Some Traders Are Making Hay By Day
By Peter McKenna
Investor's Business Daily
When you day-trade, you
sit at a computer and
put your hard-earned
money at risk day after day, hour
after hour, minute after minute.
What kind of person would engage
in such strange behavior?
"It's hard to believe, but good day
traders today are actually sensible,
risk-averse businessmen," said Kyle
Zasky, president of Edgetrade.com, a
day-trading firmin New York City.
"They have a common goal: to eliminate
as much risk from their trading
as possible."
Can the risk of day trading really
be managed? Can it be kept to such
low levels that gains will be greater
than losses?
More and more, day traders say
the answer is yes.
Across the country, working at
home or at day-trading centers, the
number of day traders is growing.
Declining stock prices in 2000
flushed occasional traders - those
who make 15 to 40 trades per year -
out of the market. Their numbers
dropped by 37% in 2000, according
to Amy Butte, an analyst at Bear
Stearns.
But the number of day traders -
those who make an average of one
trade every nine minutes - is increasing.
"We estimate," said Zasky, "that
there are now 55,000 people who I
would describe as professional day
traders."
These traders represent 81% of
total online retail trades, according to
Butte, and they account for 8% of
the Nasdaq's average daily volume.
Zasky believes the number of traders
who are making money is starting
to rise.
If true, this improvement is not the
result of new technology. The bells
and whistles day traders need to do
their work, such as lightning-fast executions
and direct access to the Nasdaq
Level Two market, have been
available for some time.
The difference is time and experience.
Day traders in
2001 are benefiting
fromthe hard lessons
learned by those who
went before. A handful
of smart, successful
traders have distilled
the art of day
trading down to its
essentials.
Now they're passing
their knowledge
on to others.
Chua In Charge
Sammy Chua, for example, is a
day trader in La Mirada, Calif. He
came to this country from the Philippines
in 1984. Two years ago he
broke both legs in an accident and
began to day-trade for a living while
recuperating.
He learned quickly fromhis early
mistakes and rid himself of the bad
habits that cost himm oney.
Last year, Chua made $10 million
day trading. He has the trading tickets
to back up this number. This
year, he is up more than $1 million.
Chua teaches a day-trading course
once a week and has made a sevenpart
video series that explains his
methods. Given his success, Chua appears
to be one of the better daytrading
teachers.
Here is a sample of the tactics
Chua says will lead to successful day
trading.
The mental approach: "Day trading
is not investing," Chua said. "That
seems obvious, but some traders
don't understand what this really
means."
Chua pays no attention to a
stock's earnings, sales projections,
profit margins or any of the other elements
long-term investors pore over.
"I traded a stock called Ciena yesterday,"
Chua said. "If you asked me
what the company does, I couldn't
tell you. Everything I trade is just a
symbol to me."
Chua is interested only in what he
calls the "heart of day trading," the
way supply and demand affect stock
prices.
"I look for stocks the institutions
and mutual funds are heavily buying
or selling," he said. "When a stock is
bought heavily, the supply is sucked
out of the stock. As the demand goes
up, the price will go up. The same is
true in reverse."
To find these stocks, Chua looks
mainly at moving averages and a
stock's recent trading volume.
"You can tell," he said, "when a
stock is under great accumulation or
if it's being sold. When you trade
that stock, you hope that buy or sell
pattern will be repeated. It's a matter
of probability."
Chua suggests that beginning day
traders learn their craft fromsuccessful
day traders, people who have put
their money on the line, rather than
fromsem inars or books.
"I've attended a lot of seminars,"
he said. "Most of the teachers were
not qualified because they had never
traded their own money. I finally
learned how to day-trade the right
way when I latched on to a guy who
had been trading for a few years."
Trading strategy: The best way to
explain Chua's method is to follow
himthrough a trade.
Continued on Next Page
The New Investor
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S P E C I A L R E P O R T S
Investor’s Business DailyF
Friday, June 29, 2001
Reprinted by permission of Investor’s Business Daily. @Copyright 2001.
On June 11, Chua took a position
that made him more than $40,000
the following day. He traded a tech
stock called Newport. Here's how he
did it.
That day, Chua noticed heavy selling
in Newport. The stock's 10-daymoving
average had dipped dramatically,
the stock price was dropping
on heavy volume and it had broken
down fromits previous support level.
Demand for the stock was drying up.
As the selling intensified, the supply
increased.
Chua had found his target stock.
He shorted 10,000 shares and left the
position open overnight.
His next step was to determine the
probable tone of the market before it
opened on June 12. If the market direction
was upward, it would make
no sense to risk his money going
short. He would cover his short immediately.
But if the market continued
downward, he would let the
short ride.
The S&P, Dow and Nasdaq futures
are the guides Chua uses to judge the
probable market direction. He also
considers the previous day's action
and overall market sentiment.
Before the open on June 12, all futures
were down. Chua thought there
was a high probability Newport, as
well as the market, would continue
to fall that day. The market had
been roiled by earnings warnings and
weakness in the tech sector.
To minimize the risk of his trade,
Chua waited until after 10 a.m. to
make the decision to cover or continue
his short.
He waited because the first halfhour
of trading provides a good clue
to the day's market direction.
"By 10 a.m.," he said, "the Nasdaq
has reached a high and a low. If it
breaks though that high, the day's direction
will likely be up. If it breaks
below the low, the day's direction
will likely be down."
By 10 a.m. on June 12, the Nasdaq
had broken down through its low.
Chua held on to his short. He had
opened the position when the stock
price was 32. He covered his short
that afternoon when the price fell to
28. His profit was slightly more than
$40,000.
All the elements of Chua's strategy
are found in this trade. He used the
supply-and-demand concept to find a
stock that was selling off. He gauged
the tone of the market using futures
trading and a reading of the 10 a.m.
Nasdaq chart.
More Chua Tips
1. Preservation of capital is key in
day trading. He uses a firm2% rule.
If a trade goes against himby 2%,
he gets out immediately. He adamantly
insists that all traders follow this
rule without exception. Chua says he
exits 40% of his trades under the 2%
rule.
2. Traders tend to let their losses
run and take profits too quickly. "If
a trade goes sour," he said, "the natural
reaction is to think the stock will
come back. That's dangerous. Get
out immediately." Conversely, Chua
thinks the prevailing tendency to get
out of a trade the minute it turns
profitable is wrong.
"Day-trading firms teach their clients
to take a quarter-point or a halfpoint
and get out," he said. "That's
nonsense. Stocks move up or down
more than that on most days. Let
your profits run. If I had gotten out
of Newport a few minutes after I
made the trade, my profit would be a
fraction of what I eventually made."
Chua thinks it's in the best interest
of day-trading firms to teach hyperactive
trading. "They make a commission
on every trade you make, so naturally
they want you to trade often,"
he said.
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