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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