Erin Arvedlund and Lewis Borsellino Chat on Yahoo!, Oct. 19

Borsellino, a veteran S&P futures trader, gives chatters some tips on daytrading strategies.
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Erin Arvedlund and Lewis Borsellino chatted on Yahoo! on Tuesday, Oct. 19, at 5 p.m. EDT. As with all chats, this transcript is unedited.

lewis_tsc:

Hi thanks for joining me. First, let me tell you a little about why I wrote "The Day Trader: From the Pit to the PC." I wrote the book as a memoir, not as a how-to book. I wanted to educate people about the life of a trader and how everyday common sense... and experiences can be applied to the trading profession.

lewis_tsc:

Also, I wanted to write it as a testimonial to my fellow traders... the people who have had the stamina, the guts and the discipline to last in an industry that has high stress and big turnover.

erin_thestreet:

Lewis I just want make clear to the people joining that you are a S&P futures trader. Please explain what those are.

lewis_tsc:

S&P futures are futures contracts that traded based on the value of the S&P 500 Index. One contract is equivalent to the basket of S&P 500 stocks. So that as I speculate on the market, I don't concentrate on one stock, but on the S&P 500 as a whole.

erin_thestreet:

Over the past few years, has the market for S&P index futures and options grown in liquidity?

lewis_tsc:

S&P futures as a hedging tool for institutional traders has been a success since the launching of the contract in 1982. It allows portfolio managers to hedge their cash stock positions, and the liquidityhas been provided by both the professional "local" and retail speculators.

erin_thestreet:

You say 'local' -- that means independent traders in Chicago?

lewis_tsc:

Right, a local is an independent trader. The trading pits are populated by individuals who speculate on the movement of the market. They provide liquidity for the institutional investors by taking the other side of their orders. These individuals are referred to as locals. They either own or lease memberships.

erin_thestreet:

And what does a membership run these days? What's the bid-ask?

lewis_tsc:

Between $250,000 and $400,000- A lease runs about $3000 a month.

erin_thestreet:

let's take a question.

driverx79 asks:

Are there any good instant execution trading systems for Macintosh users?

lewis_tsc:

It depends if you're trading stocks or futures. I'm not familiar with the Macintosh. But there are firms that allow you to have internet-access stock and futures execution.

erin_thestreet:

For derivatives I'd be curious which programs you know about it?

lewis_tsc:

Execution systems - that's beyond my scope right now. Most of mine in the office are handled with direct lines to the exchanges.

ggecko0 asks:

I've found swing trading to be more profitable and less risky. any concrete stats which suggest one is more profitable than the other?

lewis_tsc:

There are different types of trading systems - swing trading, reversals, breakouts. The key and success of a professional trader is to identify what kind of market the particular stock or commodity is trading (meaning range-bound, breakout, trend-following or driven by news rather than technicals.) And you have to have the discipline to wait for your setups and execute your trades as they appear.

erin_thestreet:

What are your favorite strategies?

lewis_tsc:

At my firm, we use a combination of 18 different trading systems. We have incorporated artificial intelligence in our computer programming, which allows the trading systems to train from each other -- keeping the good and discarding the bad.

lewis_tsc:

In fast-moving markets, like the S&Ps, Internet stocks etc. we like trend-following and trend-reversal systems.

erin_thestreet:

Does that work particularly well in S&P futures only?

lewis_tsc:

This is applicable to S&Ps, Internet Stocks and other volatile markets. Internet stocks have been more volatile than the S&Ps. In the last two years?

lewis_tsc:

The S&P's daily range has been 1700 to 2000 points a day. From high to low it could be 2000 points.

realdeal_999 asks:

How would I go about beginning to day trade--are there any resources or books available?

lewis_tsc:

Yes. I have a new Web site that is free - an educational web site called TeachTrade.Com. It actually starts out telling people NOT to trade. The reason being, 30% of day traders in stocks are making money. The average day-trading life is 3 months. The goal of TeachTrade.Com is to educate people to the different types of markets, different trading venues that are available how they function, and to focus on the psychological and emotional side of trading. We believe 95% of trading is emotional and pscyhological and only 5% of it is technical.

erin_thestreet:

So for how long do you recommend people do NOT trade until they educate themselves?

lewis_tsc:

The ironic thing about trading is that you need to educate yourself. Then you need to determine how much capital you have. You need to start very small because people who go through trading simulators and do what we call "paper trading" tend to do very well.

lewis_tsc:

Then - they go live, meaning they start trading real money. That's when the emotional and psychological aspects of controlling greed, fear and anger will manifest themselves.

lewis_tsc:

First of all, I don't believe trading is for the novice. It shouldn't be done on your lunchhour or as a hobby. You need to dedicate yourself full time to this. Once you understand the environment completely -- that might take one person 6 months and another 1 month -- then you can open a trading account. Then it's like raising a child. All the things we'll warn them against in TeachTrade they'll have to learn for themselves. It's like with a child. They won't know the stove is hot until they burn their fingers.

erin_thestreet:

So don't try this at home, in other words.

ggecko0 asks:

What are the advantages/disadvantages of daytrading on site at a "daytrading firm" as opposed to trading from home with real time data, news feeds etc?

lewis_tsc:

You have to understand that the day trading firms were set up to simulate an environment such trading rooms in institutions like banks and in brokerage houses. The illusion is that they're providing individuals with the state of the art software and tools to execute trades quickly. In reality, the trading rooms are hoping that the individuals in the room will stimulate each other to trade more, thus allowing the trading firm to make more commissions. If you're at home you can develop your plan, you can execute your plan --where to buy and where to sell and where to stop your losses out.

erin_thestreet:

Those firms are also very aggressive about lending on margin, aren't they?

lewis_tsc:

You don't run the risk of being unduly influenced by other individuals. Yes, they are

caiapo_99 asks:

Lewis: do you think daytraders will be seen in the future more like gamblers than investors?

lewis_tsc:

Any day trader who is trading without the proper education might as well go to Las Vegas and place bets. I've been trading for 19 years and never had a losing year. You can't do that if you're a gambler.

lukygut asks:

Do you watch the VIX when daytrading OEX options?

lewis_tsc:

I don't trade options, rather S&P futures.

erin_thestreet:

What are some common mistakes of day-traders and some stop-loss limits you recommend for beginners?

lewis_tsc:

I have what I call the 10 Commandments of Trading. The first one is, you should trade for success and not for money. You develop a plan of attack that tells them to buy here and sell there, and put stops at certain price levels. The point is it's like starting a new business. You look at most successful entrepreneurs. They saw a problem and solveda problem. That was the goal - not the money. The same way with trading. It's market movement. We think the market is going from Point A to Point B.

lewis_tsc:

If you're successful identifying those points and executing your plan. you'll be successful. Second common mistake is a loss of discipline. Once you develop a plan, you have to stick to it, even if it's a losing trade. We talk about risk-reward. For every $1 that you lose, you have to make at least $2.50. If you stick to this philosophy. You can make 10 trade, and 6 are losses and 4 are profitable, and you'll make money.

lewis_tsc:

Remember, there is no such thing as an undercapitalized trader. There are just traders who trade too large for the amount of capital that they have. They take advantage of leverage but borrowing money on margin or trade futures contracts without fully understanding what leverage can do to the bottom line. Another common mistake that traders make is the "Law of Averaging," which goes with the "no wishing, hoping or praying" rule.

erin_thestreet:

Averaging up, averaging down, that sort of thing?

lewis_tsc:

Traders will buy a stock or an index at a price - like a stock at $25. And it goes down to $22. Then they'll buy some more. And then they'll buy at $20. This would be okay if it were part of their plan, that said the stock was a buy between 20 and 25. But if they just buy it because they figure that¿

erin_thestreet:

The buy on the dip mentality¿

lewis_tsc:

¿because we've been in a bull market and it's got to recover. The buy on the dip mentality, they've been saved by it.

ggecko0 asks:

How much daily stock volume can be attributed to day traders? Do day traders move the big name tech and internet stocks?

erin_thestreet:

We here at TheStreet.com have reported that only 45,000 actually trade full time.

lewis_tsc:

I can only speculate on that one. But there are 7 million people trading online. I believe out of the active day traders, is between 50,000 and 70,000 people.

erin_thestreet:

That doesn't include people who trade in their off-hours.

lewis_tsc:

That would probably stick to the statistics -- like any other industry, 20% of the people due 90% of the volume.

the_invisible_author asks:

How long have you been doing this?

erin_thestreet:

wow.

lewis_tsc:

I started trading in 1981. I started trading gold futures when gold was at $850 and ounce and interest rates were 17%. -- Don't think I'm an old man now!

erin_thestreet:

I'm working on a story now about Y2K trades and among them are millenium butterflies and gold futures.

lukygut asks:

Lewis, do you consider S&P futures to be easier to trade profitably than options?

lewis_tsc:

It's easier for me because I've been trading futures for nearly 20 years. The key to any successful trading - and I don't want to make this sound trivial - is buying low and selling high. Finding a market that suits your personality and your temperament is the key to trading.

the_invisible_author asks:

Can you be successful working from a PC?

lewis_tsc:

Yes. Remember the PC is nothing more than a tool to execute your trades -- not to say because you have a PC that you're a good trader. Too many commercials show that all you have to do is open an account and go online, and you'll make millions of dollars.

erin_thestreet:

Although real-time options and futures trading is not widely available on the Internet or even through a retail broker.

lewis_tsc:

What's happening is, there will be a revolution, I believe, in day trading of futures. The futures markets traditionally have been day trading venues. But they have been very closed markets where individuals went TO the exchanges and trades. And the institutional users were very specific - farmers looking to hedge, currency dealers looking to hedge their foreign currency exposure. Banks looking to hedge their interest rate futures. now they're stock portfolio managers looking to hedge their portfolios.

lewis_tsc:

They have been very niche oriented. What the PC and the Internet have done is show that there is a wholecommunityof people out there who are willing to speculate with their own capital.

erin_thestreet:

So they don't necessarily have an underlying portfolio or a reason to play the markets other than to risk capital.

lewis_tsc:

Why futures markets work - is there is a universe of people willing to speculate on the market movement. Institutional traders come in with bids or orders and throw the market out of equilibrium. Speculators come in and try to take advantage of those market movements. They try to move in and out, which we call scalping.

driverx79 asks:

These trading systems you talk about sound complicated and involved. What can a little guy use to enhance his chance of winning in the daytrading game?

lewis_tsc:

The first thing is that day traders need to understand that they are not fundamental traders. They are technical Traders. They are looking for price time and momentum.

lewis_tsc:

They shouldn't care who the CEO of Exxon Corp is. They don't care what the break-up value is. They need to understand that they are looking for recurring price patterns. They're looking for tops and bottoms. They're looking for the market to penetrate old highs and old lows

erin_thestreet:

So strictly technical analysis, then. Any other places to start then for beginners?

lewis_tsc:

First of all, you have to be very wary of what kind of information being offered to you on the Web. You want to go to a reputable source like The Street.Com. Look at the motivation of that information source. When we put TeachTrade.Com together, we were motivated by the responses we got from the book. I was almost like the Dear Abby of day trading

erin_thestreet:

Can you recommend any exchange websites? www.cme.com, www.nyse.com, www.cboe.com

lewis_tsc:

All the different exchanges - the Merc, the Board of Trade, the NASDAQ, NYSE, etc. all have good education and informaiton sites. Many of them offer online courses to get an introduction to trading.

erin_thestreet:

What kind of changes you expect in terms of linking open-outcry exchanges and electronic exchanges?

lewis_tsc:

First, what is going to happen is there will be a consolidation of exchange. I know the CBOT, the Merc and Comex are offering side-by-side order execution . The customer can execute his order -- whether he's calling by phone or executing by PC - can determine where it goes: open outcry or into the electronic book.

lewis_tsc:

You can see the e-mini contract on Globex for S&Ps, volume is up to 50,000 to 70,000 contracts a day. And it's based on the S&P contract, but it's only one-fifth of the major contract.

erin_thestreet:

As a retail customer, that's the best way to trade the S&P futures?

lewis_tsc:

I think that's the best way to get started.

erin_thestreet:

I guess that's it.

lewis_tsc:

Thank you so much inviting me to participate.

erin_thestreet:

thanks for joining us, Lewis and we'll make a plug for your website TeachTrade.com.