Two Stock Traders, One Market, Two Very Different Outcomes...Which One Can YOU Relate To?

Paul sat in his 26th floor office alone and stared at his computer screen in disbelief. For months now, he had watched his Stock portfolio go down in value day after day, week after week, unable to act, paralyzed by fear. Now, things were really getting serious.

Paul is a Stock Control Manager for a Pharmaceutical company. Just over two years ago, he had been celebrating his good fortune - the Stock market had been good to him - he had become a millionaire - on paper.

From around March, 1998, he had invested heavily in Mutual Funds, mainly Tech Stock Funds, but he also put a large amount into leveraged S&P 500 Index funds and several large cap Stocks, also bought on margin.

The great Bull market had seen him turn a relatively small initial stake and regular monthly investments into a 1.2 million dollar fortune. 

His goal of $2 million in net assets seemed attainable - then he could retire and take life easy. The market only had to keep going up the way it had for a few more months and he would be set for life.

Now, his worst nightmare was unfolding before his very eyes…in a panic sell off, the price of every Stock and Mutual Fund he owned was again being decimated. The leverage that had driven his wealth upwards so quickly in the Bull market was now threatening to destroy him.

Tech Stocks that were once valued by the market at over $200 were now trading below $10.

The S&P 500 Index, a good barometer of the Stock market's health, was trading at around half of it's value of just a couple of years ago, and because of his leveraged exposure, his Index Funds were down even more.

Many people who had borrowed heavily during the previous uptrend were now facing daily margin calls from their Brokers - they were asked to deposit more money to top up their trading accounts.

Many couldn't pay, so their positions were being closed out, often with crippling losses. This selling forced the Stock market lower, in a downward spiral from which there seemed no escape.

Paul himself had received another margin call just two days earlier.

He had transferred his last $30,000 in savings, the money he had put away in case of an emergency, to his margin loan account, and now that too was gone!

$30,000 in two days! How could he face his wife Beth and his children, Sue and Adam, knowing that he had lost their fortune. He wondered if he could go on...

Two blocks away, Peter also sat in his office, watching his computer screen. This was not something he did regularly...but today was different. Today he would most likely harvest the profits of the trades he had meticulously planned weeks and months ago.

You see, Peter was a professional trader. That was his Business and his life. Not that he spent every day staring at a computer screen though. In fact, most days he spent with his family on their yacht or travelling around the country or other parts of the world.

Or he could be found in his new RV, experiencing the outdoors and enjoying the freedom that wealth had given him.

But today, he was at his screen, ready for action.

Why was today different? Because 30 months ago, the S&P 500 index had peaked at just above 1550 points. Now it was approaching 775 points - exactly 50% of the all time high.

As a student of the great trader WD Gann, Peter knew that a 50% retracement in price was an important support level. Also, 30 months was a timeframe that Gann had often said had major significance.

Today, Tuesday July 23rd, 2002, was potentially the low in the big bear market that had started so long ago and had cost investors so much money.

If the S&P 500 index futures traded at 775 points, Peter was going to exit all his short positions and buy a small position for the rally he expected to come.

He would place a stop loss order 10 points below his entry and see what happened. He was confident that his stop loss order would not be hit.

The market sold off all day, continuing the slide that had gathered strength over the last month.

Big volume indicated panic selling as investors scrambled to liquidate their positions before they were completely ruined and lost everything. Buyers who jumped in trying to pick the bottom quickly turned into sellers as the market kept heading south. The carnage was widespread.

Finally, the market closed for the day at 797 points, just shy of Peter's target of 775. Patience, he told himself. Tomorrow is another day.

The chart below shows the trend of the market for the last few months - then the panic selloff into July 23rd.

Source: Incredible Charts - www.incrediblecharts.com.au

Paul however, panicked. 10 minutes before the market closed, he called his Broker and ordered him to sell everything. He was about to get another margin call anyway. He didn't have any money left to pay it, so he decided to just get out of the market as best as he could.

Paul's Broker rang back just after the close and told him that he had sold all of his Stocks and Mutual Funds and was now 100% in cash.

"How much do I have left in the account?" he asked. "After paying back all of your margin loans, $175,452," his Broker answered. "What, is that all?" Paul screamed. "Sorry Paul, that's it," his Broker replied. Paul put the phone down and stared blankly out of his office window.

The reality of what he had done finally started to sink in.

He had lost over 80% of his retirement funds, his life savings. He had managed to lose a fortune. He had been so close to financial independence, but greed had made him blind to the risks and now his family would pay the price. He buried his face in his hands and wept.

At home that night, he didn't tell his family about his disaster. He carried on as normal, hoping it was all just a bad dream. But he felt dead inside, and he knew that he would eventually have to tell them. The thought of what they would think of him when they found out was almost too hard to bear.

For Peter, it was Business as usual. He went to dinner with his wife Sue and his daughter Emily at their favourite restaurant. They briefly discussed the market, but then it was on to more important things, like congratulating Emily for receiving the Student of the Week award at her School for the 4th time that year.

Both Peter and Sue were so proud of their daughter. The dinner was a celebration of her achievement, as well as a chance to spend some quality time together.

If there was one special thing that having wealth gave Peter and his family, it was the ability to spend their time as they chose, without the need to work regular hours in a Business or punch a time clock working for someone else. Time freedom was what wealth meant to them.

They contributed large amounts of both time and money to their local Church, several Schools and many charities in their city and around the world. When they saw someone in need, they often helped anonymously.

Trading the Stock market had indeed been good to Peter and his family. And tomorrow, Peter felt it would be good to him again.

The day dawned bright and sunny. Peter rose early as he usually did, full of energy. He went for a brisk walk along the beach, then showered and prepared for the day.

Paul woke up to the nightmare that he had lost his fortune and had to face another day at a job that he didn't like, working with people he couldn't stand, answering to a boss who was incompetent, but was the brother-in-law of the owner.

He felt physically sick. How could he go on? He turned on the finance news and the commentators were busily discussing the state of the market.

One of them said to a guest commentator, "Well, this bear market has been going on for so long, do you think it is time to try to make some money on the short side of the market?"

The Guest answered that the probabilities were good that the market would indeed continue down for many months, and the smart money was betting in that direction. Paul at least consoled himself that he had been able to get out when he did, rather than wait for another 2 months, when the prices of his Stocks would probably have been much lower.

Peter was watching the same channel, and now he knew that the market was close to the bottom. When the last of the Bulls turn Bearish, he thought, it's close...the low has to be so close now.

On the corner of the television screen, the overnight S&P futures were down 20 at 775 points!

Peter saw this and knew what he had to do. He called his Futures Broker and told him to buy back all of his sold S&P futures contracts immediately - he had reached his target - 50% of the all time high, a powerful support level.

He cashed in a fortune in profits.

He also told him to buy 2 futures positions so he would be long at 775. This the Broker duly did.

He then called his Stock Broker and told him to cover all of his short Stock positions at the open of the market. He didn't buy any Stocks at the time, because he wasn't as confident of them as he was on the position of the index.

Paul, on the other hadn't, called his Broker and told him to sell 5 Stocks that looked particularly weak short at the open. He was confident that he would be able to buy them back in a few weeks time at far less, thereby profiting from the downtrend and making up some of his losses.

Both men then sat back to watch what would happen. You can see on the chart below the outcome of that days trading.

Source: Incredible Charts - www.incrediblecharts.com.au

The market did open sharply lower.

Peter's Broker bought back all of the Stocks that he had short sold over the preceding weeks and months, Paul's Broker loaded up on shorts for him, because he expected the decline to continue.

But then, slowly at first, prices started to rally. Lunch time came, and both men headed down from their offices to grab some lunch. Paul would eat on his own, Peter was to meet with some friends.

Ironically, they both chose the same Restaurant for lunch that day. It wasn't really a restaurant, it was more like a Diner, but the food was good and the prices were reasonable.

Paul sat down alone and ordered an open sandwich, Peter and his friends sat at the next table and ordered as well.

The topic of discussion at Peter's table quickly turned to the Stock market. All of Peter's friends had an interest in trading and investing and they often discussed their trades when they met for lunch.

None of them ever gave the others Stock tips, but they all made money from the market using different trading styles and strategies and these were freely discussed. Paul looked at these obviously wealthy traders and wondered what they knew that he didn't.

Peter was talking about the fact that the S&P 500 index had hit 50% retracement at 775 points that morning and he had exited all his short positions and gone long, albeit only with a small S&P 500 futures position.

The other's were in agreement that this was a high probability low and they had all exited their short positions as well earlier that day.

Paul felt a sudden wave of fear creep over him again - had he made yet another mistake?

He knew he shouldn't take notice of things he heard about the market from others, but this was different. These guys were obviously successful, maybe they were right...

He called his Broker and asked how his positions were going. "You are down on all of them at the moment," was the reply. He wasn't sure why, but he told the Broker to buy them back at market.

The Broker tried to talk him out of it, but he was now sure that the traders at the next table were on to something - they knew what they were doing. He ended his phone call confident that he was going in the right direction, finally.

Paul just had to know more. He built up the courage, then turned around to the next table and introduced himself to Peter and his friends.

Peter was polite, but dismissive. They chatted for a couple of minutes, but Paul could see he was being brushed off.

He turned back around and finished his lunch. But something inside him was screaming - "Don't let this chance go by."

He turned around again, and asked Peter for his Business Card. Peter looked at him for several seconds, then pulled out a card from his coat pocket and handed it to him. He then turned back to his friends and continued his conversation.

Paul had just finished reading a book written by Robert Allen and Mark Victor Hansen called The One Minute Millionaire. In the story, it was pointed out that most people give up on their dreams too soon.

If people would only persist, they would often succeed in their lives, but most give up when they get one or two knock backs. Most people fail because the give up just a few feet from success.

Knowing that it usually took three or more knock backs before the door was opened, Paul took a deep breath and again approached Peter.

"Please excuse me one last time, but I was wondering if you would be in a position to be my trading mentor?" Paul asked. "I'm too busy!" Peter told him. "You'll have to find someone else."

That was knock back number 3. Paul took another deep breath, looked Peter straight in the eyes and said, "I don't want anyone else, I want you to teach me!"

Conversation ceased at Peter's table and a hush came over the group, as all his friends looked at him, waiting for his answer.

Peter looked at Paul for what seemed like an eternity, as though he was sizing him up. Did he have what it took? Was he prepared to make the sacrifices necessary? Could they work together?

Finally, Peter broke into a smile. Alright my friend, take a seat.

For the next hour, Paul sat and listened to these powerful traders as they discussed their strategies and thoughts on the market. He learnt more that day than he had learnt in the last 5 years as a trader, as he had bumbled along not knowing what he was doing.

As they left, Peter pulled him aside and said, "I'll call you in a couple of days and we can meet at my office. I have to tell you though, this won't be an easy task for you. You will have to fight the emotions of fear and greed every time you are in the market. You will lose money sometimes. Are you up to the job before you?"

"Yes!" Paul replied. "I am ready to succeed if you will show me how." With that, they parted company for the day.

Paul left the Diner and returned to his office a changed person. He looked the same, but he knew his life would never be the same again. He felt calm for the first time in months - he had found a Mentor.

By the end of the day, the S&P index was up 46 points, forming a huge Outside day. Peter was happy, his S&P 500 position was already well into profit.

Paul was happy as well. Every Stock he had sold short had closed well above where he had entered. He had bought them back, taken his small loss, and felt proud of himself, even though he had lost money.

Finally, something had gone right...Paul had a sense of purpose again and for the first time in months, he felt like he had a chance to get it right. This was the beginning of a wonderful adventure - he couldn't wait to get started.

With this background in mind, over the next few chapters, we will share with you the lessons and strategies Peter taught Paul in their time together. Please continue to Trend Trading.

Copyright Stock Trading Review.com 2007