Stocks: Love That Volatility!
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What a ride. The Dow Jones industrial average plunges nearly 300 points one day, then the next it's up that much. A 150-point gain at noon turns into a 100-point loss by the closing bell. Since the Dow's 14,000 record high on July 19, the average has had 14 days in which it made a triple-digit change from the previous day's close. As of Aug. 21, the Dow industrials are up 5% for the year and but down 6.5% since the peak. For most investors, the decline can be distressing, even devastating. But if you're a day trader, which is how I earned my living for nearly eight years, these market swings are manna from heaven. Stocks are moving again. This is a great market.
Day trading has an air of mystery, but it's quite simple. I relied on short-term moves of a point ($1) or more, up or down, to make money. With the size of my trades, usually from 1,000 to 5,000 shares, I couldn't move a stock. I let the big boys--mutual funds, hedge funds, and pension funds--do that. I just tagged along for the ride.
From 1998 through 2000, the big boys drove the market up, but the climb included plenty of price volatility that allowed traders to prosper. Then the market headed south for a couple of years, again with enough swings to keep us busy. For three years, beginning in 2000, I made more than $200,000 a year.
My job was to "read the tape"--a term left over from ticker-tape days. On my three flat-panel monitors at a now- defunct securities firm that held my licenses and provided the technology and capital I needed to operate, I watched the trades, which indicate the price where a stock last changed hands. I followed the quotes, which show two prices--the bid and the ask--along with the number of desired shares. From this information I tried to divine which direction a stock might be heading. If I thought it was going up, I'd place a buy order. If all the signs pointed down, I'd sell short. I might do this 100 times a day, often with multiple trades in the same stock.
To make money trading, stocks have to be moving--up or down, it doesn't matter as long as they're in motion. So every morning I'd look for stocks that were likely to move that day. I'd scan the newswires for companies that had released financial statements, been upgraded or downgraded by analysts, or had announced new contracts or lost deals. I'd examine price charts for stocks that had traded at new 52-week highs or had large moves the previous day. Then I'd try to pare down that list to something I was able to watch without missing too many of the nuances--somewhere around 50 stocks.
In the midst of the Internet bubble, the slightest bit of news would send shares into a frenzy. It wasn't so much a case of trying to find stocks to trade as deciding which ones not to watch. The same held true as stocks tumbled. Choosing the right stocks wasn't always easy, but the odds seemed in my favor. Then the bull market started. As the Dow climbed from 7,500 to 14,000, my take-home fell by 33% a year over the next three years, and in 2005 I made $50,000. I traded for six months in 2006 and made just under $20,000. By then I was ready for a new career and enrolled in a master's program at the City University of New York's Graduate School of Journalism.
ITCHING FOR ACTION
Not everyone I worked with suffered such a precipitous decline, but the market clearly wasn't the same. My fellow traders and I carped about how stocks just didn't move like they used to. And they didn't. The Chicago Board Options Exchange SPX Volatility Index, or, as it's commonly known, the VIX, tells the tale. The VIX is a measure of overall market volatility. From 1998 through 2002, the VIX regularly traded in a range of 20 to 30, even spiking above 40. But in the bull market, from 2003 to 2007, it hovered in the teens. In July the VIX closed above 20 for the first time since 2003, and stocks are just as volatile as the overall market. On Aug. 14, one old favorite, Pre-Paid Legal Services (PPD ), went up three points at the open, dropped two, bounced back up, then fell three before closing up 90 cents for the day. (That might have made me $3,000 to $5,000.) Bowne & Co. (BNE ) dropped more than a point from the open, then retraced most of the loss. (Another grand right there.)
My friends who have persevered may be benefiting. One told me he made $10,000 in a day--the first time in more than a year he has hit five digits. They're apprehensive--the market's been a yawn for so long now--but hopeful the gyrations will continue. It's quite a different point of view from the average investor's.
These past weeks have been the first time since I walked away from day trading that I've thought about what I could be missing. But I won't go back. I'm an investor now, and I'm in the market for the long term.
By Ben Levisohn