Market price data is a time series of mostly random data, a stochastic system. So a Day Trader is a Stochastic Systems Analyst - now doesn't that sound fancy!
Price data is mostly random. In retrospect it seems to follow a trend and engineers and computer programmers get duped into thinking that they can easily devise a system to do automated trading based on historical and real-time data, with some Digital Signal Processing applied to detect a signal in the noise. I tried it too decades ago, but downloading price data and adjusting for stock splits and companies changing names and ticker symbols, is a huge problem and if you then devise an automated trading system it may work for a while, but eventually it will diverge and you can lose your shirt.
An automated trading system requires constant work, which defeats the original idea!
Mutual Funds / Exchange Traded Funds / Hedge Funds
The only people that make money from mutual funds are the people that manage the mutual funds. In Canada, they make money twice - when you buy and when you sell - a total rip-off.
So instead of investing in a mutual fund of a bank, rather buy the stock of the bank, pocket the dividends and stop complaining about how they rip people off.
Long PlaysOne problem is that any trade also influences the market - it is a feedback loop. One can get price volatility with a purchase of only a few hundred shares in a blue chip company, if nobody is selling at that nanosecond instant. Now imagine trying to manage a pension fund and buying and selling tens of thousands of shares. When Warren Buffet buys/sells Apple shares, the price will ratchet up/down by a large amount. This is why there is always room for the little guy - us.
To build real wealth, you need to be in the market for the long haul - decades. The pension funds periodically 'balance their portfolios' - usually in March and October and that can cause wild volatility and crashes. So a good long strategy is to Buy in March and Sell in September, then buy in November and sell in February. If you are in cash, then you can buy the crash. If it doesn't crash, just buy it all back again a month later.
Day TradingDay trading is for making a little money to live on now. Investing is to make a lot of money to retire on in 30 years. It requires different strategies.
Day trading is also a nice mental exercise to keep your brain from atrophying, while you wait for the market grass to grow.
There are few millionaire day traders. There are however many people who sell books and training courses on day trading. Selling books and training courses is clearly more profitable and less risky!
You have to read two or three books (No more than three. Stop and practise instead), to learn the lingo and methods, just don't believe in it as the one true gospel - try to find the idea behind it - https://www.rockwelltrading.com/
Bear in mind that if someone sounds like a second hand car salesman selling a lemon, he probably is. Motley Fool is an example of a group that buys penny stocks, then hype them furiously to get others to buy into their scheme. It creates an artificial market price bump, which they and a few followers can then profit off. There are several other groups that do the same pump and dump thing. This is not for me.
Day trading is limited by what a human being can manage. People can juggle 3 to 11 complicated things at the same time in their head. The result is that a futures trading system is best limited to a pot of $5000 to $15000 and trades limited to 1 to 5 per day.
If you trade with E-mini futures, buy and sell one or two contracts at a time, then you could make $50 to $200 a day. Buy a contract and sell when it is up by 8 ticks or down by 3 ticks. On average you should win some - not much, but enough to pay the bills. If you don't know what you are doing yet, you can lose $50 to $200 a day - so you have to practise in a simulator.
If you play with $20,000 and make $1000 a month, then the yield is 60% pa. This is quite doable by an ordinary Joe and is infinitely better than parking your money in a bank with 0% interest.
In general, don't day trade with more than 10% of your pot of money to keep the risk down and test your system in a simulator for a week or two before turning loose on live trades. If you only make one trade a day, then two weeks of practise is only 10 dummy trades - precious little. If you cannot make money in a simulator, then real live trading will be even worse and you will join the crowd of suckers at the bottom of the heap.
If you are good, then you should invest half your monthly profit for the long haul in blue chips, like that nice fruit company, or that big tropical forestry company...
Trading SoftwareTrading software programs now are a dime a dozen - there is no need to write your own anymore. Ninjatrader is popular for futures trading, but your own bank probably has a system that is good enough - a fancy expensive program will not magically make you a better trader if you only do one trade per day.
TD Bank for example has four trading systems that I know of, the default Webbroker https://webbroker.td.com system, a more advanced Java based Advanced Dashboard program that you can download from the Webbroker site, which provides real-time data and also ThinkOrSwim and the related TD Ameritrade - https://www.tdameritrade.com/tools-and-platforms.page
Note however that the TD Bank Advanced Dashboard only works properly in North America. In my experience it doesn't work in the Middle East and it doesn't work in Central Europe and probably doesn't work in many other places too (it just sits there and shows some useless error messages when you click on a stock ticker) and they will happily charge your account a usage fee for your frustrations too.
Historical Analysis vs RealityIf you find an elevator stock that goes up and down, but stays the same on average (boring oil pipeline or railroad companies), then you can trade it and make money every few hours, or days, simply by sitting and staring at the real-time price graph, but eventually something will change. There will be a war, a plane crash, a court case, a dishonest CFO, a SARS-COV2 lock down... and you may loose your shirt.
It is therefore important to use simple statistics and automated orders to control the risks and identify opportunities, but you should steer clear from very complex systems, since finely tuned systems will only work in the short term.
- Set the Sell Limit at 10% above the buy price
- Set a Sell Stop Loss at 7% below the buy price
- Set the duration of the order to Good Till Cancelled
- Now, you can go on holiday!
Simple Statistical AnalysisThe Greek philosopher Democritus said that a thing is worth whatever someone is prepared to pay for it and the stock market to me resembles a pack of lemmings running over a cliff, with traders trying to outbid each other before the inevitable market crash, which happens on average every 4 years - but you don't know which year it will be.
The first book I read on stock trading was clearly written by a trader who was just lucky (or had inside information). He made an enormous amount of money with Eli Lily when they invented the anti-baby pills. His 'head and shoulders system' was impossible to recreate and everything worked only in retrospect, not with real data. Successful plays almost always resemble a 'head and shoulders' graph - after the fact.
Much later, I encountered a book by Burton Malkiel, 'A random walk down Wall Street', which rigorously proved with Montecarlo analysis that most hedge and mutual fund traders were just lucky and will blow up eventually (in the last few years, several hedge funds blew up spectacularly). It is a very dispiriting book, but it proves that one cannot predict the market by looking at price data only - you need to have inside information also. Ordinary mortals don't have inside information, but big traders and institutions do (the managers sit on multiple company boards and are all golf buddies) and they are the ones leading the pack of lemmings and since they own the trading desks, they also know exactly what the little lemmings (you) are doing.
The front running big lemmings will never admit to randomness explaining their strings of successful trades, since that will make them look dumb and they will not admit to having inside information, since that is supposed to be illegal.
The Lemming EffectSuccessful trading strategies look not only at price, but also at volume and track price volatility, to get a handle on the Lemming Effect. The big lemmings out in front of the market are the institutional investors with inside information who run our pension funds - successful small trading systems calculate how to follow the fat lemmings for a little while.
When the market is stable (going sideways) or going up (bullish), then you can buy low and sell high repeatedly and make money, a little bit at a time, on the same stock.
However, when the market is stable or going down (bearish), then you could reverse things to (short) sell high and buy low. It is exactly the same operation, just reversed in time - but more risky, since the stock can go up rapidly. I cannot recommend short selling. Selling something you don't own, is illegal everywhere, except in the stock market.
Here is a good write-up on Bollinger Band trading - https://www.forbes.com/2007/05/11/bollinger-intel-yahoo-pf-education-in_jd_0511chartroom_inl.html (I just look at the graphs, enter a trade in a spreadsheet and make up my mind in an instant - a simple visual Bollinger analysis).
So how do you know when to buy long, or sell short? Look at the long term trend - where are the lead lemmings going. Is the market going up, or going down and if you get a losing streak of five dud trades - reverse what you are doing - don't fight the market - flip your strategy around - ping-pong - http://www.traderslog.com/ping-pong-trading-making-money-in-sideways-markets
Practise Makes PerfectIt all sounds easy until you try to place a trade, then you wonder what amount to enter at the buy limit, what is the ADR and the profit target and what to enter in the stop loss and would the profit be big enough to cover the trading fees - and by the time you figured it all out, the opportunity has passed.
Therefore you have to make a spread sheet or prepare a programmable calculator with your formulas before the market opens, so that you can enter and place a trade quickly. You need to keep a spread sheet of your trades anyway, since come tax time, you will need it.
How do you find a stock to day trade? Well, that is the boring part. Here are some clues:
- Daily volume between 500K->25M shares
- Stock price $25 to $100
- Range between hi & low to be > 50c
- Look for a small gain of $100 to $200 a day on $10,000 risked.
Keep it simple https://www.rockwelltrading.com/tw/book-simple-trading-strategy/, and practice in a simulator http://www.investopedia.com/simulator/ or http://www.infinityfutures.com/ for a few weeks before you risk real hard earned moolah.
OTO and FOCO Orders
- Set the Buy Limit at 0.25% to 0.5% Below the last Closing price
- Set the Sell Limit at 1.25% to 2% above the Buy price
- Set the duration of the order to one day or specify a date
Words of Wisdom
Taxi Drivers and Hair Dressers
Past performance is no guarantee of future results. No forecasts can be guaranteed. These views should not be relied upon as investment advice. The investment process will change over time.
Warning: Pregnant women, the elderly, and children under 10, should avoid prolonged exposure to the Stock Markets.
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Do not drop your Stock Trading Computer on concrete.
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