Investors and traders aren’t likely to lose interest in the access to information, sophisticated charting and financial planning tools, and other benefits of the online investing revolution merely because the market is down. Plus, savvy traders know that down markets can be played just as up markets can, if you know how. The Internet has made it possible. Nothing’s going to stop it. Read this book and you’ll understand why.
Jan Parr, Editor, Online Investor 2001
Preface
For all their trappings of wealth and prestige, today’s great exchanges had simple beginnings. The London Stock Exchange began in a pair of coffee houses located along a narrow alley. The New York Stock Exchange evolved from a group of traders who met beneath a buttonwood tree. Both those exchanges allowed traders to look one another in the eye while they haggled over shares in the East India Company and other hot issues of the day.
In the many years since then, technology has radically streamlined the trading process. But the aim of that technology has been the same, to create pools of liquidity large enough to drive the world’s economies.
As trading technology evolved, it invented tools that would foreshadow those everyone used years later on the Internet. Before anyone knew anything about Web-style mash-ups, for example, traders staring into their Reuters and Bloomberg terminals could follow the changing prices of stocks, commodities, and currencies as they occurred. At the same time, they could also gaze at news headlines, statistical charts, and weather forecasts in the hopes of forecasting pricing trends. Likewise, before there were social networks, traders mulled over news and rumors in thousands of chat rooms and discussion threads, many of which were devoted to a particular stock or trading style.
Then, in the ’90s, when the Web had advanced enough to reliably support online trading, millions of enthusiasts took up day trading. It was absorbing and fun, like gambling, you could do it from the privacy of your home, and it might even make you rich.
The Web has been called a disruptive technology that barrels over established ways of doing business, crushing companies or even entire industries in the process. One of the very first industries the Web challenged was the traditional brokerage. Thanks to online trading, it was no longer necessary to pay high commissions and listen to what many saw as tainted advice.
Traders themselves could research the stocks that interested them and buy and sell shares with a single keystroke. Why wait half a day for your broker to take your call?
With a fast enough Internet connection, those traders could even buy and sell stocks several times over during the course of a day. In doing so, their actions mimicked those of market makers and the trading departments attached to the established brokerages. Without the brokerages’ high overhead, traders hunkered over their computer monitors at home were able to scalp profits inside the spreads between the buy and sell prices that the brokerages enjoyed. And in the process, they invented day trading.
Day trading owed its existence to the Internet. But it also fed on the Internet’s promise of untold wealth. As day traders became more and more fixated on the computer and Internet sites that provided their livelihood, they also focused on shares of Internet companies they believed would break down other industries in the same way the net had made trading for the masses possible. You could book a plane flight on the net, buy groceries, or search for a new home. Shares of start-up companies launched to perform those tasks quickly soared in price.
Share prices soared because those Internet companies were invariably small, and they had relatively few shares to trade. Thus, when large sums of money from day traders poured in to buy, demand and astronomical price levels quickly outpaced reason.
Internet trading during the dot-com boom soon resembled trading frenzies from other eras. Radio was the technology that sparked the ‘20s stock boom. Like the Internet, it was a new medium with seemingly infinite possibilities. But the Internet boom may most closely resembled a much earlier period of obsessive trading, the South Sea Bubble of the early 1700s. Traders fed on the notion of wealth to be had from South America, a land few had even seen, but which they understood to be larger than Europe, and as yet almost totally undeveloped.
Only the Internet, located within the realm of cyberspace, could by its very nature be larger than any continent or world. It was infinite, and it was sure to be an engine of infinite wealth. Therefore, so it was argued, the old rules of value, price, and reason should not be applied to Internet investing.
Of course, this was wrong. But it didn’t stop day traders from riding up the prices of Internet stocks. Some made millions in the process and were smart enough to see that an end to the good times would inevitably come. Others continued to believe, and they watched their profits dissolve into the ether of cyberspace. There are examples of both in this book.
Day trading all but ended with the dot-com bust, both as a captivating movement and as a way to make a fortune. But over the years, the markets stabilized, the tools improved, and a new more adept generation of day traders slowly emerged.
This new breed of traders is wise to the mistakes and successes of their earlier peers. Anyone who wishes to join their ranks would be well advised to do the same.
2010
Acknowledgements
Many people helped make this book possible. I would like to especially thank the 12 traders whose stories appear here. Each gave generously of their time during lengthy and at times gruelling interviews. Equally important, each shared his or her invaluable insights into the trading life, including coveted techniques, and even some lesson-filled mistakes, all in the interests of helping other traders succeed. Special thanks also to David Richardson and Andrew Vallas at Prima Publishing, for their faith in me throughout this project. My warmest thanks go out to Steve Harris, publisher of Online Investor magazine and to Jan Parr, the magazine’s editor, along with the rest of her staff. Early in 1998, Jan telephoned me to say she was in charge of launching a new magazine, one aimed at helping self-directed investors make best use of the Internet. Would I be interested in becoming one of her contributors, she wanted to know? I remember that day distinctly because it was the beginning of a fascinating new direction for my own writing: covering the incredible boom in online trading. That boom continues, even as markets surge and decline. All the while, Jan’s help and encouragement have been immeasurably helpful, as the articles all of us involved with the magazine worked on tried to explain how the Internet was empowering investors and traders as never before. Later I would be grateful to receive a similar invitation from Jamie Heller and David Landis at TheStreet.com to cover online trading for that financial Web site. The knowledge I’ve gained by researching articles for Online Investor and writing columns for TheStreet.com has been an enormous help in producing this book. Both organizations have allowed me to be a part of one of the most exciting developments at the turn of the century. And for that, I will always be thankful.
Chapter One. Introduction: Renegades in Cyberspace
Can day trading make you a millionaire? No way, says a June 12, 2000, article in Forbes magazine. The article cites a study by the former North American Securities Dealers Association (NASD, the administrative and regulatory arm behind the NASDAQ stock exchange), which found that 77 percent of day traders in fact lose money. (In 2007, the NASD merged with the New York Stock Exchange's regulatory body and changed its name to the Financial Industry Regulatory Authority (FINRA.) The average profit over the course of eight months was a paltry $22,000, the study revealed, or a little more than you’d earn if you were an especially annoying telemarketer. In all, the NASD survey scrutinized