Anatomy of a day trading seminar
Tom McFeat CBC News Online
Is Day Trading for You? It's a question a lot of people ask themselves. They've certainly heard about it. And some of the stories of huge trading profits sound incredible. Could they do it too?
They wonder if they have the stomach for it. Are they capable of acquiring "The Knowledge"? Could they join that elite group of day traders who make hundreds of thousands of dollars a year, sometimes millions of dollars, by just sitting in front of a computer terminal and trading stocks dozens of times a day?
Questions like that brought 400 people to a hotel ballroom in downtown Toronto on a recent Saturday morning. They were attracted by a small newspaper ad ("Seminar on Day Trading -- $47") placed by Swift Trade Securities, so far the only firm licensed in Canada to offer this kind of high-stakes, high risk way to play the markets.
Day trading, for the uninitiated, is the hair-curling process of buying a large quantity of volatile stock, holding on to it for hours, minutes, and often just seconds, carefully watching for an opportunity to ride a stock's momentum. In and out quickly. Investing fundamentals are irrelevant here, as the seminar leader is only too quick to point out.
The Keeper of The Knowledge
Our speaker, Charles Kim, is already a known commodity to many in the audience from his frequent appearances on TV spots, newspaper articles, and magazine features. A day-trading wunderkind, Kim has yet to celebrate his 30th birthday, but is already pulling in $5,000 to $10,000 a day doing something he clearly loves (and that's every day, in U.S. dollars).
He's employed by Swift Trade Securities as a trainer, and has a book coming out on the subject in the spring (Swift Trader, Prentice Hall). His mission this morning is not to teach people how to day trade. That requires a compulsory two-week $2,500 course (which he teaches to would-be Swift Trade clients). Today's job is merely to give each member of the audience a feel for what it is, what it's like, who tends to succeed, and who doesn't.
An engaging lecturer, Charles Kim is surrounded by eager initiates at the break, each hoping for a morsel from someone who has "The Knowledge" they crave. But here, and throughout the seminar, he is careful not to sugar coat the reality of day trading. It can be brutal. Lots of people lose lots of money. Of the people who begin day trading at Swift Trade, 50 to 60 per cent lose and never come back.
In fact, Kim says the vast majority lose money at first, as they try to figure out how to master it (he says he lost $45,000 before "it clicked"). There is no safety net. Press the wrong button and you've made a trade you didn't want to. There's no broker to protect you. You are the broker.
The Clicks and Bolts
Actually, that's the key to why day trading is possible at all. Kim explains the difference between an auction market (like the TSE or NYSE) and a dealer market (like the Nasdaq). He says smaller investors get short-changed by the regular markets, usually paying the ask price while selling at the bid, with that difference (the spread) ending up in someone else's pocket.
Day-trading firms, he explains, use direct access electronic trading systems to get around the "old boy's club" policies that reward the big clients at regular investment dealers. Day traders never wonder if their order has been filled at the price they want. They enter their own bids alongside the big market-makers like Goldman Sachs or TD Waterhouse.
The key to direct access trading is getting instant price confirmations and trading access, on a first-come, first-served basis. And Kim shows how day-trading clients of his firm (and 25 others in the U.S.) can see exactly which market makers want to buy a particular stock, who wants to sell, how many shares, and at what price.
These are called Level II quotes, and you never see them in regular online trading. This depth of market information, and especially the instant order confirmation, are what make day trading possible.
At one point, Kim puts a moving , real-time display of Level II quotes for two stocks on the overhead projector. Dozens of lines of symbols, quotes, numbers, arrows, and colours fill the screen. And they keep changing! It seems instantly confusing, incomprehensible, even frightening. But this is what you have to follow, understand, and interpret 7 hours a day if you want to have a crack at the money. Good at pattern recognition? An ace with video games? Then Kim says you'll have an advantage here.
Who are the best day traders?
So who makes a living day trading? All kinds of people, apparently. But there are some constants. You must have pockets that are deep enough to survive the initial learning curve, when losses will be steep. You must have the necessary discipline to follow your own trading rules when things go wrong. And they will. The best day traders, according to Kim, have an almost bored expression on their faces, even as they buy $40,000 US worth of some Internet stock that's on the move.
And lastly, you must have the time to master the craft. Kim says full-time traders do best. Part-timers, he says, don't get a good enough feel for the market. And since Swift Trade makes a commission off each trade, they want the active full-timers occupying its expensive terminals. Swift Trade has already had to move three times to accommodate the growing demand for its services. It now occupies a 17,000 square-foot facility a stone's throw from the heart of Toronto's financial district.
Many of Swift Trade's clients are in their 20s and 30s. But the second most successful trader in the Toronto office is a 72-year-old woman who pulled in a cool $4 million US last year.
You can hear the admiring murmur ripple through the audience. But Kim is quick to point out that she is the exception. He says he's never met anyone who started making money right away. "This isn't a get-rich-quick scheme," he says. He says there are 20 million horror stories for every success story. He talks about the unsuccessful day-trader who walked into a couple of day-trading firms in Atlanta last year and started shooting.
He points out that day trading isn't investing. It isn't even close. In fact, the best day-traders, he says, have little or no knowledge of the market. That said, Charles Kim says no one in his office makes $30,000 a year at it. "You either make a quarter million, or you suck," Kim says. Today's audience clearly wants to place itself in the former's camp.
There are still fewer than 5,000 people in all of North America who are full-time day traders. Yet such is their impact that they alone are responsible for a third of the entire volume on the Nasdaq. They are frequently blamed for increasing volatility in that market. But there's also no doubt they've added liquidity. Thousands of people trading thousands of shares, dozens of times a day, makes it easier for everyone to buy and sell.
Kim outlines some of the dozen or more strategies day traders employ. Some work well in a choppy market, some are better in steeply rising or falling markets. Sometimes you need to use two or three strategies at once. And what are the basic strategies? Well, the maxim for regular investors may be "Buy low, sell high." Not for day traders. It's "Buy high, sell higher." You can also make money on the way down by selling short. The key is movement. And that means you can make money by watching a stock's momentum, and its relative strength.
You can also make money on a "breakout". That's a stock that's hitting a new trading high or low that day. Chances are, a stock that's hit that "breakout" point will continue in the same direction, at least for the next few minutes. In and out. Most day traders never hold a position overnight.
You can also make money by "scalping", or getting a thin piece of a rapidly-rising stock's upward momentum. Buy 1,000 shares of a $35 stock, hold it for 10 seconds, and sell it for $35 1/8. Profit: $125, less Swift Trade's $25 commission = $100 US. Not bad for 10 seconds work. Do that a few dozen times a day and the money really starts to add up.
Of course, that's if you're any good. Many people just don't get it. Not enough money. Not enough time. Not enough discipline. And as the people in this morning's audience filed out, you could hear some saying this was clearly not for them. But others thought otherwise. They were already lining up to register for that $2,500 2-week course ("$2,200 Today Only!").
Who wants to be a millionaire? Lots of people, it seems. Only here, there's no help from the audience, no free call home.
You're on your own.