|The Bahamas Investor Magazine
June 22, 2010
June 22, 2010
Given that the basic tools necessary for trading are a computer and an Internet connection, market players can be found running their portfolios from almost anywhere in the world. The natural beauty and relaxing tropical lifestyle of The Bahamas has lured many traders to its shores, with the promise of making their online fortunes against the backdrop of sun-kissed white sands and turquoise seas.
“If you have a phone and live data, you can live on an island and make it as a trader,” says founder and chief executive officer of Trading Educators Inc Joe Ross, who lived and traded from Freeport for six years from 1991 to 1997. Describing his time on Grand Bahama as “very enjoyable,” Ross established his company there, tutoring wannabe traders in the finer points of the markets, whilst still trading.
Another trader with a soft spot for island living is Diane Ryan, who began day trading in 1996 and spent several years living in Nassau, while playing the market. “The advantages of trading from The Bahamas as opposed to from the US are that one minute you can be basking in the sun, swimming, sailing or whatever and the next you can be inside making fast and easy money,” she says. “The ability to play the market from an island hideaway, instead of from a concrete city, makes trading all the more pleasurable.”
The perfect trader
But enjoying what paradise has to offer and earning a six-figure income sitting on the beach can only become a reality to those highly experienced market watchers who appreciate that the risks are great and the rewards far from guaranteed.
Ryan says that the best traders are those who are naturally cautious. “The people who get in trouble are the same people who go to Las Vegas and bet their houses. You have to be excited, but be conservative, or you will lose everything. You need to be in control of your emotions, and your money.”
This is one of the reasons why most day traders trade in options, as they offer flexibility, limited risk for unlimited profit potential, and leverage on underlying assets.
Ross, who has over 50 years trading experience, believes that a good trader is one who is capable of ironing out his weaknesses and understanding his strengths before engaging with the markets. “You almost have to be a perfect person when you are trading,” he says. “It looks easy, but it is difficult to learn because you have to change yourself, and this requires diligence, self-discipline and self-control.
“You have to be willing to engage in self-examination. You must strive for perfection, be a seeker of knowledge and be truthful and honest about your trading.”
This will count for naught, however, if you don’t have access to real-time information. Technological advances have made such access available to most. “[When I first arrived in Freeport] data was intermittent,” says Ross, “but then a company put up a satellite that enabled us to get live data on a regular basis.” Now, wireless connectivity is readily available in most urban centres in The Bahamas.
Ross is quick to point out that, even then, there are dangers involved, having suffered significant losses himself–losing $45,000 in 20 minutes while trading on the S&P 500. “I was tutoring someone and wasn’t focused on the market and it got away from me,” he says. “If you are not completely and totally prepared in advance you are going to panic. You need to be able to react immediately and be in control.”
The growth of trading
When day trading first became popular in the 1990s the markets were flooded with dilettantes eager to make a quick buck, but as the dotcom crash of 1997-2000 showed, many were unprepared for the harsh realities of this kind of high-risk, pressurized environment.
Originally, trading was dominated by small businessmen and farmers whose livelihoods depended on the price movement of vital commodities. In contrast to today’s traders grappling with fluctuating markets, these speculators and hedgers watched as the markets trended for months at a time and employed long-term strategies to make the most of their investments.
Traders placed orders with brokers, who used information gathered from a constantly streaming ticker tape. This changed in 1971, when the National Association of Securities Dealers Automated Quotation System (NASDAQ) became the first electronic network taking trading out of the stock market and computerizing it to make the marketplace more accessible.
The growth and increased speed of the Internet during the 1990s had a massive impact on the way people traded and casual users became more technologically savvy. Soon, sophisticated services and tools were allowing traders to chart and analyse the markets from the comfort of their own homes, or on the nearest tropical beach.
The dotcom bubble
No matter how beautiful and sunny your surroundings are however, your mood will rapidly darken if you are losing money. It is important to keep your head, particularly when all around you are losing theirs.
Many new traders fell afoul of inexperience during one of the largest bubbles to affect the markets in the latter half of the 1990s. At this time, traders were scrambling to take advantage of the rise of the Internet, and driving the growth of web-based companies through a frenzy of buying. Companies opportunistic enough to capitalize on this trend saw their stock value grow significantly simply by adding a “.com” suffix or an “e-” prefix to their name. In this market, how fast a company grew became more highly prized than a viable business model and the IPOs of Internet companies could keep the business afloat, even if it had limited potential for real profit.
This love of all things Internet-related caused the “dotcom bubble,” which lasted roughly from 1997 to 2000 and saw many companies fail after an initial speculative high. Early successes kept the market buoyant, and media hype encouraged many market watchers to quit their jobs and focus on trading full-time from home. Even those with little experience could make significant profits in the bullish trading environment.
Ryan remembers the technology bubble as a heady time for traders, herself included, and says this is at the heart of what draws traders back to the markets day after day. “In the late ’90s it was ‘white knuckle’ time, as getting in and out of the market at the right time, especially with tech stocks, was essential. There were a lot of IPOs sold and they had to be traded fast and furiously. It was very exciting. When I got up in the morning I could not wait to get to my computer. Everybody wanted to trade and be successful.
“It is a rush and that rush is in figuring it out for yourself and winning. Once you get the bug, it is very hard to stop.”
In 2000, the dotcom bubble collapsed and inexperienced traders found their profits slipping away. The NASDAQ peaked in March 2000–at more than double its value a year before–and then began declining steadily. Traders lost fortunes, as did companies that had relied on the earlier buzz.
One strategy for avoiding such pitfalls is to use stops. Stops are limits traders set themselves before taking the plunge, so they have a measure of protection. They not only take the form of money stops, but also time stops to set stricter controls.
Today, Ryan, who trades stocks on the NASDAQ and sometimes on the NYSE, says she guards against losses by using a variety of strategies including doing plenty of research, running several dummy portfolios to gauge how certain stocks and/or sectors are performing and carefully taking note of tips from the financial media. “It’s also worthwhile looking into buying on rumour, selling on fact,” she adds.
Ryan learned a lot about trading from her parents, who advised her to diversify. “It is about research, research, research,” she explains. “It is a learning experience almost every day.”
Many day traders prefer to rely on the services of a broker, but, cautions Ryan, this can be problematic and it is worth taking the time to choose a reliable advisor. “When you trade through a broker you are depending on his knowledge and experiences.”
Ryan, who herself also uses a full-service brokerage house, says: “It is important to look at the rapport and success rate you have with your financial advisor. Today, there are quite a few successful online brokers to choose from who provide live data, charts and stats and are a lot less expensive per trade.”
While the outlook for the markets is uncertain, Ross is confident that there is still potential for profit in trading. “There will always be a bubble somewhere, but there’s a lot of volatility in the market, and when there is volatility you make money,” he says.
Ryan, who currently trades from her home in a major US city, maintains that sitting on a beach with a laptop in The Bahamas is still a viable and idyllic way to trade. “Most iPhones have apps, so we can trade stocks on the subway or in a taxi or from a notebook or in Starbucks, but it’s not quite the same as having paradise outside the window.”
Arbitrage: The purchase and simultaneous sale of an asset to profit from any change in its price.
Broker’s call: The interest rate relative to which margin loans are quoted.
Call: An option contract where the owner expects the price to rise rather than fall, ie a right to buy.
Hedging: This is where a trader makes an investment to reduce the risk of price fluctuations.
Put: An option contract where the owner expects that the asset will drop, ie a right to sell.
Scalping: A strategy where the trader completes numerous transactions, hoping to make profits on small price changes rather than larger shifts.
Short-selling: Where a trader borrows a security from a broker in the expectation that it will fall in price. The trader hopes to repay the loan of the shares by buying back cheaper shares later on.
Stop and limit orders: These allow the trader to set limits to his trading. A stop order is an order to sell at the market price as soon as the stock drops to a certain level. A limit order is an order to buy or sell at a specific price or higher.
W-type bottom: A double bottom where the price chart or indicator makes the shape of the letter “W.”
Zero-Sum market: Markets where there is no net gain or net loss, ie options and futures markets.