Million Dollar Traders

I have just finished watching Million Dollar Traders on TV. Million Dollars Traders is a reality TV show in which a rich hedge fund manager gives his own money to eight novices and tries to teach these novices to trade stocks to use his own money to make more money.

I have always dreamed of quitting my normal job and trading stocks at home for a living, so I watched this program hoping to get some pointers on how I can make this dream a reality. Million Dollar Traders, however, was very disappointing because it gave me no insight into how I can become a trader.

What I found annoying about the show is that the novices were simply given a computer, a telephone, and were told to buy and sell by themselves. There seemed to be no education about when they should buy and what they should buy. Most of the time it looked like the novices were just making guesses about which stocks they needed to buy or sell. Some traders made huge losses and in order to fix this problem, instead of teaching the traders economics, fundamental analysis, or technical analysis, they resorted to things like limiting how long their lunch or coffee breaks were. They even tried to improve stock trading performance by suggesting that the traders be rude to their stock brokers over the phone.

I Dream of Being a Full-Time Day Trader

I've written about my thoughts about being a day trader in a previous post. On the train I listened to a Smart Investing podcast by Robin Bowerman that claims that studies in behavioral finance show that many people believe they are seeing patterns in randomness. That is, if you flip a coin on an on, people observing it tend to think they can predict things or see patterns when in fact the coin flip really is just random. This comes from natural human instincts to see patterns in chaos in order to better understand the world.

This can be the case with day trading. Investors looking at the erratic intraday movements of price may perceive some trend, but maybe they are just fooling themselves.

Nevertheless, I still dream of one day getting away from it all. That is, no more lectures, no more assignments, no more shifts, no more talking to the boss--I can just pack up and make a living trading on my computer in the comfort of my own bedroom. Trading online is like playing computer games, and I love computer games.

The problem is that I just don't know how much money I could make. I am a highly risk-averse individual. This doesn't mean I haven't made mistakes. In fact, I've made many mistakes that I now regret, but from regret comes caution.

Being a day trader I think is also quite impressive. Imagine if you're at a dinner party. When people meet they usually ask, "So what do you do for a living?" Suppose I said, "I have enough money to retire. I just sit around all day watching TV." That's hardly going to impress anyone. However, if you say, "I trade shares and foreign exchange for a living. Yesterday I made $1000 shorting the Aussie dollar." A story like that really impresses people and makes them wonder too whether they might have the ability to day trade.

Of course, if markets are fully efficient and if day trading is a scam then I can always just closet index by putting 95 per cent of my portfolio in ETFs that follow the broad market and then with 5 per cent of my portfolio I could play around and invent stories based upon what I do with this 5 per cent. Since it's only 5 per cent, I don't lose much if I do lose anything at all.

Now that I think about it, this plan is the height of vanity and is really quite silly. If I would go to this length to look successful then why not just lie altogether?

Can I Be a Successful Day Trader?

At the moment I just put in as much money as possible into my mutual fund and wait for the world stock markets to go up bit-by-bit.

But I wonder whether I could be a day trader?

A day trader is someone who buys and sells stocks all day long. He or she studies the news, does research on companies, and so on.

People who subscribe to the efficiency market hypothesis would claim that this is a waste of time because you cannot beat the market.

Nevertheless, I still wonder. Today the ASX200 shot up about 150 points, an increase of about 2.3 per cent. The thing is that today is Monday and during the weekends I had a strong hunch that this would happen. How? Everywhere else in the world, that is, in Europe, America, and Asia, stock markets were going up. Everyone was positive. In Australia everyone seemed rather positive as well and yet the ASX200 fell on Friday. So then I thought that it had to go up, and my hunch was right because it did go up.

Of course, I have to be careful about confirmation bias. Before I use real money I can test out my skills on paper and see what would happen hypothetically.

Vanguard founder John Bogle believes that investors should get trading out of their system by allocating 5 per cent of their portfolio and no more to these risky pursuits. The other 95 per cent must not be touched.

Many believe short-term trading is akin to gambling. I'll just have to be careful. Even though I am warned about the dangers of short-term trading, every day I get the feeling that I can beat the market. I watch the major indices all the time, not only the ASX200 but also the S&P500 as well as the FTSE100 and Nikkei.

Top 10% Trader So Far

I am playing a simulated trading game at Trading Places. You buy and sell imaginary shares on the Australian Stock Exchange. Traders who make the most money will get job interviews at JP Morgan and presumably will get a job there.

I gave it a try and to my surprise I am ranked in the top 10 per cent. My rank is 365 out of a total of 4445 traders. Among students in my university I am in the top 5 per cent! We still have 45 days of trading left.

My strategy was pretty simple. Since brokerage cost is a massive $50 per trade, I decided I wanted to buy shares in companies I could really trust. BHP Billiton (BHP) and Commonwealth Bank of Australia (CBA) are the two largest companies in Australia, so I put much of my money into these companies. However, in many other traders were likely to invest in these companies so I needed something different to differentiate myself from others. I chose Wesfarmers (WES) because it is quite a big and successful company. I have also read about this company's excellence in business ethics, and also I purchased Wesfarmers right after its stock price dipped, so I hoped I had picked the trough. My risky bet was on Sonic Healthcare (SHL). This is one of Australia's best medical diagnostics companies. I figure that in these tough times investors might flock to the health sector in the hope of finding a safe haven. After all, people will always get sick, and Australia's population is aging.

BHP and CBA are going strong. Wesfarmers is looking okay. Sonic is not. There are still 45 days left, so anything could happen.

By the way, I am not an expert day trader, and I don't recommend this sort of speculative day trading for most people, especially if you are using real money and especially if you are using a lot of your own money.