The Guts and Glory of Day Trading. Mark Ingebretsen
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“gorillas” with knockout technology. He either takes positions in a highly diversified basket of these companies and waits for them to grow, or else he uses the shares he owns to execute an options strategy known as “covered call writing.” Chris Farrell searches out extremely stable stocks that trade on the New York Stock Exchange (NYSE). One could truthfully call them boring stocks. But Farrell likes them that way. He earns a living 1⁄16 of a point at a time by getting inside the bid and ask spread. And as you’ll see, his strategy takes advantage of a couple of unique rules governing trading on the NYSE. Another trader, Barbara Simon, a former graphic artist, has made herself an expert on how stocks trade in the days immediately before and after they announce their quarterly earnings. Brendan DeLamielleure watches 5-minute tick charts. Like a violinist watching a conductor’s baton, he waits for the precise moment when he should play a stock or withdraw. And then there’s Scott McCormick, who’s worked on classified engineering projects for the Defense Department. Each night he searches for market opportunities by running a list of stocks through an artificial intelligence software program he’s devised.
Some of the traders put relatively small amounts of money into play. Others bet the farm on expensive, highly volatile stocks. Some hold certain positions for months, even years. Others might jump in and out of a stock in a matter of seconds.
Who’s a day trader?
Are they all, in fact, day traders? Probably not, at least in the strictest sense. By most definitions, a day trader is a person who buys and sells stocks over the course of day. Just before the markets close, except in rare instances, day traders sell off everything they own and revert their accounts to cash – the better to sleep at night, since market-wrenching events can occur at any time around the world.
This book utilizes a somewhat broader definition of day trading. A day trader, for the purposes of this book, is someone who closely follows the market each and every day. All of the 12 traders fit this profile. For several hours each day you’ll find them in front of their monitors. (Some watch as many as eight monitors!). A few track the markets from the moment they wake up until the moment they fall asleep, still holding a chart or the latest research report on some high-flying company. In fact, nearly all the traders I spoke with claim they lose their edge when they stay away from the markets for too long. Nevertheless, several traders do manage to hold down demanding day jobs and still make good money in the markets. Their examples prove you don’t have to quit your day job and withdraw from the world to become a successful day trader. And they can teach newcomers plenty about how these individuals juggle the demands of family and jobs with trading.
Methodology
And that brings up a key question: Are the results claimed by the traders in this book consistent with what an average trader might achieve? Are these traders unique, in other words? Granted, locating the 12 traders wasn’t done using anything like a scientific search. Most came to me through referrals from colleagues whose help I am grateful for. But it’s worth noting that finding traders who’d make $1 million or more wasn’t especially difficult. Before settling on the list here, I amassed a much lengthier pool of candidates.
I should mention a couple of additional points concerning the methodology used to complete this book. Once a trader agreed to be included, the actual interview took place by phone. In all cases, I relied on the traders themselves to supply the details of their trading history. In no case were their accounts audited. In several instances, traders felt uncomfortable naming specific amounts of money. When that happened, I referred to things like the value of their portfolio in broad terms. Also, two of the traders (they’re noted in the relevant chapters) requested that their real names not be used. In those instances, I recreated pseudonyms and changed other personal details, out of respect for their privacy.
But again the question: Is this a representational group? My answer to that would be No and Yes. No, because all likely would be regarded as successful in whatever area they chose to focus their energies. Oliver Velez manages several companies that are outgrowths of his success as a trader. Five other traders in the book manage Web sites where they advise other traders. And their subscribers pay anywhere from $25 to $250 per month for the privilege of receiving their advise in real time. Then there are those who juggle demanding jobs. Bob Martin – the covered call writer – is a trial lawyer representing companies in product liability cases. Scott McCormick – the designer of AI trading software – is a top-level manager at a tech firm. In other words, they and several others in the book prove they can succeed at business as well as the markets. And in that sense they are exceptional people.
It also must be said that the time period during which this book was written was an exceptional one for the markets. Throughout the latter half of the ‘90s, NASDAQ tech stocks in particular rose to unimaginable heights. That record breaking bull run went parabolic during the fall of ’99 and continued into the early months of 2000. And indeed, it was in January and February 2000 that many of the 12 traders saw their accounts top the $1 million mark.
Then, of course, came one of the steepest corrections in recent memory. The best – or maybe it’s the luckiest – traders were those who somehow saw the crash coming and were able to preserve their capital. What led them to correctly predict that the sky was falling and how they reacted during the scary days of March and April 2000 can hold some valuable lessons for any trader or investor, as markets have continued on a choppy course ever since.
Renegades rule
To be sure, during that period many of the other 12 suddenly found their accounts diminished by hundreds of thousands of dollars. (Others quickly adapted and have since seen their accounts grow to new heights.) To put those heavy losses into perspective, it’s worth reflecting again on who these traders are. Whether extraordinary in their abilities or not, they are the kind of regular people you might run into at the supermarket or dry cleaners. Yet by they own volition they have entered a world where each day, when they turn on the computer, they put their entire net worth on the line. Moreover, each day their potential gains and losses sometimes far exceeded what most Americans might earn in a year’s time. In the course of buying and selling each day, they moved millions through the markets.
Yes, it’s true: Had the bull market not come about, many might not have taken to trading at all. But because these 12 traders and thousands like them have taken to trading, they’ve managed to change the equity markets forever. By some estimates, active trades account for half of all trades made each day. Moving money from stock to stock, wagering their skills in daily battles against the very best of Wall Street, that tremendous sea of capital put in play by day traders has challenged the market’s most powerful players – namely the market makers, the institutions, the hedge funds, and the brokerage houses.
What’s not commonly known outside of Wall Street circles is that all of the traditional power players – the hedge funds, the institutions and so on – themselves employ traders who buy and sell on behalf of their firms. And those traders employ many of the same basic tactics used by the 12 traders you’ll read about in this book. Over the decades, those tactics have yielded billions of dollars for their firms. Why then should it seem so incredible that individual traders using essentially the same tools can achieve the same results?
In the coming chapters you’ll learn much about this new kind of investor and how they adapt their strategies to face markets that appear to grow ever more turbulent. Precisely how they’ve come to feel at home in the brave new world they’ve helped create is perhaps the most valuable lesson of all that they can teach us.
A word about decimalization
The major exchanges were beginning the apparently arduous task of converting to decimalization just as this book was going to press. For that reason many of the stock quotes you see here are depicted using fractions. That might make them seem quaint by the time you read this. Nevertheless, I don’t think I’m being old-fashioned or curmudgeonly when I say I’m having a hard time quickly adding figures with four decimal places in my head. We may all wish for a return to fractions.
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