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Every morning at 4 a.m., Wally Trenholm’s internal alarm clock startles him awake. He jumps out of bed and walks over to a wall of eight glowing computer screens, each one buzzing with charts, news feeds and economic data. He flips on CNBC to catch European business news and then heads to the fridge to grab a heaping plate of Chinese food — he always eats dinner in the morning. As he scarfs down his hearty meal, he starts watching the foreign-exchange market. Soon after, the adrenalin kicks in. As his girlfriend sleeps in the next room, Trenholm’s computers softly hum, while clicking sounds from his mouse fill his dark Toronto apartment. For the next seven hours, the 35-year-old’s eyes will be glued to his screens as he pours thousands of dollars into the currency market.

More than 4,000 km away in San Diego, Calif., Leslie Moyer’s alarm clock buzzes at 5 a.m. She too turns her TV to CNBC and then grabs a coffee. For half an hour, the 39-year-old watches the news, reads trading sheets, then clicks over to Bloomberg.com and other websites on her computer, to prepare for trading on the North American markets. At 5:30 a.m., she starts watching the pre-market, and at 6:30 she’s off, buying as if it’s Boxing Day morning. She takes a break when the markets close at 1 p.m. (Pacific Time) and trades lightly between 1:30 p.m. and 5:30 p.m. on the aftermarkets. By the end of a very long day, Moyer will have made several trades and — she hopes — a lot of cash too.

Trenholm and Moyer are day traders, a multi-trillion-dollar market in which investors buy and sell stocks, currencies and futures contracts in a matter of minutes. It’s a fast-paced, adrenalin-fuelled world where huge money is always at stake. “It’s highly addictive,” says Moyer with more than a hint of glee in her voice. “You just jump in and fall in love with it.”

Day trading was popular in the 1990s but fell out of style after the dot-com bust. Now, thanks to a post-crash surge in the markets, and new platforms that make fast-paced trading easier and more affordable, there seems to be a resurgence. New online currency and arbitrage trading sites have helped rekindle interest, but the biggest new innovation is the Canadian arrival of contracts for difference, or CFDs. These allow investors to play the stock and currency markets without actually owning the underlying investments. This makes trading cheaper and faster, and built-in leveraging makes short-term borrowing easy, so you can control a big investment with a relatively small amount of money.

CMC Markets Canada is the biggest market maker in the country for CFDs, and CEO Bruce Seago says his company has more than 76,000 active accounts worldwide, with trading volumes up 50% from last year. As with all day trading, the main attraction of CFDs is the promise that traders can make heaps of money in a short amount of time. At CMC Markets, a $100,000 investment in a currency or commodity can be pulled off with just $10,000. Having that extra cash allows for big windfalls — a 4% increase in the investment would net an investor $4,000 — though a drop would put the trader thousands in the hole.

Easy-to-use online currency trading websites such as Forex.ca have the same appeal. These allow investors to make short-term bets on the Japanese yen, British pound, U.S. dollar and other foreign currencies, and they too make borrowing to invest, or leveraging, dead simple. Active traders like these markets because they’re volatile and liquid, and easy access to leverage means a $25,000 investment can allow you to control up to $2.5 million worth of investments.

Most of the common strategies that day traders use can be separated into two camps: a group that depends on speed, and a group that relies on technical analysis.

Traders who opt for speed often use a strategy called “scalping,” which involves the rapid buying and selling of securities. In this strategy, traders dump stock immediately after a big price increase. Traders don’t make much from each individual play — but profits can mount up after hundreds of little trades. A much riskier trading method, but a potentially lucrative one, is “fading.” That’s when an investor shorts a stock after a spike in price to cash in on the subsequent potential drop.

Technical analysis is a more complex method that involves looking for established patterns in the market for clues on what’s likely to happen next. Toni Turner, an occasional Fox News guest and author of A Beginner’s Guide to Day Trading Online, says the trick is to recognize when a trend — whether it’s up or down — is broken. “We use volume signals, moving averages and trend lines,” she says. Turner looks to daily price charts for “higher highs” and “lower lows.” That’s her way of charting the daily or weekly movement of a stock. When a stock in a downward trend begins to climb again before it has reached the depth of the previous dip, that’s called a “higher low” and indicates that it’s time to buy.

Yet another technical analysis strategy uses “daily pivots” to profit off a stock’s volatility. In this technique, investors use the previous day’s price to find “support” and “resistance” levels, that help them to buy near the daily low and sell near the day’s high. Support levels can be thought of as an imaginary floor that the stock price keeps bouncing along on. Resistance levels are the opposite. Such levels can be thought of as ceilings that seem to prevent the market price from moving forward.

Day trading is inherently dangerous, but there are some strategies that help make it safer. Most trading platforms allow investors to put a “stop-loss” on their account — an especially important tool if you’re using a margin account. With a stop-loss order, traders instruct their online broker to cash out when the value of a stock drops below a specified value. Investors can also automatically cash out when a stock’s price gets too high, allowing them to lock in gains. With a “trailing stop,” when the stock price climbs, the stop moves with it. The trader can thus let profits run while setting a percentage amount that they feel they can afford to lose — perhaps 10%. When the stock hits the stop marker, the investor is automatically cashed out.

Veteran day traders say keeping your emotions in check also helps to reduce the risk. “Trading is the most incredible psychoanalysis you’ll ever experience,” says Turner. “It goes against everything that makes sense. Hope will get you killed; a positive attitude isn’t good; trust is out of the question. You have to be a robot.” Turner advises to stick to the charts and a solid, predetermined plan.

Day trading is probably the most popular method for making a quick buck on the markets, and scores of day traders claim to have made money at it. Still, many studies show that many — perhaps most — day traders end up losing over the long term (see “Risks” to the left). It’s difficult to measure how effective day trading truly is, as traders have a habit of glossing over their losses and focusing on wins. For instance, Moyer started trading six months ago, and claims success because she’s up by 10% overall. But over the same period, the S&P 500, which is now recovering from the crash, went up by 20%, so she’s actually not keeping up with the market. Many traders also fail to factor in the additional investing costs that are racked up due to frequent trading.

Day trading isn’t as easy as some make it sound, either. Trenholm, who says he only bets money he can afford to lose, only sleeps five hours a night — from 11 p.m. to 4 a.m. — and when he’s awake, he always has an eye on the markets. On average, he makes 20 trades a day: 40% currency, 40% futures and the rest stocks and options. “I’m sweating trying to make money,” he admits.

That’s one reason why he recently started work on developing his own day-trading platform. His goal is to make enough money day trading to hire programmers to help build his software prototype, which he says would combine the best parts of the various programs he uses. “The real money will come once the system is built,” he says. “In the end, I’m an entrepreneur. But I love the markets, too.”

Risks
Some industry pros say day trading is little more than gambling. It’s addictive, too

Ask any active day trader how much money they’ve lost and they’ll tell you it doesn’t matter: they’re ahead overall. But talk to almost any respected investment industry professional and they’ll say they’ve never met a day trader who’s come out on top. While it’s true that traders can make a ton of money in one day, they can lose just as much the next. “It’s like playing roulette,” says John Jagerson, author of Profiting with Forex. “Even if you always picked black, you would eventually lose money.”Borrowing money to invest, or using leverage, is particularly dangerous. When a margin account falls to a certain level, investors must top it up. If they don’t have enough cash, their investments can be sold off against their will to cover the loss, and they can wind up hundreds of thousands of dollars in debt.

As in gambling, the only player who always wins is the house. Market makers such as CMC Markets and Forex.ca don’t usually charge per trade, but they will take a commission based on the spread — the difference between the ask and bid price. After enough trades, those costs will add up, which eats into the profits of investors.

Jack Rando, director of capital markets with the Investment Industry Association of Canada, says most people get into trouble because they start trading without a plan. “They’re aimless,” he says. They’re making spur-of-the-moment decisions and ignore fundamentals. He goes as far as saying day trading should not be considered investing at all.

Like gambling, day trading can be addictive. Leslie Moyer, a San Diego, Calif., trader, says she’ll sometimes get up in the middle of the night to check the overseas markets; her typical trading day is at least 12 hours long. Jagerson explains that such investors often develop “tunnel vision.” They get so preoccupied with the markets that routines get disrupted and emotions take over. That emotional response can be amplified when there are large amounts of money involved. Thanks to leveraging, $5,000 can buy as much as $500,000 in currency or stocks. When that kind of money is at play, trading can become “personal, emotional, and people wind up doing stupid stuff,” says Jagerson.

Appeared in Canadian Business magazine on November 23, 2009.