting there that is what creative adaptations to life are all about¡ªnot just reaching some artificial goal, which is then quickly replaced by another goal, and then another.

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We will show you some selected tools and ideas which may be helpful in striving for excellence in this article:

• Restrict the amount of time you engage in perfectionistically driven activities. Purposefully cut back in those areas that you know you devote large amounts of time to but where your performance does not seem to improve. There is a delicate balance between the commitment of time and energy needed to excel versus being compulsively overcommitted.

  At a certain point, striving becomes self-defeating because it is possible to try too hard. You may spend too much time doing and redoing to get things perfect. Research on leadership suggests that a moderate amount of motivation (leading to moderate time investment) tends to be related to best performance.

• Always break large goals down into smaller subgoals. As with end goals, try and put subgoals into objective, measurable terms. In this way, you can give yourself nourishment along the way toward your end goal. Breaking end goals into subgoals will also tend to reinforce enjoying the process of reaching your end goal.

  For example, if your goal is to learn how to understand Level II quotes, subgoals might be to understand the flow of quotes in relation to the bid and ask prices; who the main market makers are and how they tend to behave; how to use time and sales information; how to predict the movement of the stock from the imbalance of orders to buy and sell; and how to put in bids that are between the quoted prices.

  In determining subgoals, be careful not to set them at too high a level, or you will defeat the purpose of periodic self-nourishment. If you set the subgoals too low, you will not feel worthy of enjoying any satisfaction when the subgoal is met.

• Break the habit of being critical. Refrain from criticizing others’ performance, no matter how much you feel the desire to comment on their inadequacies and shortcomings. If you can break the habit of being critical of others, you will also tend to be less critical of yourself. You will begin to see that it is not necessary to continually compare yourself to others. This is not easy to do, since there is continual cultural reinforcement for playing this comparing game.
• Try journal writing to help you along the path of accomplishment. Write about those projects and activities that matter to you, and compliment yourself when you reach subgoals and end goals. Let your journal be a record of your successes, so that you may return to it for support whenever you tackle a challenge that seems too big to handle. Reading about your successes will help give you the confidence to tackle larger and riskier projects. Use your well-practiced compulsivity in a positive way to ensure that you make entries in your journal regularly.
• Keep company with people who support your projects. It will be much easier for you to reach your goal of excellence if you have others who value excellence in their own lives and who are willing and able to help support your efforts. Refrain from spending too much time around heavily critical people who are unable to appreciate your desire for excellence or who put you down out of their own envy, feelings of inadequacy, and perfectionism.
• Keep in mind the final determination of excellence is up to you. The goal of excellence is not a matter of the outside world giving you approval or applause. While it is desirable and gratifying to receive approval and recognition from others, the real gratification comes only when you have accepted yourself at a deep enough level that you can view your own projects and very existence in this world as good enough. The ultimate judge, jury, and trial reside within.

  There is no substitute for learning to love and accept yourself. All of the glitter from exciting market gains and recognition in the world cannot make you feel good enough if you are unwilling or unable to give to yourself what only you have the power to give. Without this acceptance you will always feel like more is never enough.

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Like long-term investors who follow the companies they invest in, smart short-term traders need to be aware of the news of the companies they are trading. While the momentum of a stock may be enough for scalpers to focus on, those who are doing swing trades of a few hours or position trades for a few days are basing their decisions on news regarding the stock. They need to be very tuned in to the nuances of the stocks they are trading, hoping to capitalize on the short-term effects of them.

When I went back to the trading floor, one thing that hadn’t changed was the select group of stocks deemed most popular for trading. Interestingly, many professional day trading scalpers stay away from the very volatile stocks, like CMGI, Inktomi, and JDS Uniphase. They leave these to the “amateurs” at home (like me), who love these stocks.

For example, I sold CMGI a few days ago after holding it for only two weeks. (I say “only” with the long-term investor in mind, who will tell me he or she has food in his refrigerator older than that; conversely, the day trader looks at two weeks as an eternity, and might tell me, “Greenspan could drop dead any day¡ªwhy take a chance by holding overnight?”). CMGI had a strong 60-point run-up in that two-week period and was approaching its 52-week high, which it ended up breaking through a few minutes after I sold it.

By the end of the session, due to a late sell-off, the stock closed 12 points lower than I had sold it for. I decided a 60 percent gain in two weeks was good enough for me. In addition, the NASDAQ had been on a great run for a month and I felt the pressure was building, that it had to release some steam. My decision looked pretty good, especially when the following day proved to be the day the top blew off so the pressure could escape, and all tech stocks took a thrashing. And then, the day after that, they began their climb to even further highs, with no breather until the first week in January 2000, when finally a bout of heavy selling ruined the party.

This stock (CMGI) simply moves too fast for me to consider trying to get a point or two here or there, especially given my not having a direct access execution system. And even with the advantage of an instant execution platform, most day traders have decided it moves too fast for them, too. They prefer a handful of technology stocks that offer high volume, good but not lightning-fast momentum, and a stability of the price spread of no more than one-sixteenth of a point. The big five that were most popular for trading continue to be Intel, Microsoft, Dell, Cisco, and, more recently, Applied Materials.

When the basic stable of trading stocks is limited to these five, traders can more easily become experts in one main stock. Then they can choose one other stock as a backup, or understudy trading stock, following this one as closely as they do their primary trading stock. This kind of close tracking of the primary trading stocks is similar, if not more intense, than what long-term investors do with their core portfolio. Actually, because they are counting on short-term news to move the stock, they need to be even more aware of the news than the longer-term investor, who does not need to be watching so closely when the stock is doing well.

Day traders need to spend time before the market opens and after it closes researching the stocks they are trading. They need to stay up on bulletin board news and opinion and anything happening with the industry the stock is in and how it may affect their particular stock. They need to be very tuned in to the nuances of the stocks they are trading, hoping to capitalize on the short-term movement.

My point then is simple: If you are going to be a disciplined short-term trader, you’ve got to be reading everything related to your one or two main stocks that you can get your eyes on, both online and in hard copy. You’ve got to know as much as any analyst following the company. Like an analyst, you should be able to stand up before a group and lecture on the stock, the company, and everything related to it. If you can’t imagine doing that, you don’t know it well enough. You need to know all about the sector the stock is in and how your stock compares to other stocks in that sector. This will help anticipate short-term moves for swing and position trades.

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Related to considering exit points and having mental, if not actual, stop losses to protect profits and limit losses, the disciplined short-term trader is often more tuned in than the long-term investor to what are called the support and resistance levels of a stock.

Support means the level at which a falling stock’s price will be met with buyers coming in to prop it up so that it does not fall further. The stock is deemed at the support price to be a good buy. Buyers are willing to jump in at this level. When you look at a chart of a stock, you can determine the level of support by noticing where it “bounces” off a price repeatedly.

There is usually more than one level of support, each signaling a more severe drop than the one above it. Stock charts indicate these support levels and are well worth paying attention to. If the long-term investor knows where the stock is supported, he or she may then use this information in considering entrance and exit points. When the stock breaks through its first support level, traders may use this information to consider getting out. They can see where the next support level will be. Often, breaking through the initial support means the stock will enter a free-fall before hitting the second level.

Not being aware of these fairly stable levels of support, long-term investors will tend to panic when the stock falls through the initial support level. They will then sell out of anxiety and even panic, having no idea why the stock is in a free-fall. The investor who is technically able to read the chart and determine these levels will not be surprised that a free-fall ensues when the stock breaks through its initial support level.

Long-term investors need to have this rudimentary information in helping them understand why a stock is falling so fast. Then they need not panic and end up selling at the bottom, which is often the second or third level of support.

Conversely, the concept of resistance is simply that a stock will tend to rise to a certain point and then have trouble breaking through a specific number. Some stocks will sit at their resistance point for days or even weeks or months before they break out and head higher. And sometimes they never will make it past a certain point, no matter how long you wait. You can watch it come right up to the number and then fall back; this will happen repeatedly, and when it does, it is viewed as the resistance point.

This, too, can be useful information for deciding a possible exit point. At the least, you have an idea why the stock refuses to go any higher when it hits this point. Although for those who do technical analysis the concepts of support and resistance are taken as a truism, large numbers of online investors do not know of them.

Sometimes these resistance points are whole numbers that mark a new decade, like 20,30, or 40. This is why you see smart traders put in sell orders for something like 29 7/8 rather than 30. They know it is tougher to push the stock to the next whole number and they also know that less sophisticated investors are thinking in terms of whole and half numbers. Because there are more of them waiting in line to sell at this round price, let’s say 30, they know it will be easier to hit the bid price of 29 7/8 or 2913/16 than the round number. So, basically, you decide to cut in line in front of everyone waiting for 30.

You can easily verify this by watching the movement of a stock on Level I dynamic, updating quotes. Sometimes the price will hang around the whole number a long time, just under it, before breaking through. I have seen times when the price never has enough steam to break through. This can be viewed as a “miniresistance” and is often controlled, at least to some extent, by market makers.

Of course, when the pressure of buy orders pushes the stock up, the market makers step out of the way and let it run its course.

A stock’s resistance point is important to know for another reason. When you see a stock break out sharply above the resistance point, you don’t want to be in a hurry to sell it, as it needs to be given some latitude to find the new resistance. When you watch quotes on a real-time “tick” graph that charts the movement from minute to minute, it is pretty clear after a while how these support and resistance numbers affect traders.

So, our main point here is that the concepts of support and resistance may be useful to longer-term investors, just as they are used by active traders, to help plot entrance and exit points, and to have a way to help make sense of a stock’s movement.

Now, like anything else in the securities markets, the concepts of support and resistance will hold for much¡ªbut not all¡ªof the action that takes place. There are limitations to all the charting concepts used by technicians, just as there are obvious limitations to the traditional fundamentals when applied to Internet companies.

No one¡ªwhether they were using technical or fundamental analysis, computer programs, phases of the moon (some were saying that the fact that the moon was 100,000 miles closer to the Earth on December 23,1999, closer than it had been in 120 years, made for the surge) or anything else¡ªcould have predicted an astonishing 86 percent gain in the NASDAQ for the year of 1999. The normal valuations applied to Internet and selected high-technology stocks went out the window.

Typical resistance points were blown through as if they never existed. The market showed us something toward the end of 1999 that no one had quite seen before. It left long-time Wall Street watchers and seasoned traders shaking their heads in disbelief.

Which all goes to prove what? That the market has a mind of its own. And sometimes it belies and perplexes even the most sophisticated computer programs that we can apply to it.

In Gestalt psychology, this is stated as the concept that “the whole is greater than the sum of its parts.” As applied to the market, we can take this to mean that no one individual can possibly grasp all the pieces of the market puzzle at once. As we said, we are always being forced to make decisions on limited data. No one person or group can control the whole market (on second thought, maybe Alan Greenspan can). But the forces of individual traders, fund managers, large institutions with computer programs, foreign investors, short sellers, options investors¡ªand every other human and material aspect of the market, through their respective complementary and opposing actions, together create an entity that is larger than the sum of all the individual parts.

All patterns that are used to predict future movement of a particular stock or the market as a whole are based on the notion that the past accurately predicts the future and that we can project these past patterns to predict the future. While this is more true in certain aspects of life, it just isn’t true when it comes to the stock market. While the past patterns may be quite useful in making educated guesses about the future, there is no direct cause-and-effect relationship, much to the dismay of business school professors, economists, market historians, chart technicians, and analysts.

It is far easier to predict the individual behavior of people playing the market than it is to predict the short-term or long-term moves of the entire market itself. You know the stale qualifier that all brokerage companies include when they give the yearly return on investment of funds: “Past performance is no guarantee of future results.” And, of course, sometimes past performance is a contraindicator of future results!

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