Book Reviews, Trading

Book Review of The Guts & Glory of Day Trading by Mark Ingebretsen

The full title of this book is The Guts & Glory of Day Trading: True Stories of Day Traders Who Made (or Lost) $1,000,000 by Mark Ingebretsen (2001).

The book features the stories of a number of traders who took a small account and traded it to above a million bucks. As the book was published in 2001, many of these traders made a lot of their money from tech stocks during the dot-com boom.

Here’s a summary of the type of trading that the featured traders did

  • Convex bets (Teresa Lo)
  • Tech stocks (Brendan DeLamielleure, Terry Bruce, Barbara Hamilton, and most others)
  • Market making (Chris Farrell)
  • Fundamental analysis (Mary Pugh)
  • Swing trading (Oliver Velez, Scott Slutsky, Dave Gordon)
  • Earnings plays (Barbara Simon)
  • Covered calls (Bob Martin)
  • Neural Nets (Scott McCormick)

The two styles that appeal to me most are convex bets and swing trading. The trading tips given by them are generally the standard trading advice that you would find. Two things I noticed was

  1. Quite a number of them are in the camp that plans their entries and exit levels beforehand, and let the market go to them.
  2. What most of them did to handle the more volatile periods after the market had topped, was to go into shorter time frames (i.e. intraday).

Teresa Lo – Convex Bets

  • How the money was made
    • Bought 100 Nikkei calls at the bottom, when she noticed that the Nikkei chart seemed to have bottomed at a major low in early 1993.
    • Bought speculative penny gold stocks on the Vancouver exchange at the bottom in Fall/Winter 1995, when she noticed that options on XAU bounced off from their lows.
    • Bought at-the-money calls on the S&P 100 (OEX) with expiration 4-6 weeks out, when she noticed a higher low being made after a huge consolidation in early 1996.
  • Tips
    • Lo now trades S&P E-minis with a 20-period EMA on a 15-minute chart, makes about 3 round-trip trades daily.
    • Only trade one thing at a time. There are very few people who have the talent to trade in more than one market at a time.
    • If a stock doesn’t blast right through a resistance level, exit your long position or consider selling the stock short.

Brendan DeLamielleure – Internet Stocks

  • How the money was made
    • Traded internet stocks during the dot-com boom. Went for the second-tier stocks whenever the sector leader made a move.
    • Traded stocks in the $20 – $40 range. Buys when a stock temporarily reverses in an uptrend, rides the tiny rallies and sells at a 3 to 5% gain.
    • Builds positions by averaging down when a stock is down to a level where you don’t expect it to go down much further (e.g. has already dropped 10% for the day).
  • Tips
    • To accumulate at a stock’s bottom, you build your positions gradually by averaging down. If it falls lower than you expected, sell half the position and continue to watch the stock closely.

Terry Bruce – Internet Stocks

  • How the money was made
    • Traded internet stocks during the dot-com boom.
    • Traded overnight gaps by taking a position at the end of the day when a gap is expected the next day.
  • Tips
    • The bet indication of a gap up is if the stock trades higher all day and on a day when the market rises by 150 points. Then look for a sell-off at the day’s end. If the sell-off does occur, this should rid the stock of sellers, so there’s a better chance for a gap to occur the next day. But if it closes on a huge run, then sometimes it’s exhausted.
    • If a stock gaps up, if you think it has a chance to run, sell half your position and keep half.

Oliver Velez – Swing Trading

  • How the money was made
    • Swing trading of stocks with large blocks of shares. Velez would come up with 4-5 plays each evening, map our where he will enter, and let the market come to him. If the market plays by the rules that he sets up the night before, then there’s no doubting, there’s no hesitation, there’s instantaneous action with confidence on a plan that he had mapped out the night before.
    • He sells a subscription to Pristine Day Trader which would provide his daily picks to subscribers.
  • Tips
    • Look for stocks that has just made a new high, followed by three consecutive down days, then look for a reversal.
    • Buy on a short-term retracement. Watch for a decline on light volume, and a bounce on heavy volume off the 50-day simple moving average.
    • Never buy a stock unless it’s up on the day. Wait until the stock trades above the previous day’s day. The Dow, S&P, and NASDAQ should also be trading up on the day.
    • Once the stock rises $2-$3, sell half the position, and sell the remaining position immediately if it declines to its original purchase price.

Barbara Hamilton – Internet Stocks

  • How the money was made
    • Swing trading of internet stocks.
  • Tips
    • Buy on a big buy. If a stock’s been drifting downward, a large purchase may indicate that an institutional buyer has sensed a bottom

Chris Farrell – Market Maker

  • How the money was made
    • Buy and sell within the inside market (market maker strategy) to scalp 1/16 of a point on 2,000 – 5,000 shares, 60 – 70 trades a day.
    • If a stock is particularly active, 15 – 20 round-trip trades on the same issue a day. Trade in 4 – 12 different stocks a day.
    • Strategy was applied on low volatility instruments: preferred stocks, closed-end bond funds, and debt hybrids.
  • Tips
    • If Farrell is caught holding shares, he would hold positions overnight, betting that the stock’s low volatility will bring the price back to his entry level. He might double down, and subsequently unload his inventory over two weeks.
    • Look at the time & sales, you want to see majority of the volume trading at the prices that you want to place your bid and ask.
    • If you lose more than 3/8 on a scalp, don’t trade that particular stock again.
    • Create a watch list of slow moving, boring stocks, and cull out those stocks that routinely move up or down by more than 1/2 point intraday.

Mary Pugh – Deep Fundamental Analysis

  • How the money was made
    • Deep due diligence and financial modeling to value companies.
    • Bought Microsoft between 1992 and 1996. Bought dot-com stocks during the boom.
    • Bought penny tech stocks during the dot-com boom, bought e.Digital Corporation (EDIG) at $0.70, which then rose to $25.
  • Tips
    • Set multiple sell targets for your stock, and sell a percentage of your position when it reaches each target.

Scott Slutsky – Swing Trading

  • How the money was made
    • Swing trading of stocks with accelerated earnings growth, that has put in new 52-week highs on strong volume, crossed above 50-day moving average, resumed uptrend near their support level, with high relative strength.
  • Tips
    • Choose small caps with smaller floats, they move faster
    • Add to position incrementally if the stock continues to do well.
    • Sell off portions when the stock appears to be reversing when it hits a resistance level. Then look to repurchase those shares once the stock drops to its support and reverses once again.
    • Lighten up on all non-performing positions during days when the market is behaving poorly.
    • If stock drops on heavy volume, lighten position and continue to lighten during subsequent down days. After 3-5 consecutive days in which the stock falls, exit the position entirely
    • Don’t hold a position that accounts for more than 5% of your total portfolio.

Dave Gordon – Swing Trading

  • How the money was made
    • Swing trading of internet stocks, and gap trading.
  • Tips
    • Stay away from widely held broken companies because rallies will be sold down by long-term share holders.
    • In a choppy market, exit positions whenever you make a short-term gain.

Barbara Simon – Earnings Plays

  • How the money was made
    • Look for companies with rising earnings quarter by quarter, especially companies with triple-digit or high double-digit earnings growth, daily volume of around ~100,000 shares, PEG ratio of 2 – 3.
    • Buy a stock (see triggers below) and sell it in the days before the earnings announcement. Or short a stock immediately following the company’s earnings announcement.
    • Went into intraday trading when the market started crashing with heavy down moves and bear market rallies. Also bought deep-in-the-money puts.
  • Tips
    • The strongest stocks up until the crash traded in a very tight range. The range rarely deviated more than 10 or 15% off the highs. The minute it went below its support level, it would trigger a buy. And the minute it wet above the top line of resistance and it spiked up, I would watch for a reversal down and call it a sell.
    • If you get stopped out, quickly determine a profitable re-entry point.
    • For scalping, look for stocks with daily price ranges of between 1 – 3 points.
    • Look for profitable trades on a reversal day, which is a day where the market drops at the open but then rises past the previous day’s close.
    • Don’t hold overnight positions in “blimps” or stocks with exceptionally overinflated values. Blimp stocks can produce decent intraday returns, since they attract hordes of momentum traders.

Bob Martin – Covered Calls on Gorilla Stocks

  • How the money was made
    • Look for gorilla stocks, companies that dominate because of their technology, knowledge or muscle in some critical area.
    • Writes in-the-money covered calls. For volatile stocks, the time value might be worth a few percentage points over just a month. Calls with the highest annualized percentage return are usually 4-6 weeks from expiration.
    • If a stock goes down, buy back the original call at a cheaper price, then sell another call with a lower strike (rolling down), or with a further out expiration date (rolling out).
  • Tips
    • If you do set actual stops, especially on volatile tech stocks, give the stock plenty of leeway – say 15-25%.
    • Take profits on gorilla stocks only when the stock is rising on a steep curve. Repurchase the stock during the inevitable retracement.
    • For stocks used for covered call writing, view them as a tool for making money via call writing and not as a long-term investment. Nonetheless you want them to be gorilla stocks so that the probability of incurring a loss on them is low.
    • Wait until the last possible moment to buy back calls that have not been exercised because their time value would be the lowest.

Scott McCormick – Neural Nets

  • How the money was made
    • Uses neural nets to identify patterns and confirm entry points. A screening is first done based on technical indicators, and a neural net is used to reanalyze most of the stocks.
    • A large number of indicators is analyzed because the accuracy of indicators changes as the market changes and the stock holders of particular stocks change.
  • Tips
    • Focus on discovering the trading range for the following day, not the opening or closing price.
    • Use neurals to look at patterns for particular stocks rather than general market patterns. Stocks exhibit patterns because the individuals and institutions that own them tend to trade in a similar fashion.



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