As I have alluded to in recent posts, and as the time between those posts has illustrated, I trade a lot less during the summer. There are a few reasons why.Continue reading “We Don’t Have To Trade”
It’s that time of year when the activity in the markets begins to wane. When thoughts turn from double-tops to crop tops, from shorts to beach shorts, and from breakouts to summer breaks. Summer is here in the northern hemisphere, and traders everywhere are starting to take it easy. Including me. Which is why I haven’t posted any trades for a few days!Continue reading “So Begins The Summer”
As a non-American, independence day is not a date that’s burned into my consciousness, beyond being a day I know I won’t be trading because the markets are closed. But it is a day on which I reflect on what independence means to me as a trader.
…It’s what you do with it that counts. That’s what they say, right? Nonsense. Size matters. A lot. At least when it comes to trading. It matters for two reasons.Continue reading “Size Doesn’t Matter…”
Something I see beginning traders struggle with a lot is blindly following rules and then wondering why their trades don’t work out. It’s an honest mistake to make, after all, we are taught from an early age that rules are to be respected at all times. Formal education hammers into us the idea that to succeed in any endeavour we must follow a prescribed path, we must conform, we must stick to some predetermined plan. The trouble with that kind of thinking though, is that’s not the way the real world works.Continue reading “Day Trading Is Like Living In The Matrix”
I’m often asked about program trading, and whether computers make better traders than people. The theory seems sound. If execution is everything, and if our own psychology is our biggest barrier to success, then why not remove the human element altogether and let a machine do the work?Continue reading “We Are Always Learning”
A reader asks: Why do day traders think they know the future?
To which my reply is simple: they don’t.
I should elaborate. Successful, profitable day traders, do not imagine for a moment that they know the future. Perhaps some of the unsuccessful ones believe they possess powers of clairvoyance like 90’s British celebrity fortune teller Mystic Meg. If so, that might explain why they are not making any money.
Snark aside, I understand the point of view of the person asking the question. To see profitable trades in hindsight, such as those posted on this very blog, it probably looks like the trader knew in advance how the market was going to move. It’s easy to imagine that we could fortell with great accuracy how the chart would play out. But to do so is to misunderstand how day trading works.
The job of a trader is not to predict with 100% accuracy where a price is headed. It is not to know the future. Our job is to weigh up the current price, where the price has been recently, and to consider other facts that may influence it. It is to combine all of that information with our knowledge of how prices commonly behave, and to come up with an opinion about where the price might go next. Not a predication, not even a forecast, just an opinion. So our job is not to know the future, it is to know the past and present and to use that knowledge to form an educated guess about the future.
Just like any other opinion or guess, sometimes we will take a strong view and other times we will be less sure of ourselves. For example, we might read a very positive news report about a company, then watch its stock price begin to skyrocket when the market opens. From that combined information we may form an opinion that for the next few minutes at least, the price is likely to rise further. If we hold our opinion strongly — perhaps we reckon there is a better than 50% chance of our guess being right — we might decide to buy some stock. Once in our long position (i.e. holding the stock), we would continue to re-evaluate the price and all other available information and update our opinion about what the price might do next. When our best guess is that the rise is over, we would sell our position and take our profit.
But what if our best guess was wrong? What if we bought into the stock and the price dropped? The answer, of course, is that we would sell back our position quickly to minimise our losses.
All this constant guessing might sound exhausting, but the thing is that most of the time we won’t be able to guess at all. Most of the time when we are looking at a chart we will have absolutely no idea where the price might go next. And that’s perfectly valid, because most of the time prices wander around in a relatively tight range and there’s no trade to take. We are looking for those “ah-ha!” moments when everything comes together — when we see a pattern we recognise, when the conditions are just right, when we think to ourselves I’ve seen this happen before, and there’s a pretty good chance it’s going to play out like it usually does. We’re not predicting the future, we don’t know what’s going to happen next, but we have a strong enough opinion about it that it’s worth risking some money to profit from it.
If we can form an opinion about short-term price movements that is correct more often than it is wrong, then in theory we are laughing all the way to the bank. And actually, we can be be wrong more often than we are right and still make excellent profits. But that’s the subject for another post!
A correspondent recently asked if it was possible to successfully day trade stocks without doing much research. The question was poorly worded, because it depends entirely on how we define much. But before I answer the actual question, I wanted to address the rather worrying subtext within it.
Here’s a trade that went wrong from the off:
It all started out so well. The setup was good and it looked like there was some momentum, but the price hesitated. My rule is if it doesn’t go well right away, get out. There’s no point hanging around to see if it will come good, because most of the time it won’t. I jumped ship with a single cent profit, which covered half the commission.
In this case the trade did eventually come good, and I went back in just a cent higher than I’d previously got out. This time there was no hanging around, momentum was there, and I rode it up for more than a dollar, thus taking more than a thousand dollars profit on BABA.
People quite often tell me they get killed in the market by being stopped out all the time. And almost equally as often they tell me that the trade they were stopped out of then turned around and became a winner, except they were no longer on board, adding insult to injury. They ask me if they are choosing bad stocks.
The thing is, you can’t really choose a bad stock as such, just a bad entry. Sure, if you pick the ‘right’ stocks you will find a higher rate of good entries coming your way, but even a poorly chosen stock can present a good entry. Just as a theoretically excellent stock can offer a bad one.
The problem these traders have is that they are waiting for their stop loss order to be hit. Stop loss orders are an essential tool for the day trader, and wherever possible I recommend having a stop automatically placed by our trading software as soon as our entry order is filled. But the job of that stop order is to be our emergency exit. It’s like an airbag in a car — a last line of defence if we lose control. If we are driving at high speed and see a collision ahead, we wouldn’t keep our foot on the gas and assume the airbag will save us, we would at least try and brake to stop the car before we hit the obstacle. The airbag is only there in case the brake doesn’t work, or if we cannot stop in time.
The stop loss order is the day trader’s airbag. It’s there to take us out of a trade if we lose our internet connection, or if our computer crashes before we end the trade, or if there’s some other kind of problem that means we are no longer in control. But as long as we are in control, we don’t want to rely on that stop order. If a trade doesn’t work out the way we envisage, there is no point waiting for the stop to get hit. We should always try to exit ourselves, and do so quickly with the minimum possible loss.
In the above trade, I was out with a 1 cent profit. That’s $10 on 1000 shares, so in reality a $10 loss once commission is taken into account. Had I waited for my stop loss order to be hit, I’d be looking at a $50 loss at least, which would be $70 after commissions. I could take a $10 loss on every core stock on my watchlist and still be better off than taking a single $70 loss! What’s more, I only need to make a tiny profit on one trade to easily cover my tiny loss. But if I rely on my stop and accept the bigger loss, I’m on the back foot with a defecit to try to recoup.
Having taken that tiny loss on BABA, the tape showed renewed momentum and the price made another break for it. There was no reason not to enter again, so in I went. Had I been burned by a larger intial loss, I might have hesitated on taking the second entry. But having got out quickly for essentially break-even, there was no reason to hold back.
Keeping losses small by exiting at the first sign of trouble means that we get to keep our account balance intact, it takes the pressure off trying to win back a large loss, and it means we can take multiple entries without hesitation or fear of the risk. Stop orders are for emergencies only.
I’m only posting one trade from yesterady, but it’s a biggie. And it raises a question of the kind that often comes up on these kinds of trades
Boeing openend with a massive gap down. For anyone reading this blog in the future, that’s because on Sunday (the day before this trade was taken), a Boeing 737 Max aircraft operated by Ethiopian Airlines, crashed, killing all 157 people on board. It was the second aircraft of this type to crash in less than five months. Within 24 hours, several airlines had announced they were grounding their 737 Max fleet pending the crash investigation. By all measures, this was a major incident, so it was inevitable that when the markets openend on Monday morning, BA would open down. What we didn’t know was where it would go next.
As day traders, we don’t need to know whether the stock is likely to go up or down on the day, we just want to know that it’s going to move. Preferably with good volume. BA was an obvious candidate for any stock day trader’s watch list on Monday.
As a stock, it did not disappoint, making (relatively) huge gains, even though it still closed down on the day. As far as my own strategy goes, it gave a perfect set up and blasted through several potential exit points without taking a breath. When two targets coincided and when the momentum took a break, I was out.
BA is a much higher priced stock than I would normally trade, but as I have talked about before, dynamically sizing your position to take account of the high price is one of the advantages of trading stocks. I had cash tied up elsewhere, and I don’t know BA as a stock at all, so I went with a fairly conservative 300 shares. The half-hour trade netted a final profit of $3,444.
Here’s the inevitable question though: is it ethical to profit from a disaster? Is making more than $100 a minute profit from the fact people died something to be proud of? Or even just comfortable with?
Everyone has to make up their own mind, but here’s my take. The accident happened. It’s terrible, awful, and of course my thoughts are with the families of those who where killed. I hope beyond hope that the cause is found and that it helps engineers reduce the risk of such a crash ever happening again. But the fact remains the crash has happened. It’s in the past. We can’t change that. We cannot bring back the dead. Trading the resulting stock price movement is not going to alter what has already occured.
The wild swings in Boeing’s price were inevitable. They were going to happen whether or not people like me traded them. To shift a stock the size of BA the amount it moved requires institiutional amounts of money. It takes hedge funds and pension funds pulling out to cause such a drop. After that, algorithmic trading kicks in. It’s going to happen whether we like it or not. So we can either put our fingers in our ears, avert our gaze, and try to pretend it’s not happening, or we can accept the inevitable and get on with our job.
The job of trading almost always, if we think about it, involves acting on good and bad news. Stock prices move for a variety of reasons, but the big moves happen in response to news. Factory closing? The stock price will probably move. Do we stop to think about the people who will lose their jobs as a result of the closure though? Probably not. Just as we probaby don’t stop to celebrate the good news events that are disconnected from our own reality. We just watch the chart and trade the moves.
As horrific as a plane crash is, it is a news event and most of what happens subsequently is inevitable. So I see nothing wrong with continuning to do my job. There’s nothing to be gained from ignoring it.