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By David Ferrell
Originally published on The Orange County Register, December 26, 2012.
Eyal Shahar's Irvine-based academy teaches the principles across the world.
Eyal Shahar knows the sting of losing big in the markets. During a trip around the world in 1983, while he was secluded on an island in the Philippines, stocks
in his native Israel plunged so badly that the government took over the banks. Shahar got the news only upon reaching Hong Kong, when he wired home for money.
He was wiped out. There was no money to send him.
“This was a very, very devastating moment,” recalls Shahar, 52, a former Israeli air force intelligence officer. “I hung up the phone and said, ‘What the hell
do I do now?'”
With $300 in his pocket and plane tickets in hand for Tokyo and Los Angeles, Shahar flew on, landing in L.A. with hopes of finding temporary work to fund his
trip home. Instead, he says, the detour morphed into a whole new life in America. A skein of unlikely events transformed him into a diamond importer, a publisher,
a serial entrepreneur specializing in corporate turnarounds, and, finally, into the founder and president of the Irvine-based Online Trading Academy, a tiny
campus in a cookie-cutter industrial park near John Wayne Airport where novice investors learn the intricacies of the global financial markets.
Shahar founded the enterprise mainly as a trading floor in 1997 and at one point had 180 traders handling $500 million a day in transactions, he says. In 2001,
while slogging through the aftermath of the dot-com bust, he shifted the focus entirely to teaching. Brokerage houses offered to refer clients if he ceased
competing against them in making trades. And by then, he had developed what he says are powerful techniques for taming the fickleness that had once done him in –
strategies that he felt were marketable and perhaps important for helping others avoid the pitfalls of trading.
Much of the knowledge, Shahar says, accrued through sessions held at the end of the trading day, when winners and losers would compare what they did, analyzing
why some made profits while others failed. The insights caught on; Online Trading Academy now has 26 franchises throughout the United States, with seven more in
Canada, Dubai, Great Britain, India, Jakarta and Singapore. The annual growth rate, Shahar says, has been 40 percent for seven years in a row.
Students sit in classrooms, practicing their lessons by executing real trades online. Losses, if any, are covered by tuition – about $1,000 a day for weeklong
courses on stocks, options, futures trading and foreign currencies.
The soft-spoken, bespectacled Shahar, who has a habit of hugging rather than shaking hands, makes the bold claim that his methods pay off if traders are disciplined
enough to employ them properly.
“It has nothing to do with gambling or ‘Let's try this to see if it will work,'” Shahar says. “It's all very specific, rule-based strategies. It's very systematic.”
Which does not mean it's simple, he adds. There are nuances to grasp and countless judgments to be made in the ever-shifting, real-time markets. “There's room for
interpretations and it takes time to understand exactly how to do this. But it's very, very systematic and it's relatively predictable.”
Finding a sure means of wringing profits from the financial markets has been a goal of investors for as long as those markets have existed. Personal computers
have wrought a new era in trading, vastly boosting the number of players and giving virtually anybody a chance to tap into unlimited wealth from the privacy and
comfort of home – or to squander a nest egg. Every trade, in principle, benefits one party while costing another.
Shelves of books have been written touting paths to success, some stressing analytics – the nuts and bolts of the corporate ledger – and others seeking patterns
in price movements, often treating the markets as a profound math or science problem, or even as something mystical. A guru named Suri Duddella is a pattern trader;
his website, Surinotes.com, beckons with color-coded stock graphs of such beguiling arcs and angles they could hang alongside Kandinskys and Miros.
No one yet has produced a system that clearly dominates the markets. A sure-fire approach would be the golden goose for anyone who mastered it. Trading would,
as Shahar suggests, lose its casino-like quality and steadily pile up money for those with the secret. An argument for Shahar's strategies is the success of Delia
Garcia-Celedon, a 40-year-old mother of five from Bakersfield and one of Online Trading Academy's star graduates.
“I try to make at least $1,000 a day, and that's low-balling it,” says Garcia-Celedon, who gave up a child-care business to trade full time, mostly in the
volatile market for crude-oil futures. “I'm OK with making $500 a day, but most days I'm above $1,000, easy.”
Her trader friends describe her with words like fabulous and incredible. Some have watched her trade during online demonstrations. During the course of a
telephone interview, the lively Garcia-Celedon kept on trading. “Got in at $86.51 on crude short,” she announced. “Just in the last couple of minutes, I'm up $270.”
Then: “Just got stopped out,” meaning a price change had triggered an automatic sell. “Made me $300. Now I'm up $2,170 for the day, and it's barely 10:30 in the morning.”
Garcia-Celedon's celebrity at Online Trading Academy was assured on a single day in October when she “made a really hard run on crude oil.” Starting small,
she kept adding to her position. “I was just kind of playing the game as I knew how. I'd hit a level and short it. I'd profit and do a countertrend. I was pushing
up on the price.” When it was over, she says, she had cleared $40,700.
“I'd never seen so much money in my life.”
She plays Shahar's methods and adheres to his fundamental caveat: Limit the losses. Every trade contains stop orders, pre-programmed instructions to sell
if a price moves the wrong way. If a run of trades goes badly, Garcia-Celedon quits when she is down $1,000 and starts over in the morning.
Losing days are rare, she says, but she has traded full time for only three months. The question now is whether she can maintain her success – which is
not a given, say skeptics, who compare the extraordinary unpredictability of the financial markets to that of global weather patterns. Each is regarded as an
example of a chaotic system in which accurate forecasting for any length of time becomes impossible, even in theory.
“The stock markets are said to be nonlinear, dynamic systems” influenced by a myriad of factors not easily quantified, writes Manus J. Donahue III in “An
Introduction to Chaos Theory and Fractal Geometry.”
So while the fractal-like, “self-similar” patterns evident on a financial chart suggest a kind of order, investors cannot possibly know all there is to
know about conditions that will determine which way the chart will move next, such as the health of a CEO or a political development that has not yet become
publicly known. “Because we cannot accurately describe the current situation with the necessary detail,” Donahue writes, “we cannot accurately predict the
state of the system at a future time.”
In an article, “Chaos Theory, Financial Markets, and Global Weirding,” published last year in Forbes magazine, Tom Konrad noted that such highly complex
systems “tend not to be chaotic all the time, but rather exhibit chaotic behavior only some of the time. The system will behave quite predictably in a
deceptively regular fashion for a while, but then shift with little warning into another mode of behavior that is also regular and predictable, but seems
to follow a different set of rules.
“Much theoretical work has been done to understand and model such changes,” Konrad wrote, “but the lesson I draw from chaos theory is that recognizing
such changes in hindsight may be simple, but predicting them in advance is and will continue to be extremely difficult.”
Eyal Shahar doesn't buy those naysayers. He argues that it is not necessary to predict what will happen in the distant future – or even to be right most
of the time. It is sufficient to correctly anticipate some price moves and exploit them while curbing the damage of incorrect moves through stop orders.
Two really good trades can more than offset six or eight bad ones, he says.
Here's how Shahar sees the market: The long run of investing that swelled stock prices for decades is over. Baby boomers are retiring, drawing money out
of their stocks to live on – a trend that should keep prices relatively flat. The academy teaches long-term investing for those who want to build retirement
plans, but in general Shahar is against chasing blue-chip firms just because they are fundamentally strong.
“When a company is hitting its profits and it's got a great team and it's really humming, are you buying wholesale at a really good price? Or are you
overpaying?” Shahar asks. “All the books and information out there (condition you) not to buy the good deals. You're conditioned to buy at the high price –
that's why the vast majority of consumers are losing money in the market.”
Frequent traders are better off, he says, to play the regular price fluctuations caused as big investors buy and sell. When Goldman Sachs, for example,
sells thousands of shares of an equity, the price plummets due to basic laws of supply and demand: more shares are available than investors want.
Online Trading Academy teaches its students to watch for drops that appear likely to be triggered by institutional sell-offs. Once a price falls far
enough, new investors will recognize that the stock is a bargain and begin snapping it up. Demand will bounce the price upward again. Students try to
anticipate where the bounce will happen and buy at close to the lowest price.
If a stock falls from $55 a share to $50, for instance, the investor wants to buy at $50, then sell after the price rises again. The risk is that the
price will continue to drop after the stock is purchased. The standard safeguard is to set a stop order – a pre-programmed instruction to sell – at slightly
below the purchase price, perhaps in this example at $49.50. The loss, if any, will be minuscule.
“I'm willing to take 50 cents' worth of potential loss” in exchange for the chance at larger profits, Shahar says. “This is where the discipline comes
in. There are very specific rules. You can predict very, very well a possible bounce in a particular zone.”
This is a form of price-action trading, a style in which price changes govern trading decisions. Price-action is the only method that works for high-volume
day traders, who have no time to analyze every stock, and produces profits for savvy individuals and big trading firms alike, says Al Brooks, a longtime
trader and author of “Trading Price Action Trends” and “Trading Price Action Reversals.”
Brooks says he knows plenty of people who make – or claim to make – steady profits, even though losers far outnumber winners. He doesn't agree that the
markets are chaotic systems; he sees them as cyclical and highly mathematical.
“I've looked at charts going back over 100 years,” he says. “If you take the dates off the charts, they look like the charts of today. The underlying
patterns are the same.”
These days 75 percent of the market's volume is traded by means of computer algorithms, which carry out price-action decisions at incredible speed,
Brooks says. Mathematicians and engineers at high-volume trading firms strive every day for more effective formulas. “They all have hundreds of algorithms,”
he says. “Every conceivable idea has been tested.”
Despite that, winning algorithms tend to come and go, he says. Markets shift. New realities emerge. Not every firm profits, and some that do eventually
blow up and go out of business. “It's not like there's one thing that works forever,” Brooks says. “You're competing against the smartest people in the world.
It's a zero-sum game.”
Students enroll at Online Trading Academy for any number of reasons, including the chance to test their wiles in the fast-action world of day trading.
“I wanted the excitement of it,” says Gordon Peldo, 78, of Lake Forest, a graduate who worked in commercial real-estate before taking his first course at the
school in 2006. “I don't want to buy 100 Ford shares and wait 10 years to see what happens. That's just not me.”
Others are more interested in making prudent, long-term investments, often as part of self-directed IRAs, say academy officials. Many have left jobs,
voluntarily or otherwise, and need a new source of income. Some have traded as a sideline for years and decided to get better at it.
Many trading experts hold weekend seminars or classes on the Internet. Shahar says he wanted Online Trading Academy to have brick-and-mortar locations –
a reassurance to students that the school will be there tomorrow. Those who struggle can come back and retake any of the classes for free as often as they need to, he says.
About 60 instructors crisscross the globe, dispatched by the headquarters in Irvine.
“They're just excellent,” says Peldo. “They just have a really good cadre of knowledgeable, caring, concerned instructors.”
“They give you a great education,” says Paul Lacombe, a 56-year-old former computer executive who lost his job three years ago. He now day-trades crude-oil
futures, Nasdaq and S&P futures, and the euro and Japanese yen from his home in Candia, N.H. “You then need to refine that knowledge and be very disciplined and
regimented about how you approach it.”
To further the organization's reach, Shahar launched a weekly radio podcast in 2010. The talk show – which recently logged its one-millionth download – is a
key marketing tool that helps keep students sharp and engaged in trading, says Gary Christmas, the organization's director of broadcast media.
“Practice is really important – and understanding these philosophies,” Christmas says. “You can't get enough of it.”
Some experts liken trading to swinging a golf club. Knowing what to do is just a start. It takes years of practice to hone a winning style – to grasp the
subtle distinctions between one financial chart and another, to see opportunities encoded in the patterns, to know where and when to move.
No one can say how many superstars are out there, reaping fortunes in their house slippers. Surely a mother of five in Bakersfield is not the only one. But
are there hundreds? Thousands? Tens of thousands?
“I knew a guy who said it was like sitting in front of an ATM machine,” says a skeptical Peldo, the Lake Forest day trader, who never saw any evidence
of the man's wealth. There were no Porsches, no fine new clothes. Still, Peldo himself makes money – just not $1,000 a day. He earns enough to keep going,
and, at 78, he says he's still learning.
“You are going to have losses, period. You are going to have losing days, period,” he says. “There are no assurances of anything, I don't care how good you get.”