FOR 'DAY-TRADERS,' THE TURMOIL IS TERRIFIC
While much of the investing public is nervously watching the market's wild moves and wondering if this is the start of a bear market, at least one group of investors is having a blast. Day traders, who spend their time constantly buying and selling thousands of shares, hoping to rack up profits on small stock-price moves, are thriving on the markets' recent roller-coaster ride. Day trading, which is so fast-paced it requires some of the same skills as video games, is enjoying a surge in popularity. The Electronic Day Trader (McGraw-Hill, $34.95), a high technical guide for playing this risky game, has even made it onto Business Week's best-seller list.
"Uncertainty to most investors is very unnerving," says Jeff Burke, co-founder of Block Trading, a large Houston-based day-trading firm with 17 offices in 10 states. "For day traders, this is opportunity knocking on the door." Burke claims that his firm's most successful traders took home profits of $50,000 to $60,000 on Aug. 5, a day when the market roared back at 3:30 p.m. from a loss of 133 points to close up 60 points. Many traders bought thousands of shares when the reversal started -- and made considerable profits in just a half an hour.
"We live for volatility, says Roy Sidikman, a day trader in Saddle Brook, N.J., who says he netted about $30,000 each day on Aug. 4 and 5. In July, he says he made "in the mid-six figures" -- his best month ever in two and a half years of full-time day trading. Much of those trades were in volatile Internet stocks, he says.
SHORT PLAYS. But, while many traders made money in Aug. 5's big leg up, the name of the game recently has been shorting stocks (which is a way to bet that they'll decline in price). Brad Frericks, an Atlanta day trader, says he had made the lucky move to leave open some short positions in small-cap stocks overnight on Aug. 3. Those bets paid off handsomely the next day, when the Dow fell 299 points, or 3.4%, and the Nasdaq fell 65 points, or 3.54%.
"Traders are looking to short strong stocks on rallies," says Marc Friedfertig, manager of Broadway Trading in New York and co-author of The Electronic Day Trader. This sounds counterintuitive, as do many day-trading strategies, but it's apparently working. Since the overall trend of the market is down, day traders figure that stocks that are rallying will probably reverse when investors see a chance to sell for a decent price. "People want to get out," says Sidikman. "You can almost feel the money coming out of the market on rallies."
Still, some traders had a tough morning on Aug. 5, when they expected the market to open with a big down move in a continuation of the previous day's sell-off. But the market opened up and worked its way higher. At noon, it started gradually stumbling down 133 points. "Slow-bleed down days are killers," says Sidikman. In one Internet chat session, several investors told of failed trades where they bought stocks long in the morning but sold for a loss by the middle of the afternoon, says Rod David, president of Avid Trading Co. in Kansas City, which provides research and technical analysis to active traders. They then missed out on the rally late in the day.
NATURAL BORN BUYERS. "New and inexperienced traders tend to have a difficult time," says Friedfertig, mainly because they hesitate to sell short. "People find it more natural to be buyers than sellers," he says. Some have probably been burned on short positions in the past because the market's pattern over the last few years has been to brush off downturns and then race higher.
Keep in mind: What may work for day traders, who usually have sophisticated electronic trading systems with a flood of information on trading patterns, probably won't work for the typical active online trader. Active traders may find it better to simply walk away from their computers during big down drafts. That strategy paid off on Aug. 5 for Karen Millar of Beverly Hills, Calif., who has been trading online from home for the past year and a half. Confident in the long-term strength of her holdings, when she saw the market was down 125 points, she went to take a shower. "I came back, and the market totally reversed itself and went up considerably," she said in an E-mail interview. "Maybe I should stay away from this screen more often!"
Many financial advisers would argue that she would indeed be better off if she bought and held stocks for the long term. But Millar, like many short-term investors and day traders, is clearly enjoying actively managing her portfolio. In what could be the day trader's motto, she says, "I love the volatility, as long as it is going my way."
Amey Stone is associate editor of Business Week Online
Updated Aug. 6, 1998 by bwwebmaster
Copyright 1998, Bloomberg L.P.