Pay a visit to the Securities and Exchange Commission’s (SEC) Web site and you find more dire warnings about day trading. “Be prepared to suffer severe financial losses”, a headline on the site warns. Beneath the headline, the text reads, “Day traders typically suffer severe financial losses in their first months of trading, and many never graduate to profit-making status.” Moreover, the SEC notes that “day trading is an extremely stressful and expensive full-time job.”
A TV commercial for Barclays Bank that’s aired frequently on CNBC reinforces the idea that day traders are in deep denial when they think they can make a living by trading their own accounts. The ad depicts an unwashed, unshaven, and slightly unhinged trader at work in his pajamas. We watch as he racks up profits of $16 or $64, even while his life savings stand in danger of evaporating at any moment.
Success stories
Happily, the traders profiled in this book belie that stereotype. And for that reason alone, we can learn a lot from their stories and the strategies they’ve used to succeed. Their record of success is vastly better than the findings of the NASD survey. To secure a place in this book, each trader had to build an account that totalled seven figures or higher. Alternately, over the course of their careers they needed to have taken at least seven figures from the market. The great majority of the 12 traders did far better than that. Some succeeded in earning more than $1 million. One trader, Mary Pugh, in keeping with the book’s subtitle, did sustain losses well in excess of $1 million. But prior to that, she had built her account up by many millions more. And her losses occurred mainly because she chose to place a major portion of her portfolio in a small, highly speculative tech firm.
Far more common were losses of hundreds of thousands of dollars incurred during the tech wreck of spring 2000. But even when factoring in these huge losses, the traders were still left with accounts that were vastly higher than the sums they began with. Their returns of 100 percent to as much as 1,000 percent or more would impress even the most out-on-the-edge hedge fund manager.
The stories of how these traders amassed that money are indeed true tales of guts and glory. Teresa Lo let close to $1 million ride on long index options – one of the most risky trading arenas you’ll find. Over the weeks her profits grew. But she refused to take the funds off the table, even though she knew an unexpected market downturn might render her entire options portfolio worthless. Terry Bruce grew his portfolio from $75,000 to well over half a million in just six months, only to watch it crash back to zero following a series of bad trades. To get back into the trading game, he took out a second mortgage on his house. The $40,000 he amassed would serve as both trading capital and expense money. And he knew if he lost it, he’d find himself practically out on the street. During the turbulent markets that occurred during late ’99 and into 2000, Barbara Hamilton found herself making and losing as much as $100,000 in the course of a single day!
A new breed of entrepreneur
The stories these traders have to tell are all the more remarkable when you consider that many came from very different walks of life before taking up trading. True enough Lo, Oliver Velez, Brendan DeLamielleure, and Chris Farrell served stints with brokerage houses before they began trading their own accounts full-time. But they are the exceptions. Before taking up trading, Barbara Hamilton was a classical pianist and then a software programmer, Mary Pugh worked for top-level New York ad agencies. Terry Bruce made a good living as a photographer. Over time, like civilians drafted into the Army, they became hardened market veterans. And their performance, as you’ll see, often exceeded that of Wall Street’s best money managers.
Indeed, a decade or so ago, before the advent of the Internet and the spread of deep discount online brokerages, these same people might have sought their fortune by starting their own companies. Or, they might have reached for brass rings in the entertainment industry, maybe by writing a screenplay, or waiting tables while they auditioned for acting jobs. In all likelihood, trading offers a better chance at success than any of these alternatives. Only a handful of aspiring screenwriters and entertainers ever achieve true success. Likewise, if you start a small business – even a boring business like a yogurt stand or a quick lube shop – your odds of success are pretty dismal. Roughly nine out of ten businesses fail in their first years of existence, according to the U.S. Small Business Administration. The successful ones hemorrhage money for years before turning a profit. And during those manic early years, small-business owners must continually scramble to find cash to pay their suppliers and employees. Besides worrying about the product and customers, small-business owners tear their hair out dealing with regulations, personnel flare-ups, irate landlords, and a plethora of other problems.
Why day trading is so appealing
Trading for a living seems elegantly simple by comparison. Moreover, it’s the sort of career or second career that you can begin immediately. First, learn all you can about investing. Read books. Tune into Web sites like Finance Yahoo, TheStreet.com, Quicken.com, and CBS MarketWatch. Listen to CNBC in the morning while you take a shower. Set up a personal computer with a fast Internet connection. And finally, open an online account with $50,000. And you’re set to go. As one successful trader (not profiled in this book) told me, “This is the one thing that I can do where I feel like I have control over everything. I don’t have any employees. I don’t have to worry about suppliers.” Seated at his computer, he, like other traders regularly matches wits with Wall Street’s best and brightest. And quite often he wins.
To be sure, becoming a successful trader can take months or even years. And some people simply aren’t cut out for the job. For those entirely new to the subject, the appendix contains a primer on trading. But for now let’s focus on that $50K in start-up capital, the minimum amount most trading coaches say you need to get started. It’s the Information Age equivalent of a stake in a poker game.
But in today’s economy, it’s not really that much money. Fifty thousand dollars wouldn’t buy you very much of a business, for example. And without a separate source of income, such as a spouse’s salary, you’d be hard pressed to pay your business expenses and your living expenses in the early months.
Therein lies the allure of day trading: It’s an opportunity to turn a modest sum into a fortune, and in a short time. “If you’re good at it,” notes Brendan DeLamielleure, “there’s not a higher margin business in the world.” Call day trading the new American Dream. Its allure is especially strong for those who’ve served time in unfulfilling jobs, those who’ve been downsized, underemployed, or otherwise left out of the ‘90s economic boom. When you launch your trading career, there’s no need to worry about finding investors, as would be the case with a brick-and-mortar business. No need to worry about customers beating a path to your door. There are stories of really daring traders – and also fool-hardy. I’d hasten to add – who have amassed their $50K stake by maxing out their credit cards. As long as the potential exists for people to make so much money by putting together a comparatively small stake, day traders will remain with us. Sure lots will flame out and go back to crummy day jobs, just as most people who start small businesses fail and most aspiring actresses fail and most novelists. But a long line of newcomers will always be there, ready to take their places.
That is as long as the potential exists to make money in the markets. To make money, all traders really need is volatility. Needless to say, over the last several years the markets have been notably obliging in that regard.
Unique strategies
Which brings up how the traders profiled in this book can be especially helpful to anyone who’s thought about joining their ranks. Each of the 12 traders you’ll read about has developed a unique strategy. You could think of this book as a kind of sampler of artistic styles. And – yes – the most successful traders play the market the way a skilled musician plays an instrument.
One trader, Bob Martin,