The Colgate Scene
July 1999
Table of contents
Adventures in the day trade online
by Christopher A. Farrell '95
It's 9:00 Monday morning, and I awake to the sounds of my alarm clock. I couldn't be happier: It is the beginning of another trading week. I roll out of bed, "commute" into the next room, and turn on my computer. The work week has begun.

     But this is not your typical 9-to-5 job. There is no office to go to, no car pool, and no "good mornings" to co-workers. There is no boss in the next room. I don't produce a product, nor do I sell one. When people ask me what I do for a living, I pause. In fact, I don't really "do" anything. There are no clients, no projects, and no deadlines. There are no co-workers, no staff, and most of all, no friends. I am known by account number only. I am in total isolation. The entire day I may not see or speak to another soul. The work is extremely intense. The pace is fast. In many regards, this is warfare. It is a job unlike any other in the world.

     Sometimes I do feel guilty. I am 25 years old and I answer to no one. My day is spent in the comfort of my own home. People may criticize what I do, but on a good day I can make more money in a single afternoon than most of them may make in three months, without ever leaving the house. Still, I am not providing a service to anyone. Is the world a better place because of what I do? Sometimes I don't think so. Very few people understand. They think it's gambling; I tell them it's not.

     I am a day trader. My job is to buy and sell stocks for a living. I do not work on Wall Street. My seat is not on the floor of the New York Stock Exchange, it is in cyberspace. This is rarefied air. These are untested waters. I am among a new breed of entrepreneur and this is a new frontier. But do I have what it takes? Mentally, am I strong enough? I've been doing this for almost two years. In the past I have made very good money. But the past is for cowards. And there are no guarantees. Today I must make money.

     It is now 9:30. The bell has rung and the stock market is open. I take my seat at the table with the world's biggest banks, brokerage firms, and mutual funds. The chess match has begun.

     From the preface, Day Trade Online By Christopher A. Farrell, John Wiley & Sons, Inc., New York, 1999. 240 pp.

    

Tell us about your book Day Trade Online?
Day Trade Online is a guide to the risks and rewards of day trading stocks from home over the Internet for a living. I saw the opportunity to be one of the first people to write a book on what seems to be one of the hottest topics in the new age of investing, online day trading, and I jumped all over it. There are more than seven million online trading accounts right now, and it is estimated that it will grow to more than 20 million by the year 2002. My book made both The Wall Street Journal and USA Today's Bestseller Lists after being out for less than one month. If anything, that is an indication of just how popular online trading has become.

    

Why has day trading become so popular?
Thanks to the Internet, trading stocks online has now become so cheap and easy that anyone with a computer and a small amount of money can access the financial markets. This has created an amazing opportunity for the individual investor. With the click of a mouse, you can literally make hundreds of thousands of dollars per year buying and selling stocks from the comfort of your own home, provided that you know what you are doing.

     This easy accessibility has also been a dangerous thing, however, because it has meant that anyone and everyone can now trade stocks, even those that don't have any real understanding of the system or the risks involved. That is why there have been so many horror stories of people who have lost their life savings on a few bad trades.

Why are so many investors losing money when they attempt to day trade?
First of all, it is because they attempt to trade the most volatile, risky and dangerous stocks, the Internet stocks, when they really have no business doing so. In the short term, the chance for survival in those stocks is slim, because the movements are lightning-fast. You can literally stand to lose thousands of dollars in a matter of 30 seconds when these movements go against you. For this reason, I much prefer to day trade the slower-moving segments of the New York Stock Exchange over NASDAQ stocks. I hope that this book will go a long way in making the general public understand it doesn't have to trade the Yahoo!s, Amazons, and EBays of the world to make a living day trading.

     Part of the problem is that the investing public fails to see that in the short term, the odds of success are severely stacked against the online day trader. In many ways, the system is geared towards the day trader's failure. When you enter a trade over the Internet, it is no different than walking through the entrance of a Las Vegas casino, except in the world of online trading, it is a "virtual casino." In this dangerous environment, the odds significantly favor the house, the Wall Street trading firms, and over time, the house always wins.

     The fact that online trades are so cheap stands as testament to this. Don't be fooled by the ads for $10, $8, or even $5 trades. The online brokerage firms are "begging" for the right to take the other side of your trade. They are in the business of trading against you and their other customers. That is precisely why they offer sub-$10 trade commissions, even free trades, and an abundance of free market research. That is to online trading what the free "comps" are to the casino -- a gimmick to lure unwary and unknowing investors to bet against the house.

So how is it possible for the day trader to be profitable under these circumstances?
Successful day traders all share the same ability to bet with the house, not against it. You have to recognize the "inside" strategies the top Wall Street brokerage firms have used for decades at the expense of the investing public, and exploit those same techniques to beat Wall Street at its own game. By using those techniques, you effectively mimic the house, and you utilize the "house edge" to your advantage. Buying on the bid and selling on the ask. Using limit orders, not market orders, and avoiding the most volatile NASDAQ stocks. In a very real way, this is Wall Street's equivalent of being on the dealer's side of the blackjack table. That is the only way to consistently make a living at this game.

What else do you hope that people will learn about day trading after reading your book?
I also hope that people will begin to see that profitable day trading has absolutely nothing to do with traditional investing. Using charts, graphs, and research and reading The Wall Street Journal cover to cover each morning will not help you one bit as a day trader.

Why not?
Because day traders must operate with an ultra-short-term perspective. News is old the second it goes to print and market conditions can change in the blink of an eye. You have to be ahead of the curve, not behind it. The window of opportunity in some stocks may sometimes last only a few seconds. This may mean buying a stock and reselling it literally seconds later if you hope to make a profit on the trade.

     Essentially, you are looking to anticipate and exploit tiny supply and demand imbalances that occur throughout the trading day. For example, buying 1000 shares of a stock at 8 and selling it at 81/8, for an eighth point, or $125 profit. It is these small profits of sixteenths, eighths, and quarters that can literally add up to thousands of dollars per day.

How can you relate this book to your education at Colgate?
First of all, the fact that I graduated from Colgate went a long way in giving me some degree of credibility in writing this book. As a first-time author, the idea for this book was accepted by my publisher before one page of it was even written. In the world of book publishing, that is a rarity. Sometimes I have to remind myself of just how fortunate I was to get a book deal in the first place. Without question, Colgate played an important role in that.

Is there any advice that you could give to Colgate students?
We live in an entirely different world than the world of even 10 years ago. There is a whole generation of Colgate students who are growing up with the reality that job security is a thing of the past. In today's financial world, you have to look out for your own best interests, and success requires that you be an innovator, an entrepreneur, a risk taker. If you're not, you'll end up answering to someone else for your entire life, and you'll never get what you deserve. If you see the opportunity to "blaze a new trail," go for it!

Top of page
Table of contents
<< Previous: "...front office" Next: "Love for alma mater..." >>