NerdWallet's Smart Money Podcast - Day Trading Highs and Lows: A Nerdy Guide to Calculating Risk

Episode Date: August 10, 2023

Get an inside look into strategies and pitfalls of the high-risk, high-reward world of day trading. Hosts Sean Pyles and Andy Rosen discuss the high-stakes world of day trading and shed some light on your statistical chances of finding success. Then, Andy welcomes seasoned traders Sierra Smith and Michael Sincere to the podcast to share their perspectives. They pull back the curtain on Sierra's typical trading morning, break down concepts like options trading, and highlight the rollercoaster ride of market highs and lows. They also discuss the profound role of social media in day trading, the importance of discipline and emotional control, and the potential pitfalls and real challenges in day trading. Drawing from their personal experiences, they shed light on how they’ve learned to take profits quickly, prevent losses from spiraling, and maintain a realistic perspective on potential returns.  In this conversation, you’ll hear about: day trading; options trading; market highs and lows; social media influencers; emotional control; cashing out; taking profits and alleviating losses; researching the stock market; and understanding and making money. To send the Nerds your money questions, call or text the Nerd hotline at 901-730-6373 or email [e-mail]. Like what you hear? Please leave us a review and tell a friend.

There was a time back, oh, about 30 years ago, when headlines were filled with stories about people using newfangled technology to trade stocks minute by minute from the comfort of their couches. Today, you can trade almost second by second, but that doesn't mean it's a good idea. In the beginning, it's definitely not all sunshine and rainbows. When you make mistakes in trading, those are very expensive mistakes that you are making, especially when you're doing day trading with options. It's very volatile. So it's very much high risk, high reward. Welcome to NerdWallet's Smart Money Podcast. I'm Sean Piles. And I'm Andy Newfangled Rosen. Today we have episode two of our nerdy deep dive into next level investing. And Andy, let's just start out with the caution we mentioned last episode,

which is that here on Smart Money, we still think the vast majority of people will have more success with very basic investing strategies, like using the buy and hold strategy, investing for the long term, utilizing low cost, lower risk index funds, seeking out safe returns like high yield savings accounts. You'll get no arguing from me on that, Sean. But as we noted last time, some people do want to do more on the markets. Maybe they have some playing around money. Maybe their risk tolerance is higher than the average bear or bull. Maybe they're just curious about all these terms that they hear on the nightly news. Does anyone watch the nightly news anymore? Nope.

Yeah. And as we also noted, it's good to be educated about the different ways investors use the stock market and other markets because all of it has an impact on the overall economy, which affects everybody. Right. Well, frankly, when I hear the phrase day trading, I just think the odds are really against people. There's research showing that only about 1% of day traders consistently make money. And some kinds of day trading, like trading options, you can actually lose more money than you put up. If you don't know what you're doing or your expectations are not

aligned with the reality of what you're doing, you can get into a desperate situation pretty quickly. It is absolutely true that people can get over their heads quickly. And there are a lot of people on social media that make day trading seem like it's easier or more profitable than it actually is. Think of it this way, right? If you were losing a lot of money day trading, do you think you'd go on TikTok and brag about it? I doubt it, right? Probably not. Yeah.

So if people want to try this, they need to be aware of these percentages and aware of the risks and the time and effort that is involved. You really have to be watching moment to moment to see what's happening. But the fact is that there are a lot of day traders out there and they do help move markets. So let's hear from a couple of them to try to understand what they do and how it really works. Let's do it. But before we get to that, a reminder from the lovely folks on the NerdWallet legal team. We nerds are not financial or investment advisors. We will not tell you what to do with your money.

Everything in this episode and this series is to provide you, our dear listener, with the knowledge to make informed decisions with your own money. And listener, we want to hear what you think, too. To share your thoughts around next level investing with us, leave us a voicemail or text the nerd hotline at 901-730-6373. That's 901-730-NERD or email a voice memo to podcast at nerdwallet.com. So Andy, who are we hearing from today? We're hearing from two day traders, one former, one current. Sierra Smith is a trader and social media creator who runs a Discord server where she and other traders talk about strategy, trading concepts, etc. She's based in Houston, and you can find her on TikTok or YouTube as well. Michael Sincere is an author and speaker about investing topics.

Among his books is Understanding Options and Start Day Trading Now. And he's also a financial columnist for MarketWatch. He's based in Miami. Hey, Andy, before we go any further, let's take a second to talk about what a Discord server is and what it means to run one. A lot of folks might not be familiar with this. You said Sierra does this, right? Right. So without getting into too much detail, Discord is basically a chat service organized around a specific topic or interest group. And they're particularly popular among video gamers. That's kind of where the service rose to popularity, but they've developed a big audience in the online investing world. Content creators like Sierra will often use Discord service to connect with their audiences.

If you haven't used Discord, think of it as something like a mixture between Slack or Microsoft Teams with a little bit of Reddit mixed in. Okay, cool. Sierra, Michael, welcome to Smart Money. Thank you for having me. Thanks for having me too. So the first thing I want to know is, I guess I will start with Sierra. So did you do any day trading today?

I actually did do some day trading today. So tell me, just as an easy example to pull out of your head, what did you do? Just talk to me about what your morning went like. So this morning specifically, I did live trading with my Discord server. So we got on around 8.15. I marked up three different stocks for them so that way they can have a variety of options if they chose to take some trades. And so I personally took Apple today. I traded Apple. I took calls, which essentially means that I believe the stock is going to go up for those who don't understand options terminology or anything. And so, yeah, that's kind of what my morning was today, day trading. And then afterwards, we just kind of did some education. We did some trade recap for some people who didn't win on their trade. We

went over why they didn't. And yeah, that was pretty much my early morning today. And could you tell me kind of what you saw in Apple this morning, sort of in layman's terms that made you feel confident about making those short-term trades? So I think Apple was the pricing for free market. So there's free market and post-market and there's actual market hours. Free market with options, you cannot trade. But in the free market, it was sitting within this demand zone, I believe. And so if it's within a demand zone, that essentially means that the stock most likely will go up from there. So I just was still like, hey, I'm going

to take Apple calls today because within that zone, it's just a whole chart analysis that we did before the market opened. And so that way, when the market actually opened, we were able to take that train based off of that prior analysis. And Michael, I know you're not really doing day trading anymore. Tell me kind of what your daily thinking about your portfolio looks like. Right. What Sarah was doing was something I did do in the past, mostly when there was a volatile market. And I would jump on some of the hot stock and kind of ride it higher. And I stopped it because it's wonderful when you're on the right side, but if you're not, it can turn around really quickly. So to answer your specific

question, I switched from day trading to a more traditional buy index funds and I sell covered calls, which is also an option strategy. But to me, it's a lot less risky than day trading. Just for the people out there, when you sell a covered call, basically what you're doing, if I'm understanding correctly, is you are selling an option for someone else to buy a stock that you already own. So if your trade doesn't work out, you at least have the stock to back it up. You're not going to have to buy a stock at a higher price than you might want to pay for it in order to sell it. Is that accurate? It is. And I'll give you an example. Let's say I bought Apple. And then what I would do is I would rent out those shares to Sierra, who's buying calls. I'm selling those calls to her. She's

buying them. So I wouldn't make as much money on it, but I do get an immediate income. And so what I do is I sell them to the speculators. And I'm like the landlord. So I get my income and I just want my nice income and I don't have to go through the stress of watching it all day long, every minute, can't even go to the bathroom. You know, that lifestyle I decided to walk away from. But by selling the covered calls, basically, Sierra or another speculator would, they basically own the rights to it and they can sell it from me at any time. So I just wait a month or whatever time like that I decide to sell those calls on. Got it. So maybe you folks have met before, even without knowing it. Probably. Right. Absolutely. I hope you enjoyed those calls

that you bought for me today. Thanks. So let's go back and sort of hear a little bit about each of you with your sort of origin stories. Maybe start with Sierra, like how old were you when you started trading? What made you start? Tell me a little bit about kind of how you got into it. So I started trading when I was 18 years old. After I had graduated high school, I had a friend and he had posted on social media that he had bought his dream car at 18. And I'm like, what? Like, you know, like we just graduated high school. So it doesn't make sense for you to be buying your dream car at this age. Or so I thought. And so I asked him, what do you do? Like, well, how did you buy that car? And he told me that he traded options. I'm like, I've never heard about options trading before. All I knew was I can buy

a stock if I so wanted to. Right. And so he taught me how to trade options. And then from there, I just started trading. I spent a lot of time looking at charts. I just fall in love with trading. I've just been trading. I would say I trade at least four out of five days of the week, even now. And it's just because now I think my shift with trading has focused for not trying to trade to survive and make a living and provide for myself. But now it's just trading just to make some income and just because I love trading. I really do love what I do. I'm really passionate about it. Because I think when people hear trading, they have like a whole negative stigma around it. Or they when it comes

to financial stuff, in general, people get kind of leery, you know, no matter what it is, whether it's trading or investing, or whether it's buying something off the street, people get a little leery when it comes to putting their money in certain places. So I just think being able to destigmatize trading as a whole is something that I love to be able to do. You talk about how you love it. What makes you love it? And do you love it every day?

I mean, there can't be all sunshine and rainbows, can it? So in the beginning, it's definitely not all sunshine and rainbows. When you make mistakes in trading, those are very expensive mistakes that you are making, especially when you're doing day trading with options it's very volatile especially the way that i trade so it's very much high risk high reward so you know obviously the days that i win i'm having a great day you know i love it then but obviously those losing days are really hard i do you get more comfortable trading you kind of realize like how to take losses with the grain of salt but but those larger losses, those hurt. But when it comes to options trading, you just have to

build up a third mental fortitude, especially if you trade the way that I do. While I do agree, there are definitely less riskier ways to trade. That's just how I purposely do it. Because like I said, I'm 20 and I like to, I like to make risks, you know, so it works for me. Got it. I'm 39 and I use a robo advisor. So, Michael, I know you've done a lot of research and writing about various aspects of navigating the financial world, but you've done some specific research into the world of day trading. I was wondering if you could give a really quick CliffsNotes about kind of how this became a normal part of the financial world. It wasn't too long ago that regular people could not just log onto their computer and trade stocks on their own. I mean, you would have had to go through a lot more hoops than you can do now. So can you talk just kind of a little bit about the history and kind of maybe you can segue into how you became acquainted with it.

Well, the history goes back to the 90s. And when I was beginning as well, all of a sudden I discovered trading. And I think it started with Netscape, which I think went up a unbelievable amount of money in one day because of something called the Internet, which was suddenly discovered. Before, if you were day trading or any kind of trading, it would cost you as much as $100 per trade. And once the internet came and these companies started switching to online trading, it went from $100 per trade to maybe $20 a trade. And as you know, now it's pretty much free. But that's when I got involved. And in the 90s, the day trading was unbelievable. It seemed like any stock you bought related to internet, you could make $20,000, $30,000 a day.

And that's when it really got really popular. Unfortunately, it all came to a screeching halt when the market, I think it was around 2000, when it all crashed. And all the day traders started losing money, all their money. I mean, I was on these websites and I saw them just panicked as they, I'm trying to think of some of the stocks they bought, but many blew up like Pets.com and all these others. And people got sick of day trading for many years. I mean, the majority did.

And then now it's kind of made a resurgence again, or at least it did over the last few years. And so, Sarah, what she's doing, it's a high, as she said, high risk, high reward. It's intense. You have to sit, be in front of the computer all the time. And day trading options is even more speculative. And I wrote books on options and on day trading. But when you combine day trading with options, the way options work, they can switch in a minute. You could be up and then

the next minute you could be down. So I have a lot of respect for anyone who can book a profit. For me, I was trying all types of trading and decided to write books about it because I made so many mistakes, lost so much money at first. And so I was trying to help other people. And that's when I both wrote books on day trading and options. I think I wrote about eight books on both. I did want to ask, both of you in different ways have made part of your living out of talking about trading and talking about the financial world with people. And I think this is true of a lot of people who get into this kind of world. There is this kind of content aspect to it. Tell me why you think the sort of public facing aspect of it seems to be important

to a lot of traders, you know, from the influencers to the authors. So I know from my experience, I can say like, I recently started utilizing social media to talk about trading. And so I had made a TikTok about it online and it blew up and it went viral. And so many people were like, oh, I'm super interested in trading and I would love to learn. And for the first time in two years, I was like, you know what? Maybe I will start teaching because I've never wanted to teach people about trading. I just want to do it by myself and go on about my day. But I think when it comes to the social media aspect of trading, I think people have to see that it works for other people. They have to see how it works, why it works in order to want to get into it. Because everybody knows you can buy and sell stocks, but no one really knows how profitable

it could be or what that looks like on a day-to-day basis. So I think the social media projection of it really helps bring people into the trading, I guess, industry, if you want to call it that. I saw on one of your, I think it was a TikTok video that you made. I saw you talking about how there's a lot of people on social media that will tell you, oh, I did these three trades and I made this amount of money. And you're kind of warning people. It's not that simple. What do you think are some of the pitfalls of social media-based investing? I think one of the pitfalls of it is everybody wants to make trading seem like it's perfect. right? And then people always want to post what

they've made in their profits, but they won't talk about their losses or what they put in. I know as far as option goes, it's a lot in that percentage. That's how I see it. So for example, like if I tell you guys that I've made $10,000 in a day, it's not because I turned $10 into 10,000, you know, it's usually because, okay, I made a foot of 40 and made 25% on that trade. So I think the pitfall, the major pitfall when it comes to trading and social media is that people don't advertise the entirety of what it is. And a lot of people end up getting in the trading thing that they're going to turn $50 into 5,000 in two days. And that's just not realistic.

Michael, I mean, obviously you're maybe not as active on social, but you've done quite a lot of content around these kinds of activities. So what's your perspective on it? Well, first of all, by writing these books, I was able to speak to some of the best traders and investors in the world, like Peter Lynch, Mark D. Cook, who passed away. But Mark D. Cook was one of the top option traders in the world and was successful for many, many years. I used to interview him all the time and he became a friend. So I learned a lot from him. And it took him five years to become successful. It was very difficult those first five years and he wanted to give up many times trading options. But then he found his system.

And what I learned from him and my own experience is it's really the emotion that gets everybody. It's really the discipline and emotion. Everyone talks about the discipline, but they don't really know what it means until they start trading. And what I mean is you're in a losing trade trade and you're ready to lose $10,000. And you have to figure out very quickly whether you close the trade, whether you add more to it, whether you hold. And these are lightning fast decisions that really hurt a lot of people. I'm sure Sierra's gone through this many times. I've found from my experience, it's very difficult. Beginners have high expectations about how easy it is to make money, as Sierra said. But it does take a long time to find your own style. And trading's not

for everybody, too. And some of the pitfalls I found is, one, a lot of people turn from trading to gambling. It's very easy to do. You think you're trading, you're following everything, but you're betting way too much money on a trade, which means, yes, you can make $100,000, but you also could lose that exact same amount if you're not careful, which is why I tell people the number one rule is to trade small, especially when you're beginning. Do not try to make $100,000 in one day. Try to make a few hundred. If you can do that consistently over a long period of time, then you may have a shot at it. But if you come in there trying to make big, big bucks,

nine out of ten are going to blow up their account, in my opinion. Yeah, I'm definitely seeing more people fail than succeed when it comes to starting out in trading. And that's just because so many people account size, so I can put tens of $500 into a trade and be okay with it with the way that I trade. But the strategy that I use may not work for somebody who only has $500 in their account. And so I think a lot of people just assume that you can just make all this money overnight and they end up just getting so discouraged beyond trading, which kind of sucks because trading for me obviously has changed my life. And I think there's so many good and positives to it, but I just don't think people are really fully educated on what trading really is. I do want to get back to some things that might help those sort of beginner level people who just know this term and want to get a sense of it. Michael, if you would

be willing, could you just tell us a little bit more about kind of how you moved off of day trading? You talked a little bit kind of just about the lifestyle and why it didn't work for you, but just a little more detail on kind of how your views evolved would be awesome. I kept coming back to the fact that the strategy that worked again and again, and I used to have long conversations with John Bogle as well, who was the father of indexing. And I found out that over and over, I was making more money on a longer term basis just by buying and holding these index funds. At the same time, I was trying to make fast money using the strategies Sierra's using, like momentum trading. And I actually did do option trading with momentum. I found it extremely stressful. I found out I had to devote entire days

to it. I tried to get out by noon. That was my goal each day, get in at the open, ride it, and then get out. And yes, on the good days, I'd make pretty good money. I'd make $10,000 on good days. Once I made $30,000 and I was riding high, three days later, I believe I lost it all. I found out after about a year of this, it was not for me. You have to know your own personality. And I found for my personality, I couldn't take the stress of it every day. And so I pretty much stopped day trading. And I wrote books on helping people manage the risk part of it. Anyone can learn about the technical aspects of it, like the charting and the indicators. But it's the emotions that are the difficult part to manage. That's what

really ruins most people. I emotionally did not have what it takes to be a professional day trader, especially a momentum trader. And I saw that it was easy to blow up my account. And some days I blow up that day or that week and I got out of it. Sierra, it must also take kind of nerves of steel to stop after a couple minutes, right? If you're doing well, it's probably tempting to say, oh, I could get more, right? It seems like one of the things you're describing is kind of managing that and knowing when to stop. I would love to hear kind of either one of you talk about when to stop, like when it's time to stop, whether you're having a good day or a bad day, when it's prudent to take a deep breath. So one thing I always tell my students is that when it comes to day trading, green is green. It doesn't matter if

you made $500 or $5, because I promise if you saw $5 on the ground, you would pick it up. I think I have lost so much money in the markets just holding out on trades and just like, hey, you know what, going up, I could hold this out for, you know, five more minutes, 10 more minutes. Then it ends up reversing back down against my trend. And the minute that I see I'm in profit enough that I'm happy with, I will end my trade. And I think the reason why I trade like that, again, is because I'm at a point where it's not like I'm trading trying to compound my account and secure my lifestyle. Like that's all said and done now. So I feel like now when I trade, it's very relaxed. It's just get in, get out, make something for today, and then go on about my day. That's why I'm okay with just being in trades for a few minutes.

Because sometimes I will exit a trade and then the stock will run three more dollars i'm like man i could have made so much money but as long as i left with something i'm good and what about on a bad day there's got to be a temptation to chase a loss to try to get it back yeah how do you manage that i have trading rules actually like i have personal rules like for me to come into trading, like if I take a loss, I'm just going to be done for the day. I honestly, I could have a risk or a probability of being able to make that back, but I would rather take one loss

than take two losses or three losses trying to keep revenge trading and get that back. Lost a lot of money doing that also. So I'm no longer doing that when it comes to trading. So I just think when you take a loss, you have to make sure that you don't let your losses lose that bad, if that makes sense. Like you obviously, you have to have a stop loss

and proper risk management. So that way it's not like when you do lose, you're losing your entire account side every single time. Tell me if there are listeners out there who are thinking, this sounds fun. This is something I might be interested in. I would like to try it out.

Where do you recommend people start? What's the sort of first step someone should take? I mean, thinking of someone who might not even have a brokerage account and just wants to figure out if day trading is something they could ever do. I think people who want to start should start not by learning anything about brokerage accounts or charting or anything. I think they just need to learn what trading is and what trading is not. Because I know a lot of people want to start when they hear how much money that people have made, but they have to understand what trading is, like what trading really is and what it isn't. And then after that, I say people start with just looking at charts

and just seeing if they can find something that makes sense to them. And the biggest thing that helped me learn how to trade was having somebody who walked through it with me. Because you want to know what type of learner you are. Some people can read books on options trading and learn. Some people watch videos. Some people need one-on-ones with people. So just figuring out how you learn and using that and applying that to the trading world. Michael, what do you think? I think that people should, again, as I said, start small. I think they should, if they know nothing about the market at all, they should start with opening up an account, starting with index funds or mutual funds, start at that level. They really need to understand the

stock market first. If you want to become a day trader of stock, do a small amount, but you have to start with the brokerage account. You have to learn the different aspects. And that means learning about the indicators and learning, you know, there's a lot to the market that a lot of people don't know. Now, eventually, if you want to trade options, you should first start by learning the different aspects of options. There are great books, you great books on trading and on investing with options. But again, there's no rush. If you're coming in trying to make big money fast, it may not turn out so well. So basically become a student of the market.

Both of you, thank you so much for coming on to the show and telling us about your perspectives. Thank you so much. Thank you. You are so welcome. Thanks for having me. Hey, Andy, I got to tell you, I'm pretty torn after hearing that conversation. Sierra seems to be living a super cool and successful life at such a young age. And there's part of me that wants that, but there's another, much more rational part of me that knows that it's just not realistic.

You hear about all the money she's made, and it can be easy to forget that the vast, vast majority of day traders lose money. So I really view Sierra's narrative as a cautionary tale, maybe for her followers online more than for Sierra herself, because people might view her TikToks or courses or those of another day trader and think that this is a secret path to instant wealth. But it's really not. Again, in all likelihood, you're going to lose money if you do what Sierra does. Sean, I think I have to agree. Obviously, Sierra does seem to be living a super cool life, right? She seems to be having a really good time and that's her life. And a lot of people have tried this and had very different results. And so, yeah, you might wind up like her and you might envy her. But on the other hand, you could wind up like the majority of traders and not get the kind of results you're looking for or wind up losing something that's important to you. So you may be able to improve your chances by doing very scrupulous research, paying really close attention to your investments and how they're performing moment to moment.

But on the other hand, your research may lead you, as it seems to have done Sean, to the conclusion that this investing style isn't for you. Maybe you don't even have the time for it. And many people spend hours doing this every day and still lose money. As we said before, those are not the people you tend to see promoting their trade as much as the

winners do. No. And that's why at the end of the day, I know that I'm much more of a Michael than a Sierra. I love to do some research and have a solid understanding of what I'm going to be doing with my investment strategy. Plus, like Michael, I do not have the emotional fortitude to weather the big ups and downs that Sierra experiences on a daily or hourly basis. All right. Well, Andy, how about a preview of what's coming up in episode three of this series? Are we going to Vegas? Well, you know, some people would say we are because we're talking about options trading, short selling, derivatives and contracts, all of which can have huge upsides and huge downsides. But they're also very important

in the market, so it's worth hearing how they work, who might want to include them as part of a diversified portfolio, and how to know when it's time to leave it to the pros. The risk and reward tends to be a lot higher than with just stock ownership, because generally with derivatives trading, you're either going to get a big payout, double your money or something like that, or you're going to lose everything you invested in a particular contract. For now, that is all we have for this episode. If you have a money question of your own about investing or anything else, turn to the nerds and call or text us on the nerd hotline at 901-730-6373.

That's 901-730-NERD. You can also email us at podcast at nerdwallet.com. Visit nerdwallet.com slash podcast for more info on this episode. And remember to follow, rate, and review us wherever you're getting this podcast. This episode was produced by Tess Vigland and me, Andy Rosen. Sean and Liz Weston helped with editing. Chris Davis helped with the fact-checking. Kaylee Monahan mixed our audio.

And a big thank you to the folks on the NerdWallet copy desk for all their help. Here's our brief disclaimer. One last time, we are not financial or investment advisors. This nerdy info is provided for general educational and entertainment purposes and may not apply to your specific circumstances. And with that said, until next time, turn to the nerds.