Link to Profile Semperoper, Dresden Sieg (auf dem Siegesäule), Berlin Brandenburg Tor, Berlin Skyline, Frankfurt am Main

Thursday, August 16, 2007

Diamonds are a Girl's Best Friend

But I'm not sure they're mine ... Diamonds Trust Unit Series 1 (DIA:Amex) that is. I decided while I was sitting at my desk and not doing very much useful or engaging work today that when unemployed at the end of the year I would make my living "scalping" the market. That's when you do a few quick intraday trades in the markets to take a few hundred or a few thousand dollars out for the day. Needless to say, this is not investing, and it is not for the feint of heart.

Scalping got a black-eye during the dot-com days when it seemed everybody was quitting their job to day-trade. It seems any fool, yours truly included, can day trade when everything is going up up up ... but everyone runs for cover when the markets head south, like they have been doing the last couple of weeks, including today. This is actually when it can be much more fun.

The nice thing about scalping is that you can make money regardless of which way the markets are trending. The not-so-nice thing about scalping is that you can lose money quickly if you aren't disciplined.

To play this game, you need a trending market or issue ... something with volatility. No shortage of that these days.

That still doesn't mean that it is easy money. You've got to put some of your own money at risk, you've got to take a position, and you've got to settle on a couple of exit points ... one if you are losing, and one if you are winning. It's no different than playing the tables at a casino. There is an element of luck, but you make your money by cutting your losses and riding your winners.

What makes this a viable strategy is that the trending is far more easily anticipated than picking the right horse or a number on a roulette wheel. But don't kid yourself that the game isn't rigged against you. All the financial prices you see on the TV networks are delayed prices, so if you're going to play this game you are going to want to lay out a few bucks for real-time data. In other words, you start out in the hole.

Then you spend an inordinate amount of time watching your market or issue bounce around in price ... look at the spread between bid and ask and volumes advertised at each to get a feel for which way things are going ... trying to read the market sentiment.

So having decided to go re-activate a part of my brain that has been largely dormant while I work in a German industrial concern, I couldn't wait to get home to play today's melt-down. I ventured in with a somewhat tame bet on the Diamonds, which are structured to follow the Dow Jones Industrial Average, which seemed like a good candidate for someting that has depth of volume and the potential to move. If I were my old self, I would have been playing OEX puts and calls, but then again options are for pikers and I was trading them when I had no money at all, which is the case with most option traders ;)

When I jumped in the DJIA was coming off the lows of the day and the broader indices were showing some signs of coming back to life, so the trade to make was a buy ... to go long.

Well, I'm actually up about a couple hundred bucks at this point ... lucky me. I might be able to make a living at this after all. But having put myself in the game, I can't go shopping until I close the position, so the question is one of how much money I want to make today. Enough to buy a bottle of Absolut?

p.s. - I got out with enough for that Absolut.

"Dow Jones Industrial AverageSM", "DJIA®", "Dow Jones®", "The Dow®" and "DIAMONDS®" are trademarks and service marks of Dow Jones & Company, Inc. ("Dow Jones") and have been licensed for use for certain purposes by State Street Global Markets, LLC pursuant to a "License Agreement" with Dow Jones and have been sublicensed for use for certain purposes to the Trust, PDR Services LLC and the American Stock Exchange LLC pursuant to separate "Sublicenses." DIAMONDS are not sponsored, endorsed, sold or promoted by Dow Jones and Dow Jones makes no representation regarding the advisability of investing in the Trust.


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