Day traders live in the fast-paced world of price and volume data, taking advantage of an asset’s fluctuations within time spans of a few seconds to mere minutes. Day traders are up long before the markets open, reading the news, performing market scans, and watching channels like CNBC and Bloomberg in order to get a reading on the market direction for the day. When the opening bell sounds, day traders have already narrowed in on the stocks, derivatives, or currencies that are going to be traded for the day. Day in and day out, this cycle will repeat itself, as traders attempt to be one of the very few who can successfully sift through the random flux of the markets and make a profit. If a career in all of this maelstrom seems exciting to you, we explain the educational degrees that would be beneficial to trading in this incredibly lucrative, yet risky environment.
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Retail Day Traders
With the advent of electronic trading systems, day trading has become more accessible for the retail traders and has grown in popularity. In the United States, a person merely needs to put up $25,000 worth of capital in their account to circumvent the pattern day trader rule and begin trading through one of the many discount brokerages available. With margins sometimes four times the amount of initial capital, and brokerages competing with one another to offer the lowest commissions, day trading is increasingly becoming a potential source of income. Retail traders come from a diverse array of backgrounds and just like any other form of self-employment, formal education takes a back seat to experience, diligence, and passion in the chosen field.
Erez Kalir: Inside Track
In the 80s and 90s, traders were employed based primarily on their tenacity, charisma, and intuition in trading, working up the ranks as assistants to floor traders or clerks on the stock exchanges. Traders from this era learned from the school of hard knocks, and it was not uncommon to find traders with little or no formal post-secondary education in the pits. However, as times changed, and the world of electronic trading has made the trading game a lot more complex and competitive, firms are under pressure to recruit the brightest minds from the top-ranking universities. Below are a few types of degrees that recruiting departments of investment banks and hedge funds tend to gravitate towards:
- Finance/ Business Administration: Recruiters look upon finance degrees favorably because a lot of the concepts that traders will encounter will be a core part of the undergraduate program. Graduates from a finance program should already have had exposure to the translation of accounting statements, derivatives, fixed income securities, and corporate finance. Furthermore, universities tend to set high GPA standards for admission into finance programs, and the top undergraduates may take part in actual portfolio management scenarios using real funds: a precursor to the investment decisions they will likely face when employed.
- Economics: George Soros, Ray Dalio, and Jim Rogers are three men famous for their macro-economic-based trading philosophies. A degree in economics will expose the budding trader to business cycles, economic indicators, currencies, interest rates, and monetary/fiscal policy. As history tends to repeat itself, economics graduates would have become familiar with the inner workings of important policy decisions, economic shocks, and crises, as well as their impacts on a global scale. Moreover, economic intuition will allow day traders to better understand the news flows and current events that may lead to trade decisions. Finally, economics degrees should expose undergraduates to basic regression and statistical analysis, both of which are utilized in futures trading.
- Computer Science and Statistics. As trading is becoming more and more computerized, it would be beneficial for enterprising traders to understand how these electronic flows of information work. Furthermore, firms employ armies of computer scientists and statisticians in their risk management teams, or to program complicated trading algorithms used extensively in high frequency trading, statistical arbitrage, or market making. If you are a quantitatively minded trader who is comfortable allowing your programs to make all the decisions (many thousands of times a day), then computer science would be an excellent major for your career. Furthermore, statistical concepts are applied extensively in day trading options, such as when gamma scalping straddles. Computer science and statistical undergraduate backgrounds can lead to graduate work in fields of financial engineering or quantitative finance—both of which are very lucrative in their own right. (See article on Flash Trading.)
- Applied Mathematics, Engineering, Physics: Trading can be incredibly mathematical in nature, especially as it pertains to derivatives. Math, engineering, and physics majors are highly sought after by recruiters because of their ability to understand incredibly quantitative concepts, while learning to apply them in creative ways. For instance, the famous Black-Scholes Option Pricing Model can be reduced to the heat equation, and newer iterations of option pricing models rely heavily on stochastic volatility modeling.
The Bottom Line
Traders come from a variety of backgrounds, reflecting the extremely vast array of styles and techniques unique to each individual. However, as the markets are quantitative in nature, it would be useful to pursue a degree in a quantitative discipline if you wish to make a career out of trading. That said, an understanding of economics and finance is also extremely important, and degrees in business administration, finance, or economics can also be viable means upon which to launch a career.