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Day Trading in the Slow Lane


Getting Started

Here's what Christopher Farrell recommends for getting started as a day trader.

Equipment:

  1. Computer with modem: $1,500

  2. Internet connection: $20 per month

  3. Real-time scrolling quote system: $80 per month plus exchange fees

  4. Account at an online brokerage firm: free

  5. Cable television to watch CNBC all day

Capital Requirements:

"Day traders should not attempt to trade full-time unless they have at least $50,000 in risk capital. Part-time traders should not begin to trade unless they have at least $5,000 in trading capital."

Christopher Farrell graduated from Colgate University in 1995 with a degree in philosophy. After working two stints in the brokerage business, he decided to strike out on his own, day trading for a living. His book, Day Trade Online, describes how to make a living trading the stocks that most people ignore. Farrell began the interview by contrasting his book with several other popular day trading books.

Christopher Farrell: I started writing this book last summer right when The Electronic Day Trader came out. That book and the one by David Nassar [ How to Get Started in Electronic Day Trading] are written within the framework of what they call ECNs [electronic communications networks] and aimed at the high-end, professional day traders -- people who pay a lot more than the $10 per trade. My book has a different slant. It targets the individual investor who uses discount brokerages such as Ameritrade, Waterhouse, Brown and Company, and so on.

Amazon.com: Almost to a man, the traders interviewed in Electronic Day Traders' Secrets trade the highly volatile NASDAQ stocks, and most of them lost lots of money when they started.

Farrell: Exactly. I know a couple of those guys really well. Jim Crane-Baker's in there, and he says he was in the hole, like, $40,000 or $50,000 before he started making money. And now, in a good month, he's making over six figures.

The reason that top day traders make the money they do is that they have lightning-fast executions, and they can get in and out before everyone else. But, unfortunately, 95 percent of the trading community doesn't have those fast executions. Even with the online brokers, the executions, by Wall Street standards, are horrendous! They may be a second to two behind what the faster day traders are able to do.

Amazon.com: So you avoid volatile stocks?

Farrell: You can't trade them profitably when you have slow execution. Looking back to my last two years, when I've traded NASDAQ stocks, I may be right on 5 out of every 10 trades I do. When I trade the slower-moving stocks, I'm right about 9 to 9 1/2 out of every 10 trades I do. Slow stocks are the only ones where the odds are truly in your favor.

Amazon.com: So what stocks do you trade?

Farrell: I stick with New York Stock Exchange stocks. It's a much fairer market than the NASDAQ market.

Amazon.com: Why?

Farrell: Because the specialists there are required to fill customer orders before they fill their own, and that's the trump card that allows people like me to be profitable. But you have to use limit orders for the kind of strategies I describe to work. There's no way to make money day trading using market orders. It's like going to a casino and betting consistently against the house. You're not going to win--the house always wins.

So the whole key to short-term day trading is that you've got to bet with the house, not against it. And that means using the same trading strategies that the Wall Street trading firms use, to take the other side of the buying and selling. Essentially, you make all of your profits at the expense of individual investors who are longer-term-oriented, who are putting their orders in at the market--not trying to negotiate the best price. They're willing to accept whatever price the market will give them.

Amazon.com: You trade the closed-end bond funds, and utilities.

Farrell: Closed-end bond funds, utilities, real-estate investment trusts -- anything that's considered interest-rate-sensitive -- that's not going to move: the kinds of things that move up or down only a 16th of a point during the day.

Amazon.com: Do you find it's easier to trade in a market with an upward bias or a downward bias--or doesn't it matter?

Farrell: It doesn't matter to me one bit. I like to avoid the times when the market is extremely volatile, simply because the Internet can get jammed up a little bit. On days when the Dow has dropped 400 or 500 points, sometimes your order-execution system goes down. Those are times when it's better to sit back.

Amazon.com: Do you never hold the trade overnight?

Farrell: I don't mind holding trades overnight in lower-volatility issues, simply because there's not that much risk. If you try to do that with NASDAQ stocks, you're going to get killed.

Amazon.com: Do you do any research?

Farrell: You don't really have to do much research. The key to profitable trading is exploiting the supply-demand imbalances. If you read something in Business Week that says that a stock is $10 overvalued, then you're in with a bias to sell, when, in fact, supply and demand on that given day at that given moment may dictate that the profitable trade is to go long.

You want to go in every day with a clear head. The best day traders I know, even the guys that trade the NASDAQ stuff, don't even read the papers. It doesn't help them make one ounce of profit.

Amazon.com: Tell me about yourself. You're only 25.

Farrell: Yes. I've been day trading for about two and a half years. Basically, I started at Olde Financial in Detroit, and then I was on the trading desk at Gruntal & Company in New York. After about two years, I realized that you don't have to be in a traditional Wall Street job any more to participate in the market.

I didn't have too much of my own money, so I formed an investment fund and sold interest in it to raise money, and I've been trading ever since.

Amazon.com: Do you see yourself working as a day trader 10 years from now?

Farrell: Definitely. Without a doubt. I think it's the greatest job on the face of the earth, because it's not really work, in the true sense of the word, because you're not really providing a service for anyone. You're a true speculator. There are no deadlines. When that market opens, you're just on top of your markets, and when that market closes at four, that's it until the next day. You're not taking anything home with you.

Featured Titles

Day Trade Online by Christopher A. Farrell

The Electronic Day Trader by Marc Friedfertig, et al

How to Get Started in Electronic Day Trading: Everything You Need to Know to Play Wall Street's Hottest Game by David Nassar(Afterword)

Electronic Day Traders' Secrets: Learn From the Best of the Best Day Traders by Marc Friedfertig, et al

Copyright © 1999 by Amazon.com, Inc.
The Investor's Library has reprinted this copyrighted article with the permission of the copyright owner.


 
 
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