The Guts and Glory of Day Trading

True stories of day traders who made (or lost) $1,000,000

Mark Ingebretsen

• Publisher: Harriman House
• Year: 2011
• ISBN:
  9780857191489
• Topic: Business
• Subtopic: Stocks
• Index: Business

A rediscovered trading classicVery few day traders make money - let alone $1 million or more - in the daily stock-trading battle. 'The Guts and Glory of Day Trading' tells the true stories of twelve otherwise ordinary people who have made or lost at least $1 million trading stocks. Their triumphant and tragic tales pull back the curtain from the gritty world of day trading to give a rare glimpse of the human emotion, the lives transformed, and the lessons learned, aside from the hype.Day traders aren't only market gurus and stock brokers, but regular people - classical pianists, burned-out photographers, moonlighting business consultants - who decided to pursue an exciting and treacherous phenomenon to achieve independent success and wealth beyond their wildest dreams. Their stories will inspire you, and - more importantly - show how you can improve your own trading strategies by learning from their successes and avoiding their mistakes.Every battle has its winners and losers. Every day, thousands of day traders take their battle positions in front of their computers to go head-to-head against the world's best, and most powerful, trading institutions. There are casualties, many casualties. But there are also victories - moments when an individual trader reaches the pinnacle of our capitalist system to take a profit.Making money isn't easy - with a 75 to 90% failure rate, only the strong survive, and only the most savvy live to trade another day. But despite the negative press, a wildly unpredictable market, and the possibility of losing their shirts on any given trading day, these market mercenaries continue to trade, and day trading continues to grow as a profession. What drives them? In 'The Guts and Glory of Day Trading', you'll read the astounding stories of those traders who have been skilled enough to make significant money, and the gut-wrenching dramas of those who were unfortunate to lose vast fortunes.Their stories and strategies will keep you on the edge of your seat. These valuable lessons from this trading dozen tell more than just the pits and peaks of stock trading. They teach the survival skills and tactics necessary to live to trade another day. You can learn how to improve your own trading techniques by learning what most of them did right - and what some of them did wrong.

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 the accounts of 124 day traders. It found only two cases in which traders earned $100,000 or more. That’s less than a mediocre stockbroker makes on commissions, the Forbes article noted. The implied message, seemingly: It‘s better to steer clients into bum trades than to make those bum trades using your own money.

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, who’s a lawyer from Wichita, Kansas, looks for successful, fast-growing companies called “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 W...