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[VermeerUK]

Worthy read for 'Novices/Inexperienced'(imho) Regards.V __________________ "Day traders: They’re baaaack!" The lure of quick profits is once again tempting these hit-and-run artists back into the stock market, even if the odds of generating true riches aren’t very good. By David Landis, Kiplinger's Peter D. owned a demolition business in the late 1990s but found that the real money was in the stock market. He became an active player, calling in trades to his broker from construction sites around New York City. "I was making thousands of dollars a day by trading," he recalls, mostly in rapidly moving tech stocks. Why bother, he thought, with unions and payroll records and cold weather? So, in 1999, he sold his business to trade stocks full-time. It didn’t take long for reality to hit. The few hundred thousand dollars in profits that Peter made in the waning days of the bull market quickly disappeared after stocks peaked in 2000. But now the bull is back, and, after a two-year hiatus, Peter is again ready to try his hand at making a living trading stocks. "I have had enough time to break the bad habits, to wipe my brain clean," he says. There are indications that the resurgence of the stock market is enticing others to give day trading a spin. Should you fear another bubble in the making? Probably not. But the return of day trading is not a comfy sign of the times.Fast and easy. On a recent Friday evening, Peter was one of about 20 people attending a seminar hosted by Pristine.com, a day-trader training firm in White Plains, N.Y. "Everyone has horror stories," says Peter, 51, scanning the hotel meeting room. "That’s why they’re here." Lou M., who has been trading full-time since being laid off from his job in the grocery business, says he made -- "and quickly lost" -- a couple of million dollars trading stocks. But, like Peter, he hasn’t soured on trading. "I’ve always loved doing it," says Lou, who, like Peter, asks that his last name not be used. The evidence suggests that traders such as Peter and Lou are hardly alone in their lack of success. Douglas Jordan, a finance professor at California’s Sonoma State University, and David Diltz, a finance professor at the University of Texas at Arlington, studied records of 324 day traders during 1998 and 1999. They found that only 36% made money during the periods in question -- this, mind you, during a raging bull market. Riverboat gamblers Both Peter and Lou have what experts say are the necessary characteristics to be successful stock traders -- a passion for the market and a riverboat gambler’s disregard for ordinary caution. But passion doesn’t necessarily guarantee profits. Being a good trader "is like being a good baseball player," says James Angel, a finance professor at Georgetown University, in Washington, D.C. "If you’re one of the top 1,000 players, you can make a really good living. If you’re like me, you’re going to drop the ball and strike out a lot." Most Barry Bonds wannabes recognize early in life that they need an alternative game plan. Not so with stock traders, who are not investors in the classic sense but speculators who seek to profit from the second-by-second fluctuations in stock prices. The democratization of the markets in recent years has put traders on an even playing field. Now everyone starts out with the same tools -- an abundance of news and research and the ability to trade instantaneously at a low cost. The information revolution coincided with a historic bull market. As stocks soared in the late 1990s, tales emerged of fantastic wealth earned by a new breed of investor. These high-volume traders, almost all of them male, flitted quickly in and out of stocks to produce a series of profit gains that were individually small but could amount to serious money when multiplied many times over. Influence far beyond their numbers Day traders quickly became symbols of a new order on Wall Street. Although there were only about 9,000 at the peak, they attracted attention -- and criticism -- far out of proportion to their numbers. They were blamed for fueling stock-price volatility, and some trading firms that sprang up to accommodate them were accused of ripping off naive customers. Day trading gained even more notoriety in 1999, when a disgruntled trader who had lost more than $100,000 killed nine people in a shooting rampage in Atlanta. As stocks began to sink, story after story emerged of traders who had suffered catastrophic losses. Day trading faded from public view when the stock bubble burst. But a core of traders, numbering perhaps 3,000 to 3,500, survives. Some are proprietary -- or "prop" -- traders, who use the capital of a trading firm or hedge fund (a lightly regulated pool of money) and keep 50% to 70% of the profits they generate. Retail traders buy and sell with their own money, absorbing all the profits -- and losses. Cary Gruber is a retail trader. He left his job as a stockbroker in August 1998 to trade full-time. After nearly six profitable years, Gruber, 32, is an elder statesman in the midtown Manhattan office of Schonfeld Securities. Ninety to 100 traders work in row after row of desks on a trading floor that’s half the size of a football field. Gruber counts about a dozen who were trading when he started. What fundamentals? Like most professional traders, Gruber bases his buy and sell decisions on "technical" factors -- stock-price and trading-volume data, usually displayed in the form of charts. He’ll study 200 to 300 charts a day, searching for stocks that fit his criteria for a breakout up or down move. Many day traders care little about a company’s "fundamentals" -- price-earnings ratios or debt levels, for instance. Some may not even know what a company does. On a recent morning before trading opens, Gruber has scribbled symbols of a dozen or so stocks that bear watching. One is Research in Motion (RIMM, news, msgs), creator of the BlackBerry wireless e-mail devices. Two weeks earlier, the stock had jumped $24 a share, or 51%, in a single day, in response to better-than-expected earnings news. But it had moved little since. That straight-up-then-sideways pattern is what technicians call a bull flag, a possible precursor to another surge. Gruber also pays attention to the action on Netflix (NFLX, news, msgs), a fast-growing renter of DVDs by mail. The previous day the stock closed at $59.61, a penny above its 52-week high. Because it broke through "resistance" at its previous high, there was a good chance the stock could go even higher. Although widely used, technical analysis has many detractors, particularly in academia. The "random walk" theory popularized by Princeton economics professor Burton Malkiel in his 1973 book, “A Random Walk Down Wall Street,” argues that historical stock prices contain no clues about future prices. Technical traders disagree, insisting that price and volume movements are key indicators of market psychology that can be exploited by those able to interpret them. At minimum, they are a starting point for experienced traders such as Gruber, who have been at it long enough to incorporate their own instincts and experiences into their split-second trading decisions. The pressure is especially intense during the mad rush of the opening hour of trading. Gruber is taking clues from the momentum of price changes, the spread between bid and ask (buy and sell) prices, the direction of market indexes, the performance of sectors in which he frequently trades (technology and biotech), news announced over a public-address system and alerts from fellow traders that a particular stock is moving. A window on one of the three monitors in his trading station tracks the number of shares he trades (usually between 600,000 and one million each day), his profit or loss and his "buying power" -- the dollars available to buy more stocks at any given moment. (Based on Gruber’s equity of $300,000 at the time, his buying power could be as high as $1.2 million, which consists of his own money multiplied by a 4-to-1 margin provided by Schonfeld.) Cutting their losses Even the best traders are wrong more often than they’re right. Having the insight to recognize a mistake is what distinguishes a survivor from a flash in the pan. Gruber’s approach: Take what the market gives you, and cut your losses when you’re wrong. Trading commissions are low enough -- as little as $3 per 1,000 shares for a high-volume trader like Gruber -- that he can easily afford to sell a loser and get back into it moments later if the trend changes. On this day, the market isn’t exhibiting any strong trends, and Gruber puts relatively little money to work. He’ll wind up the day having traded just 365,000 shares. His profit after commissions is $4,700 -- not a great performance, but it’s not bad considering that the Dow closes down and the Nasdaq is barely in the black. It takes a minimum of $30,000 in capital to become a retail trader at Schonfeld. But owner Steven Schonfeld says he’d rather have newcomers start out on the prop side, trading small amounts of his capital under carefully controlled circumstances. Proprietary traders also have to pass a series of exams given by the National Association of Securities Dealers. Those who show promise as traders are given more freedom and more money to trade. Traders who have talent and are willing to assume all the risks in an attempt to reap all the profits, can always move to the retail side later, Schonfeld says. Emotional detachment is a must What kind of experience best prepares someone to be a trader? Malcolm Murray, who runs several of Pristine.com’s trading seminars, points to former airline pilots. Their experience of strictly adhering to a preflight checklist prepares them well to follow a rules-based trading regimen, he says. Murray is a former health-care industry executive who has been trading for three years. He has been successful enough that Pristine recruited him. Gregg Kravitz is 23 and less than a year out of the University of Maryland, where he majored in organizational leadership. Since last July, he has been trading for a hedge fund while working out of Schonfeld’s offices. For many hedge funds and trading companies, he has the ideal trading background: none at all. No bad habits, no preconceived notions. After spending his first month observing experienced traders and trying out his own strategies on a computer simulator, Kravitz was given real money to trade but with strict limits: He could trade a maximum of 100 shares at a time and hold no more than three stocks. His loss limit for the day was $300. If he lost it all in the first hour of trading, he would spend the rest of the day observing others and watching instructional videos. No guarantee of getting rich Six months later, he has a little more freedom. On an average day, he says, he’ll trade 20,000 shares, and he might make $500 to $700 on a good day. But he has yet to find the consistency he’ll need to stay in the business. His best day recently was immediately followed by two of his worst. "More than anything else, it’s a mind game," he says, trying to put it in perspective. "It is a challenge every day to be able to step back and trade independently of what your emotions tell you to do." Emotional detachment or not, it’s clear that day trading is hardly a surefire way of getting rich. Day traders seem to perform best when stock prices are rising sharply. But there’s no telling how long this bull will stick around. Most day traders are allowed to sell stocks short (to profit from falling prices). However, there’s little evidence to suggest that they were able to use their ability to short stocks to make money -- or at least avoid disastrous losses -- during the bear market. The obvious conclusion is that most day traders are just like the rest of us: When the market roars, they may make good money, and, when it turns inhospitable, they suffer -- only more so because they take greater risks. The Kiplinger Washington Editors, Inc. _____________________________________