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!
Just one chart today, because it’s a lovely one:
ROKU was up from the off, and presented at least three excellent setups. There was even more in the afternoon for anyone who trades that part of the session.
For me, it was the regular morning entry, and an exit at the first sign of trouble which coincided with a regular exit point. That put $1,150 profit in the pot. For anyone trading a strategy that holds longer, it wouldn’t have been that hard to bump that up to $2k.
As I say, there was a lot of sideways action after the initial morning flourish, then we headed north again.
A couple of nice trades on what we used to call ‘dot com’ stocks back in the day. You know, when the internet was the new hotness and you could buy anything with dot com in the name and make a killing. That all went pear shaped of course, then the real internet revolution came along. Now almost any stock could be considered a dot com if we go by the definition that they need a website to earn the label.
Today’s trades are proper internet plays though. Businesses who are based entirely online and who couldn’t have existed twenty years ago.
First up, every traveller’s friend, Trip Advisor:
The stock took a trip south (sorry) from the open, and looked so weak and was subject to such selling pressure that the early entry was a no-brainer. Like a visitor to a bad hotel, I was out at the first sign of trouble. In the end there was more to be had, but I was gone with a four-figure profit in the bag and looking for the next trade.
The next trade happened to be dating giant Match:
This came along a bit later in the morning, but I’m glad I was still around to take it. After some faffing about earlier, traders clearly fell in love with the stock and started to pile in. We took a rapid ride up, and when the relationship started to look a little rocky I called an end to it and came out better off to the tune of $1,450.
Two simple trades netting almost two and a half grand between them. As always, there were plenty of other opportunities to be had.
Here are a couple of trades from quite a busy day. First up MYL:
All standard stuff, with a textbook entry and an exit at a logical place when the momentum dried up. The rapid descent in the price returned a $900 profit for about ten minutes in the trade. Those who hold longer than me could have taken more as the thing went further south, but each has to stick to their own rules. Mine are based on momentum, and whilst the chart can’t show the same granularity as the tape, those two big red volume bars followed by the little green one give a good idea what happened and why I got out when I did.
Next up, Facebook, because why not? It’s been a while since I posted a trade on FB.
The setup here wasn’t quite as clean as MYL, but it was clear enough, with a weak price getting squeezed. The trade, once entered, was over very quickly, lasting only about one five minute bar. As with MYL, momentum dried up, and we were already at an excellent exit, so there was no reason to hesitate on covering the position.
Anyone trading in the afternoon could have profited further from the additional drop after about 13:00, but personally I was long gone and sipping jippers on a beach (figuratively, you understand).
I don’t have time to post today, so no explanations or preaching about how taking the easy middle can make for a comfortable living. Just a quick chart of TSLA:
I will say that this was late in the morning for me. TSLA as I mentioned before, is a bit too pricey for me to watch regularly. But when my other trades were done I went back and checked the chart because of the way it was setting up, and was rewarded with $1,750 from a trade that lasted about a quarter of an hour.
Since the Easter break I’ve posted a few big winners, so I thought it was time to post a couple of bread and butter trades again, the sort we can expect to find every day. Because let’s face it, two grand profit from one five minute trade is, while not unheard of, not something we can hope to see every day either. It’s the bog-standard simple wins — the easy middles — that account for the bulk of a day trader’s profits.
First up then, here’s SFM.
It doesn’t get a lot more textbook than this. A standard setup for a momentum trade on a modestly priced stock that’s accessible to anyone with a margin account. A pretty uneventful price drop after the entry, then an exit at a logical place after it a) failed to hit an obvious target and b) momentum evaporated at the same time. $600 profit on this puts it at the upper end of the ‘bread and butter’ type trades, but it’s well within expectations for a regular trade.
Here’s another, which occurred a few minutes later, on UAA.
This trade was over much more quickly, taking less than ten minutes to produce $400. The exit was less clearly defined on the chart alone, but of course the chart never tells the whole story. For that we need the tape, and the tape made it clear that things had taken a turn and that it was time to get out. The chart hints at what happened with that whopping great green volume bar.
There you have it, two regular trades, neither of which was unusual, both of which were well within the realms of what we can expect on any trading day. Between them they netted a thousand dollars in profit (before commissions, which are negligible). They were far from the only trades like this, they’re were plenty more to be had…just like there are every day.
If you have even a passing interest in a) the stock market and / or b) electric cars, then you probably know how Elon Musk’s Tesla is being shorted like no other stock. Not just by the big players either, there are whole groups of people self-organizing on Twitter and Facebook researching the hell out of the company, analyzing Musk’s every tweet, and shorting the stock like there’s no tomorrow. They are convinced that poor management, endlessly problematic manufacturing, and an unpredictable figurehead (Musk) mean that the company is inevitably doomed.
I’ve nothing against shorting a stock. Indeed I suspect that if I tallied up all my trades since I’ve been in this game I would find I have a preference for the short side. But I would find it very hard to hold a short position overnight, let alone for weeks, months, or even years. When you trade long, there is a limit to your potential losses. Go short, and you can lose far more than your initial investment.
All this shorting activity, and Musk’s digital equivalent of verbal diarrhoea on Twitter, make Tesla a volatile stock. It’s high priced (above my normal threshold), but like Apple, sometimes it puts up trades that are just too good to ignore. So when this nice short came along on huge volume and momentum, well, it would have been almost rude to refuse:
The price was already looking weak after dropping through the previous day’s low, which it retested (and failed to break above). The big drop came in two lumps, with a pause in the middle. The first alerted me to the trade, and when the second happened on huge momentum, I was in. As we can see from the chart, the next bar pushed back on even higher volume. With more than two grand profit booked, I was out.
I’m not going to say this was a stress-free trade, because when a stock moves that much that fast and you have money on the line, the old heart rate is going to become elevated. But I will say that making a couple of thousand dollars in five minutes is a considerably less stressful way to short Tesla than selling off stock and sitting on your hands for months on end!
Here was a nice little trade on Disney, a stock I don’t watch that often, though I probably should. With speculation and the eventual announcement of their streaming TV service, plus a lot of M&A rumours and news, there’s always something going on. The stock is priced a little higher than my preferred range (I usually stick to those under about $100), but it moves nicely and predictably.
Anyway, here’s what happened on Monday:
A pretty textbook setup and entry, with a target that did not get hit. So instead I was out when it dithered around 138, taking 84 cents a share for a $840 profit on a thousand share position in a little over ten minutes. With such a liquid stock a much larger position would have been viable (funds and margin permitting), but I had money tied up in other trades.
For anyone who likes that sort of thing, the double bottom and rejection of the previous day’s low provided a nice signal to get in for the ride back up from about 11am. But you know me, I prefer the easy middle and the early finish!
It’s been a couple of weeks since I posted any trades here. As I wrote previously, we’ve had guests staying over the Easter break so I’ve mostly been away from screens, not trading and not posting. It’s good to take a break every now and then. It doesn’t have to involve travel, just a change of routine can help keep the mind sharp and motivation levels high. Doing the same thing day after day can become tedious. Trading properly is monotonous at the best of times. Taking time out can re-ignite the flame. Absence makes the heart grow fonder and all that.
I started easing myself back in towards the end of the week with a few trades. Here’s core stock NVDA, which I was keeping an eye on mainly because it had suffered huge losses the previous day. When that happens there is often a good amount of movement in the next session. The price might continue to fall as more people see the earlier drop and jump ship, it might bounce back as bargain hunters jump in, or it could just bounce around consolidating. It doesn’t matter which way it goes, all we as traders care about is that there is likely to be a lot of volume and some decent range, especially at the open as the latecomers join the party, all of which adds up to easy trades. Here’s mine:
Given the liklihood of early movement following on from the previous session, I had no hesitation taking the earlier entry. The drop was fast and ferocious, netting a $1,400 profit in around 5 minutes. The exit was when the price hesitated around the (second) target, the first having been blasted through without a second glance.