Stern Advice: 5 reasons to start day trading now

Thu Feb 2, 2012 1:14pm EST
 
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By Linda Stern

WASHINGTON (Reuters) - We all know what we are supposed to say about day trading: It's horrible, a scam, a vestige of the 1990s tech boom, and just for naive chumps.

But still, there are days when it would be nice to lock in a big win, or pile into a favorite stock when it seems to be beaten up.

In an era of flash crashes, computerized trading, whipsawing volatility and sell orders that cost less to execute than it takes to buy a gallon of milk, why should you stick with the old buy-and-hold strategy? It seems a bit out of date. You don't have to party like it's 1999, but you can be a little more active around the edges.

That's the view of Richard Schmitt, an adjunct professor of retirement planning at Golden Gate University in San Francisco, a long-time retirement consultant, and author of "401(k) Day Trading: The Art of Cashing in on a Shaky Market in Minutes a Day" (Wiley, 2011). Schmitt has been moving his own retirement account money in and out of the market on a daily basis since 2008.

"The beauty of doing it in a retirement plan is that trades don't trigger immediate taxes," he said. Trades within 401(k) plans, individual retirement accounts and Roth IRAs don't trigger capital gains taxes, though many 401(k)plans do limit the frequency with which you can trade.

Here's Schmitt's system: "Near the end of each day, if the market is lower, I'm buying. If it's moving higher, I'm selling." He suggests investors take 1/1000th of the value of their portfolios, and link that amount to the daily percentage change in the Standard & Poor's 500 stock index.

So, if you have $150,000 in your retirement account, you would trade $150 for every percentage point move in the SP500. You'd do that near the end of the day, by moving that much money out of a stock fund or exchange-traded fund and into a money market mutual fund.

"It's a lot like rebalancing, in that when you become overweighted in an asset class like stock, you will sell some," he said. "It takes the rebalancing concept to an extreme."   Continued...