Visions of Riches Can Blur Risks for Players

On the floor of what is probably the biggest day-trading brokerage on the West Coast, what stands out most to a first-time visitor isn’t the phalanx of souped-up computers or the T-shirt-clad twentysomethings trying to make a killing.

It’s the industrial-size cereal canisters.

Lined up along a back wall of Momentum Securities’ Irvine office are eight large containers of Corn Flakes and other cereals that seem more appropriate to a college cafeteria or a warehouse supermarket than to a brokerage.

But is this the breakfast of stock market champions, or rations for people about to lose their shirts?

In Wall Street’s growing debate over the surge in rapid-fire trading by individual investors, the focus is less on the millions of amateurs trading occasionally online than on the experiences of “professional� day traders--the players at Momentum and a relative handful of firms like it nationwide.

These are the traders who do it for a living, shelling out thousands of dollars to firms like Momentum to learn what they hope are literally the tricks of the trade.

A Times reporter spent a week late last year at Momentum’s Irvine branch, sitting in on the first week of a training class and interviewing new students and seasoned traders.

Though day traders are famous for frenetically buying and selling stocks--and for closing out all of their positions by the end of each day, leaving only a net profit or loss--it’s initially tough to detect much excitement on the trading floor. Except for the infrequent roar at a profitable trade or the string of expletives at a losing one, day traders spend most of their time staring silently at the stock quotes that flash incessantly across their screens.

But pay attention during the first and last hours of each trading day and the intensity becomes palpable. These are considered the best periods in which to trade, and it shows as Momentum’s 80 full-time traders bear down on their terminals, at times rapping furiously on their keyboards to execute transactions.

Clearly, this is when the real money is won or lost.

In a corner of the room sit the “scalpers,� mostly twentysomething males whose staccato-like trading style is hyper-active even by day-trading standards. Their trades come in bursts--in and out, in and out--as they play small price moves in individual shares and refuse to hold any stock longer than a few seconds.

Whereas most day traders execute dozens of orders a day and hold stocks for at least a few minutes, scalpers easily do a couple of hundred trades a day.

Sitting in stylish high-backed leather chairs and glaring at multicolored computer screens, scalpers and their fellow day traders appear to be playing very expensive video games.

Nevertheless, it’s a grueling existence, starting with the hours. Because the market operates on East Coast time, trading starts at 6:30 a.m. PST--hence the vats of cereal--and finishes at 1 p.m.

A small box at the top of each terminal displays that trader’s accumulated profit or loss for the day. And like children peeking at others’ report cards, traders commonly spy on their peers’ “P&Ls;�--especially those of the handful of star traders. Minutes after the market closes, word quickly filters through the room if William or Adam or Jason has won big that day.

On the flip side, however, a sizable contingent of traders keep to themselves. Many in this group appear to have lost money in day trading, and they hope to attract little attention.

In fact, despite a handful of well-known success stories, everyone at the firm also seems to know people who have “blown out� their accounts and had to call it quits.

“My heart would be breaking� as people incurred losses, said Mitch Cariaga, a day trader and a pastor at a nondenominational church. “I’d spend a lot of time praying for people even while I’m sitting at my computer.�

In the week a reporter spent at Momentum, several traders told of a woman who raised the cash to day-trade by taking out a second mortgage on her home, but had recently dropped out after losing most of her $50,000.

“You could see how badly it affected her emotionally,� trader Tim Clarke said.

Why would anyone risk such sizable losses?

“There is an intoxication that comes with making $1,000 in a minute just for making the right judgment,� said one middle-aged woman who nonetheless had to quit day-trading after losing $60,000. “So that suckers you in, and you want to stay and do it again.�

Adds day trader Bruce Powers: “It’s like anything. You think you’re going to be the one who doesn’t� lose money.

The students who have forked over $5,000 for Momentum’s one-month trading class are predominantly in their 30s, 40s and 50s, and many hope to dump their old careers. There are several businessmen, a lawyer and two dentists. Only two of the 22 students are women.

Most say they’ve invested before, though one or two are new to stocks, and a couple admit they don’t know how to use a computer. Privately, one student confides that he started in the market a few months ago by reading a book called “If You’re Clueless About the Stock Market and Want to Know More.�

The class instructor, veteran day trader Fernando Gonzalez, says he teaches because he hated watching newcomers with no instruction lose money.

Gonzalez tells the students that if they stick with day trading, he would be surprised if they’re not making at least $10,000 a month in a year. He also peppers his remarks with a series of warnings, however. “Day trading is a high-risk business,� he says. “It’s higher-risk than normal investing.

“Day trading is not a quick and easy money scheme,� he adds. “It’s not get rich quick. . . . There is no secret in trading, no secret formula, no secret book, no secret course.�

He tells students to initially trade relatively small dollar amounts--typically 100 shares a pop--and avoid risky Internet stocks. He also lays out the golden rule of day trading: If a stock goes against you, sell it immediately rather than risk a debilitating loss by holding on in the hope that it will turn around.

Though sequestered in a classroom the first two weeks, the students quickly feel the energy of the trading floor. During breaks, they excitedly watch the traders, and within days they have learned the stars’ names and daily profits.

Although the students pledge at the end of the first week to take it slow when they begin live trading, it’s clear that many feel very confident. They’ve racked up juicy profits in simulated trading all week and are anxious to show what they can do in real action.

“There’s got to be a catch,� says Mike McMahon, a middle-aged former executive from Huntington Beach, after class ends the first Friday. “It’s too damn easy.�

Three months later, follow-up interviews with several students show they’ve learned another lesson: Day trading is far tougher than they thought.

They now know, for example, that it’s much easier to sell a losing stock in simulated trading than in real life, where would-be buyers in the cyberspace of electronic trading can simply vanish.

And while losing $1,000 in 10 minutes didn’t seem so bad in mock trading, new traders can panic when their money is on the line and they make stupid mistakes--such as hitting the wrong key and buying when they mean to sell.

The former students have discovered that there’s often no logic to a stock’s momentary gyrations, and they find themselves reduced to pure guesswork in making trades.

A good trade creates “an adrenaline rush like you can’t believe,� says Larry Hartman, a 56-year-old former mortgage broker from Yorba Linda who is down $20,000 of his original $30,000 stake and recently had to put another $5,000 into his account. But “the downside is like a punch in the stomach.�

When former students link a few profitable trades or a few good days, they’re tempted to think they’re right around the corner from consistent profitability. But so far at least, more bad days have followed for some. And for them, it’s getting just plain hard to cope with mounting losses.

“One day, I traded like an idiot and lost more than I even told my wife that I lost,� said one trader who asked that his name not be used. “A bad trading day definitely can keep you up at night.�

One problem, Hartman has found, is that even on days when he manages to break even or make a small amount in trading, he gets clobbered in commission charges--which run $8 to $20 per trade and must be made to Momentum whether a trade is a winner or a loser.

Last Wednesday, for example, he was even on trading but shelled out $500 in commissions.

Though generally pleased with Momentum’s training class, Hartman feels in hindsight that it downplayed the length of time it would take to make money. In a recent TV interview, Hartman said he saw Eyal Shahar, co-owner of the Irvine office, say it can take beginners six months to get the hang of trading. Nobody told that to his class, Hartman said.

They said, “You have to pay your dues, and don’t expect to make money right out of the chute,’ � Hartman said. “But they didn’t say, ‘Spend six months to a year struggling.’ �

Shahar, however, insists that all traders have been warned about the risks. “I know that every single person that went here was very clear about how risky it is,� he said.

In a recent interview, Shahar said he’s taken several steps to boost risk disclosure and weed out newcomers who are unlikely to succeed. He has revamped the firm’s training program, breaking it into separate “beginner� and “advanced� levels.

Newcomers are now barred from opening accounts and trading at Momentum without making it through the advanced class, but only a handful of students from the beginner level are allowed into the advanced class, Shahar said.

He also has beefed up the disclosure documents that customers must sign when opening accounts.

“We go way overboard to disclose the risk,� he said.

As for Hartman, he also is bothered by what he sees as a relatively small group of traders who appear to be the only people making money consistently. One star trader, William Rhee, seems to rack up several thousand dollars in profits every day, Hartman says. He knows because he eyes the P&L; box on the trader’s screen when Rhee takes breaks.

“I see people every day making thousands of dollars--and it’s always the same people,� Hartman said. “The rich get richer. The poor keep struggling.�

All that has Hartman wondering how long he’ll be able to stick with day trading.

“My gut feeling is I can do this job,� Hartman said. “I just have to somehow survive my money.�

In the game of day trading, winning traders appear to share several traits: They’re well-educated, have enough cash to withstand initial losses and--most important--possess a gut trading instinct that most people may simply lack.

“It’s not the easiest thing in the world,� Rhee said. “If it were that easy, I think we’d all be rich.�

Many beginners lose because they “come in here without the competitive thrust,� said longtime day trader Stephen Swigoda. “You’ll make $1,000 and you’re ‘high-fiving’ your next-door neighbor� instead of focusing on the next trade.

Still, for Rhee and other big winners, life seems pretty good.

For the first six weeks of 1999, Rhee says, he’s up about $150,000. In 1998--his worst trading year--the 33-year-old Irvine man said, he made $300,000 despite suffering a year-end slump and sitting out the final two months.

“There’s nothing else I’d rather do� for a living, Rhee said. “I go home and I can’t wait to come back the next day to trade.�

Rhee has some advantages over many of his peers. He once was a professional trader at a Japanese bank and later traded bond futures on his own.

But Rhee and other winning traders insist that their success stems from working long and hard to master their craft.

“I don’t make a lot� each day compared with other star traders, Rhee said. “But I’m a lot more consistent than most people.�

Adds Sam Bose, a former chief financial officer of an import-export company who estimates that he’s up about $170,000 so far this year: “I’m on my computer till midnight, and I’m up at 4 in the morning.�

Last year, the 36-year-old Signal Hill man had trading profits “in the high six figures.� Bose cautions, however, that his profits are not strictly from day trading. In many cases, he holds stock overnight. People should try day trading only if they have more than $100,000 to withstand the early losses, and if they have “a lot of passion for this.�

But as long as tales of big winners circulate, there’ll likely be no shortage of newcomers trying their hand at day trading.

“It’s a skill that is very difficult to master, and part of the problem is that it looks so simple,� said Spencer Sheldon, who began trading in May.

“I mean those who do it well--and there are a few who are doing it very well and making incredible amounts of money--make it look so easy and they do it so elegantly that a lot of people are sort of lulled into the notion that you just open a trade and money magically appears.�