Life of a Day Trader – one woman’s 6-month turn as day trader
VANITA JONES REVEALS THE PROMISE AND PERIL OF ONLINE INVESTING
WITH THE EXPLOSIVE growth of online brokerage firms, it seems that practically everyone is trying to make money by trading stocks electronically. And as millions of Americans join the online trading craze, an increasing number of investors are tempted to try a more lucrative–and much more risky–way to cash in on the trend. They become day traders.
A day trader is an individual who buys and sells securities all day for a living. It’s that investor’s job to spot opportunities in the market and quickly capitalize on them. That may require “going long,” buying an equity that appears poised to rise, or “shorting” a stock, selling it in what is essentially a bet that the stock will fall in value.
But there are huge differences between a professional day trader and the average person who updates his or her stock portfolio now and then through an account with, say, E*Trade or Ameritrade.
For one thing, a typical individual investor can get into the online trading game with a personal computer and less than $100. Among professional day traders, the usual cost of entry is a hefty $25,000, Another difference: even active investors typically don’t tinker with their stock holdings more than twice a month, if that often. By contrast, day traders may hold their positions for a few precious minutes, purchasing or unloading as many as 50 stocks a day.
There is one other enormous distinction separating day traders from the so-called armchair investor sitting in front of their home or office PC.
Professional day traders are engaged in a persistent, two-pronged battle: one against Wall Street, the other against themselves. For not only are day traders matching their wits against the market on a minute-by-minute basis, they must also fight to keep their own emotions in check–regardless of whether they happen to be making a king’s ransom or watching all their money go up in smoke.
As a result, being a day trader takes nerves of steel, often demands the patience of Job and–it almost goes without saying–requires some serious cash. In other words, if you don’t have the discipline or the dollars, don’t even try it.
INTO THE LIFE
Just ask Vanita Jones, 36, of Los Angeles. One year ago, Jones became a day trader. She did it for six months–working from July through December 1998. Her experience illustrates the thrills of day trading, the despair that sometimes occurs and the personal and professional lessons to be learned along the way.
Jones is the kind of person who has always excelled at whatever she did. Before she started day trading, she was a successful stockbroker for Prudential Securities. Prior to her one-year stint at Pru, Jones worked in sales for eight years at a firm that sold messenger and attorney services to law firms. By the time
Prudential recruited her, Jones had been promoted to vice president and was earning a six-figure salary.
At Prudential, Jones “really learned about the stock market,” she says. The brokerage firm also reinforced concepts Jones had already been exposed to when she earned an M.B.A. in finance and entrepreneurial studies at the University of Southern California’s Marshall School of Business.
Armed with this background and experience, Jones was confident she would be successful at day trading. To boost her knowledge, she spent $2,000 on a seven-day class designed to teach her as much as possible about trading–everything from investment psychology to the technical strategies used by securities pros.
When she plunged into day trading last summer, Jones was fortunate enough to have $50,000 in cash at her disposal. Most day traders need $20,000 to $25,000 in start-up capital, but some get going with just $10,000 or so.
“GAP AND CRAP”
Jones began trading out of the offices of the online brokerage firm Westwood Trading (later acquired by Cornerstone), and she remembers her early days vividly. “I would do just two or three trades a day and then go home,” Jones recalls.
By using a strategy known as “gap and crap,” she could easily pocket $500 or more in an hour or so. And by bailing out while the going was good, Jones was observing a cardinal rule among day traders: “You can’t get greedy. You have to take your profits and get out of there.”
Needless to say, it was a rush to earn so much money so quickly. And such a work schedule represented a far cry from her 14-hour days at Prudential.
In fact, one of the reasons she left Prudential was to spend more time with her son, who is now three years old. So, as a day trader, Jones initially found the best of both worlds: a new sense of freedom as well as fast money. Kit was exciting. I woke up every morning looking forward to trading,” she says. “And I used to make a lot of money, when I first started, just playing gap and crap.”
A gap occurs in the market because there is trading that takes place overnight. In many cases, individual investors come home from work and place buy or sell orders through Charles Schwab & Co. or some other online broker. These electronic orders, however, don’t get executed until the following business day. The result is that various stocks “gap” up or down in overnight trading, depending on investor demand.
Whether or not these stocks will close their gaps and return to the previous day’s levels is anybody’s guess–a crapshoot, you might say. As such, these openings present narrow windows of opportunity. To determine how she should play gaps, Jones would look at the S&P futures to gauge how the overall stock market would open.
If the S&P futures index pointed to a lower start, Jones would try to find individual stocks that had also gapped down. Then she’d watch her ticker screen, which showed her the size of buy and sell requests and how quickly orders were coming in for any given stock. Ultimately, if Jones felt a stock would dose its gap soon after the opening bell sounded, she would take a position in the security. “With a stock that had gapped down at least 2 points or $2, if I traded 1,000 shares and it dosed the gap, I made a quick $2,000,” Jones explains.
The gap and crap strategy, however, only carried Jones for so long. One of the reasons was that Jones loved to short sell. When investors short a stock, they’re selling shares they don’t actually own but have borrowed on margin. The trader hopes that the stock’s price will fall. When it does, the trader repurchases the stock at a lower cost than he or she originally paid for it. Short sellers then return the borrowed shares, pocketing as profit the difference between the price at which the stock was bought and sold. “I was definitely a bear,” Jones acknowledges. “But I knew you couldn’t really be a bear in this market.”
Indeed, as the Dow Jones industrial average continued to rise to astronomical levels, the strength of the market made it especially difficult to earn money as a short. So Jones did the smart thing. She adjusted her game plan.
DEVELOPING A NEW STRATEGY
One technique she adopted was to divide her trading day in half. Because she lived in California and was following the markets in New York, the first half of her day ran from 6:30 a.m. until 10 a.m. She’d watch how the market opened and determine, based on the first 15 minutes of trading, whether it looked like it would be an up day. If so, how long would that upswing continue? Also, she tried to determine which sectors were likely to be hot. During the second half of the day, which ended at the 1:00 p.m. closing bell, Jones again looked for either strong or weak sectors and then the strongest or weakest stocks within those sectors. It was nerve-racking for several reasons, not the least of which was knowing that “everything can change in the last hour,” Jones says.
Through it all, the wily investor managed to pick her share of winners and losers. For instance, at a time when some investors were buying Microsoft (Nasdaq: MSFT), Jones made money shorting the software giant during periodic dips in the company’s stock price. Another time, however, Jones bought an Internet highflier, Excite! (Nasdaq: XCIT), and took it on the chin.
“I went long and it started going down, and I couldn’t get out,” she says. As Jones watched Excite! drop by a point, she remembers thinking: “How in the heck am I going to get out of this thing?” When all was said and done, Jones lost $1,200 that day. But she learned firsthand a valuable lesson that all investors would do well to heed: stocks “tend to fall faster than they rise.”
When stocks fall, one strategy used by day traders is the “Lizard Reversal.” Traders watch for a stock that is going down all day, but at the very end it closes up. Normally, you’d expect it to pop up the next day.
Jones also describes a technique known as “1-2-3-4.” The theory behind it is that if a stock goes up for three consecutive days, you can expect that on the fourth day, it’ll most likely do the reverse. The opposite holds true as well, according to this theory: if a stock has fallen for three days in a row, the odds are that it’ll rebound during the fourth trading session.
For all the theory behind these strategies, Jones says they won’t matter much if you don’t have the conviction to stick with your stock picks. “You can get bogged down in all [the strategies] when the main thing to focus on is discipline,” she says. To succeed, a day trader must consider: “How much am I willing to risk on a particular trade and stick to that strategy no matter what?” In fact, experts tell traders to limit themselves to a maximum loss of half a point.
You should also focus on an entry point, Jones advises. “Think about where you want to get into [a stock],” she says. And if you’re attentively charting a stock’s performance over time, “you can see where you should exit,” Jones adds.
One final caveat from Jones: trade only when you have a clear head. Most of her losses occurred in the month of September, when things were turbulent throughout the globe. “My biggest mistake was to trade when emotionally and mentally I was not in the game,” she says. “I was just going through the motions.”
LOOK AT THE INVESTOR IN THE MIRROR
One of the ironies about Jones is that she became a day trader at all. She’s not a person who is comfortable with taking big risks. “They always say that when you trade, it’s like looking in a mirror–and that’s true. You really learn about who you are,” Jones says. “In my case, I’ve always been a cheapo. I certainly didn’t want to lose money, and I really am not risk tolerant,” she confides.
Her risk-averse nature worked for and against her. “For, because my losses were usually [contained to] half a point; against, because I didn’t let my winners run,” she says. “Oftentimes I was making the right selections, but I didn’t have the patience or tolerance to stick with them. That’s how I ended up spending more in commissions than I was making.” On a given day, Jones could make or lose $500 or $1,000. In total, she lost $18,630. Of that total, $15,040 was in commissions and execution expenses.
Jones traded through Westwood Trading. She also had an account with the firm that allowed her to buy stocks on margin, or using leverage, at a 4-to-1 ratio. Thus, she could spend $1,000 and actually control $4,000 worth of stock. In return, she paid Westwood $40 in commissions and about $5 in execution costs, for a total of $45 per “round-trip” trade–that is, buying and selling a stock.
Some traders at Westwood made as many as 100 roundtrips daily; Jones averaged far fewer–about 20. But even at that rate she was spending $900 a day in commissions. “Everyone around you is in and out,” of the market so fast, Jones says. “But I realized how quickly the costs were accumulating.”
In late 1998, Jones left Westwood Trading and began trading from home. She wanted “the freedom to do more position trading as opposed to day trading.”
As a day trader, Jones says she usually held on to a stock for about 30 minutes before selling it. With position trading, she could hang on to the stock for a longer period of time, riding out brief bouts of volatility and staying ahead of commission costs. But Jones never really got a chance to try her hand at position trading. She called it quits before fully employing that strategy. “The worst part was deciding for myself that trading wasn’t right for me, at least not at this time,” Jones says.
LIFE AFTER DAY TRADING?
Mentally, Jones knows she made a mature choice–and the proper decision. Yet she still finds herself “constantly wondering: did I give it enough time? And then feeling that I had the knowledge, the resources, but ultimately not the energy to do it anymore.” Jones is now at the point where, she says, she doesn’t want to pick up a financial newspaper or see the business news on television. “I became so consumed with it that I just crashed, especially given my own grave disappointment that it didn’t work out the way I wanted it to.”
But a post-day-trading life has continued for Jones. And, most importantly, she is happy. Jones is expecting a baby in mid-August and plans to stay home with her child for some time. Still, when asked whether she would ever go back to day trading, she pauses to grapple with the question, and then answers truthfully: “I’m still asking myself that,” she responds. “I don’t know.”
Then she ponders further and adds: “I think that probably at some point I will get tempted to start doing position trading, but probably on a much smaller scale via E*Trade or something.”
After all, Jones adds: “I’m still a bear–and I think the market is way overvalued.”
RELATED ARTICLE: HOW TO GET INTO DAY TRADING
If you’re interested in learning more about day trading, there are a host of interesting and informative books and Websites on the subject. Here are a few recent selections:
Day Trading into the Millennium by Michael P. Turner (Mass Market Books, $62.95)
How to Get Started in Electronic Day Trading by David Nassar (McGraw-Hill, $24.95)
Hit and Run Trading II by Jeff Cooper (M. Gordon Publishing Co., $99.97)
Electronic Trading “TNT” I: Gorilla Trading Stuff by Joe Ross and Mark Cherlin (Koata Ltd., $100)
Also by the same authors:
Electronic Trading “TNT” II: How-to-Win Trading Stuff (Koata Ltd., $100)
Electronic Trading “TNT” II: Technical Trading Stuff (Koata Ltd., $125)
Stock Patterns for Day Trading by Barry Rudd (Traders Press, $95)
The Electronic Day Trader by Marc Friedfertig and George West (McGraw-Hill, $34.95)
To find out more about day trading, log on to:
Legend Trading Seminars
(www.tradingseminars.com/highlights.html). This site is devoted to investors who want to learn from the top traders.
The Momentum Trader
(www.mtrader.com). Day trading classes taught daily in an interactive forum.
(www.877daytrade.com/info.html). The site to go to for live, online demonstrations as well as commission-free trades.
(www.natt-daytrade.com). Go to this site to learn how to day trade.
COPYRIGHT 1999 Earl G. Graves Publishing Co., Inc.
COPYRIGHT 2000 Gale Group