If nothing else, their private corner of Lightspeed’s office space, partitioned with glass walls, serves as a kind of boys’ club, complete with a mounted bass on the wall, a marker board scrawled with in-jokes, and salty dude talk all around. At one point, the trader named Chad describes the S&P’s chart shape as forming a “vagina pattern.”
“Big V,” says Milman, smiling.
The morning trading is so uncertain that Milman is only dipping into the market in small increments, putting out feelers to see if he gets a pull in one direction or another. “Right now, it’s not working out. See,” he says, pointing to a financial stock he’s been following, “it just went down three points.”
By 10:30 a.m., he’s recovered some of his losses, but his profit-and-loss gauge is still flickering red, down about $3,000. His neighbor appears caught in a downdraft: “Shit! Fuck!”
Financial news trickles in over Lightspeed’s intercom, and the traders keep track, but they don’t necessarily act on it. For one thing, they often find that stocks move on news before the news is even announced. For another, stocks don’t always react to news predictably. When Goldman Sachs announced worse-than-expected earnings in December, the stock actually went up instead of down. “It just goes to show, you can’t peg it on news stories,” says Milman. “It’s got to be more than that.”
Within a few minutes, a pattern begins to emerge on his screen. Milman thinks he sees a cup-and-handle in the S&P 500, a U-shape on the chart with the leading edge forming the handle. Milman believes this could portend a jump up. Not that he knows what’s driving the buyers and sellers to form this shape, only that it appears to work more often than not—if in fact he’s actually looking at a cup-and-handle and not just some random pattern (and many technical analysts believe this pattern is only observable in three-to-six-month stock charts, not ones lasting mere minutes or seconds). “If it could break above this,” he says, pointing to where the handle is forming, “it could be a technical buy point.”
Or not: “There’s no pure science to it, you know,” Milman hastens to add. He ruefully recalls a day in October when he lost “a hundred, comma,” meaning $100,000. “I was convinced that the bottom was in and just got way too aggressive, and it decided to go against me. It was a disaster. I made it all back in the next two days. But it was definitely a rough day. I hit the bar after that.”
Despite all its technical aspects, the basic template for day-trading appears fairly simple: If in a short period of time a stock has been ranging between, say, $20 and $25, Milman will dub the low price the “support” level, the high price the “resistance” level—a perceived floor and ceiling for the volley of buying and selling. He looks for signs that a stock will break the support or resistance level and head in a new direction—up or down, depending on the day’s overall trend—to a new price range, wherein the tug-of-war between buyers and sellers, bulls and bears, begins anew. Usually, after three or four volleys—visually speaking, three or four clusters of short, tight zigzags lasting as little as a minute, what Milman calls a “consolidation”—Milman will make a determination about whether a “setup” has arrived and buy in just as the stock breaks the price level. If he times it right and a stock does in fact break out, he starts selling off as he reaches the next peak, collecting profits all the way up. If he doesn’t time it right, he now owns a stock that’s headed down instead of up. Typically, he doesn’t wait around to see how far down it will go; he simply sells and takes the loss.
Do the chart shapes Milman observes actually predict what will happen? Hard to say. In reality, the reason the stock may have broken its resistance level after three or four volleys between $20 and $25 could simply be that a random mutual-fund manager decided that he wanted the stock at $20. By joining the volley, the sheer force of his large capital infusion—billions of dollars, enough to fundamentally move the market—might have pushed the stock price past $25. But why it happened is of little consequence to Milman. What matters is that thousands of traders just like him are encouraged to give chase once a stock breaks its prior level, effectively forcing the price even higher as everyone starts buying in. In a kind of self-fulfilling prophecy, so-called momentum traders bet that other traders are thinking the same thing they are, piling in, in hopes of selling off before the momentum peters out. Which came first, the fundamental behavior of buyers and sellers or the widespread belief that these levels have consequence, effectively inspiring the behavior to occur? It doesn’t matter. Momentum is momentum.