REAL WORLD
Was It Capital Or Was It Control?
Three Traders
by Don Bright
What makes them successful? What makes them fail? Here's how these three made it through the good times and the bad.
When things are good, we often forget what the bad times were like until they hit again. When the bad times do hit, it's those who are diligent, persistent, and flexible who thrive. Impatience has no place.
In past articles I examined the differences between professional, proprietary traders, and customers of a retail brokerage firm. This time, I would like to take you through the real-life experiences of three traders I know. You'll see what it takes to survive.
DILIGENCE
I met a gentleman in Denver three years ago, in 1999. He was in business for himself reselling frequent flyer tickets from the airlines, and was looking for something more challenging (and rewarding). He and I hit it off, and we stayed in touch. He was well-educated and very intelligent (which can be a positive or a negative in a new trader!). He was 32 and had $25,000 in starting capital. He started trading around August that year, and immediately started making a little money employing basic techniques such as opening-only plays, market-on-close imbalances, and momentum. By year-end, he had made a profit of approximately $25,000. This is a great achievement for a brand-new trader, since it usually takes a year or longer to become proficient in trading at this level. Not only that, he started trading near the end of the bull rally and made a considerable amount during the market correction of 2000. He surrounded himself with successful people and gained the confidence necessary to put his trading strategies in action.
Armed with this success and a positive attitude, he started to explore other ways of making even more money. He had been reading about all the mergers and acquisitions that were taking place, as well as risk arbitrage. He thought if he had access to enough capital, he could make money trading one stock against the other. Being a proprietary trader, he traded with his firm's capital, and so he did have access to enough money, as long as the risk was controlled. He began with one or two qualified merger deals such as Bell Labs-General Telephone (BEL/GTE) and AOL-Time Warner (AOL/TWX). (Warning: Don't consider merger rumors to be tradable spreads. None of it's real unless it's filed with the Securities and Exchange Commission.)
He spent hours analyzing mergers and acquisitions reports, going so far as to read the minutes of board meetings and Sec filings on his own to determine the viability of the merger and the estimated closing date. This helped him to determine valuation within the marketplace. Then, by tracking the movement of the combined trading prices and merger ratios, he was able to trade in and out many times during the day.
After taking the time to become comfortable with this strategy, he was able to trade new deals as they were announced. With diligence, discipline, hard work, and his keen mind, he was able to make approximately $2.7 million in little more than two years.
...Continued in the November 2001 issue of Technical Analysis of STOCKS & COMMODITIES.
Don Bright is with Bright Trading (www.stocktrading.com), a professional equity corporation with offices around the US.
Excerpted from an article originally published in the November 2001 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2001, Technical Analysis, Inc.
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