Share this story
Close X
Switch to Desktop Site

Day trading, demystified

Should dabblers join pros on investing's wild frontier?

Rich Tyroler changes stocks more often than he changes socks.

He's a professional day trader. He and thousands of others across the country have made careers of trading stocks and other securities, hoping to profit on small fluctuations in price.

About these ads

Most investors measure their ownership of a stock in years; for day traders, it's unusual to stick with one stock for more than a few hours.

It's a field now in the spotlight, after disgruntled day trader Mark Barton murdered nine people in Atlanta.

Regulators worry that new traders, including a rising number of amateurs, aren't sufficiently aware of the risks.

Who are these people? How do they do it - and why, given that they are likely to lose money in the long run?

The phenomenon is made possible by remarkable new technologies that give a housewife in Walla Walla access to the same information as a hotshot trader on Wall Street. Shares of stock can be bought or sold, sometimes for the price of a McDonald's lunch. It's alluring.

But market access, without enough knowledge or the capacity to take losses, can have a dangerous downside.

Technology - and a desire to strike it rich that seems a 20th-century gold rush - have led about 5,000 Americans, formerly lawyers, small-business people, even summer-camp directors, to the woolly world of professional day trading.

About these ads

But like California's 49ers, most learn that there's no such thing as an easy buck. And with the technology that allows them to move in and out of the market in a matter of seconds increasingly available to anyone with a PC, their numbers will continue to grow.

Unless, that is, a bear market stands in their way.

The larger result of this new class of traders, experts say, is capital markets with higher highs, lower lows, and quicker leaps from one to the other. In a word, volatility.

It may be anathema to traditional investors, but volatility gives Mr. Tyroler his living - though it wasn't always so.

His path to professional day trading was typical. Two years ago, he was running a summer camp for children. While looking for a camp of his own to buy, he started spending much of his time managing his stock portfolio, sometimes making several trades in a day.

But his approach wasn't that aggressive - he usually held stocks for weeks before selling. While his approach held risks, he made money, putting him in a minority in his new field.

After months of trading on an Internet service, he signed up with Generic Trading, a Philadelphia-based firm where professional day traders move money in and out of stocks many times a day.

From 8:15 to 4:15 each day he sits in Manhattan and stares at three computer screens, flashing graphs and quotes, in a crowded room filled with chatter from about a dozen fellow traders. Alan Greenspan drones over CNBC in the background.

During his amateur days, Tyroler based his investments on news about a company - if strong earnings were announced, he would buy. Now, he looks only at trends in the price of a stock, taking what's known as a technical approach to trading. Each night he analyzes charts of about 200 stocks he regularly trades, looking for something he might want to buy the next morning.

What goes up. . .

This morning, for example, he notices that stock of Lucent Technologies, the telephone-hardware company, is moving steadily upward. So he buys 500 shares at just over $62 each - a $31,000 investment. His hunch that the stock will continue to rise, though, proves wrong, and he sells it off at the end of the day at a $200 loss. (He profits more than $1,000 on a $90,000 stake in Motorola on the same day.)

Actually, Tyroler is conservative by the standards of day traders. He sticks mostly to larger companies, avoiding more volatile securities such as futures, options, and Internet stocks. And he makes only about 20 trades a day; many day traders make hundreds.

Despite those precautions, Tyroler is exposing himself to big risks. "I like the fact that you're making real decisions and deciding your own destiny," he says. One day he lost $14,000, though on average he says he profits $1,000 a day. To succeed in day trading, he says, "you need the ability to lose money and be OK with that."

Many aren't. Three people have come and gone from the desk next to his in the nine months he's been at Generic, consumed by the losses that are typical in the field.

But the big numbers - profits or losses - don't faze Tyroler. He remains quiet and without emotion as the numbers flash on his screen, tens of thousands of his dollars in the balance on each transaction. Others are not so restrained - thrown chairs and cursing are not unheard of when trades go sour.

Regulators have accused day-trading firms of inadequately advising clients of the financial risk. A recent study by the North American Securities Administrators Association, showed 70 percent of professional day traders lose money.

More worrisome, perhaps, is that with Internet trading through discount brokerages, the field is no longer limited to full-time people like Tyroler, who have an average net worth of $600,000 and a certain market-savvy.

Many of the pros get their start with trading on the Internet before "graduating" to full-time, on-site trading at places like Generic.

The distinction between on-line investing and day trading is blurry. But technically it boils down to access to markets. Full-timers at professional day-trading firms pay more for fuller information on a network linked directly to the market in "real time."

Internet companies such as E*trade, Charles Schwab, and Fidelity Brokerage, on the other hand, act as brokers. They provide less data, and take orders for trades, which may take hours to execute.

Interactive Brokers even provides live access to options and futures markets over the Internet, and plans to offer Web traders the same live access to stock markets as day traders starting Sept. 22.

Even basic Internet trading offers immediacy that lures people to invest more aggressively, says Ed Nicoll, president of Datek Online Inc., a leading online brokerage. "It used to be that most people waited for their monthly statement to sit down and analyze their investments." Now anyone can get instant updates on where their portfolio stands throughout the day - and trade accordingly.

. . .may fall down

His and other firms discourage risky trading by those who lack expertise. "It's like giving people the freedom to drive cars," says Mr. Nicoll. "Some use it right, some don't." But there's nothing wrong with even novice investors managing part of their portfolio more aggressively than the rest, he says.

Amid criticism, companies that offer day-trading services insist that following the ups and downs of the market is a sound move - for those who do it right.

"Trading is a serious business," says Ron Shear, CEO of Carlin Financial Group, the parent company of Generic Trading. "People trying this need to treat it intelligently and can't be in a rush to make a fortune." Those who make it, Mr. Shear says, have discipline, work hard, and react quickly to changing markets.

Also, "They have to be very, very competitive," he adds. "They have to have a lot of confidence, and they need the ability to do the opposite of what they see coming across CNBC."

Watching, trading stocks from work More people may be day trading full time, but many still prefer the cushion of a steady paycheck. That can mean trading from the workplace. A recent survey of 102 network administrators by Computerworld found that only 8 percent of companies block access to investment Web sites - sites that enable you to monitor stocks and, in some cases, trade. Below are the top sites visited by people at work last March:











Source: Media Metrix Inc.

(c) Copyright 1999. The Christian Science Publishing Society

Follow Stories Like This
Get the Monitor stories you care about delivered to your inbox.