How I day-trade (by a non day-trader)

I prefer not to day-trade. “Hate” is a strong word that I try and reserve for the really special moments in life, such as, “I hate parsnips.”, so I won’t go as far as to say I hate day-trading. That said, it doesn’t bring me baskets of joy.

As I recently mentioned here on this blog, I recently noticed a change that told me it was time to take a break from my preferred trading style, which is trend trading. Because of that, I’ve had to fall back on one of the other tools in my tool box, day-trading.

As I believe I mentioned at some point in an earlier blog post, it’s been my experience that the shorter the time frame, the more difficult the trading. My main reason, and I have a few, is that as the time frame shrinks, so shrinks your window of opportunity to be right. Other reasons include intra-day trading is more susceptible to “noise” and therefore volatility, and of course the need for tighter stops.

When I trend-trade off the weekly, I risk 0.5% to 1.0% per trade. When I day trade, that drops to 0.2%, and should I have a number of losing trades in a row, that risk per trade drops to 0.1% until the losing streak ends. To understand how to calculate the size of the trade, see point #2 on this past post.

I also employ a three strike rule, meaning three losing trades in a day, and I’m done for that day. Having this rule in place means I know the absolute most I can lose in a single day, or therefore, in a single week. It also means that terrible situations like this don’t occur. It also means that because I have a finite number of available trades, I’m far less inclined to waste one on an “I’m bored” trade.

For those that were hoping for a “can’t lose” day trading set-up or strategy, this post will be a thorough disappointment. As with any time-frame, it’s not the most important component. Risk management is. Risking just a fraction of your account isn’t sexy or exciting, but it does ensure you’ll be around tomorrow, next week, and next month. It also reduces your stress per trade, knowing that the fate of your account does not rest on the next one or two (or even the next twenty) trades.

Focus not on how much money you might make, but on how much money you could lose. And consider this: if you can’t be consistently successful risking just 0.2% of your account on a day-trade, why would you suddenly become successful risking 2%, or 10%, of your account? Increasing your risk won’t make you a better trader.

And yes, you can still make money.

 

 

Bend like the willow

On Friday morning (April 11th), I liquidated all of my main account, and by the end of the day, most of my technical trading account as well.

I have zero idea where the market is going, so my decision was not based on a market opinion. Instead, I based it on my account’s reaction to the market as of late, and it was telling me that the way I had been trading for a good while now, was no longer working in this market environment.

Rather than hold on stubbornly, I decided to cash in my chips. After all, you can’t play if you don’t bet…and you can’t bet if you don’t have any chips left. I’m content to have a healthy collection of chips, and will now do two things: I’ll wait patiently for the market to confirm that my style of trend trading (long or short positions, I don’t care)  is once again in season, and in the meantime, I’ll cherry-pick prudent, small, day and swing trade set-ups that are more conducive to my comfort level in this type of market.

You can’t fit a square peg into a round hole, nor should you try and force your preferred style of trading onto a temporarily incompatible market. Disciplined and Stubborn are not the same thing. One pays, the other doesn’t. I trade with significant discipline, but when my style and method no longer pay (and I know that because my account balance tells me), I take that as my queue to change, and not to stubbornly fight Mr. Market and plow on.

I could very well be wrong. Maybe I was just shaken out. I have no idea. What I do know is I wasn’t willing to risk giving back any more of my chips.

 

 

 

When the “smart” money isn’t so smart

  • A couple of weeks ago, I noticed someone bought a whopping $4.4 million worth of slightly out of the money SPY weekly calls on a single strike. At time time I figured, well, if someone is willing to risk that much money on an option expiring next week, then I guess I could tag along. He bought $4,400,000. I bought $500. It didn’t work. They ended up expiring worthless last week. I was out $500. He was out $4,400,000. I assume that he risked an appropriate amount of his capital on the trade, just as I had done, and we both still slept OK that Friday night.
  • Last week I thought about buying a SPY weekly strangle, expiring on this coming Friday. SPY was around 184. The 188 calls were going for $0.40, but the $182 puts were also going for $0.40, so effectively, the options market was paying up a premium for the puts (or giving a discount to the calls, whichever way you wish to look at the glass). Because of the inequality, I passed on the strangle, which would have cost $0.80 in total (I really prefer to pay roughly the same for both sides of the trade, as it’s the safest way to buy a strangle. Had the 186 calls been $0.40, that would have been an equitable strangle). This morning, with SPY at 188.80, those 188 calls are $1.30 and the 182 puts are $0.03, for a total of $1.33, which would have been a 66% profit from the original total cost of $0.80, despite the original bias to the downside. Still, I don’t regret not taking the trade because the strangle strikes/costs were so uneven, and that wasn’t a good trade set-up…for me.

The point to both of these is that the ‘smart’ money doesn’t always get it right; sometimes they lose, and lose big. Following size doesn’t always mean you’re following someone smarter. And regardless of what the options market was pricing in, they were wrong. A lot of supposedly very smart men with great suits, fancy houses and leather briefcases, got it wrong.

Follow your own plan, and realize that managing risk, sticking to quality set-ups that have been back-tested and proven by you, and discipline will serve you much better than listening to others that at the end of the day, know nothing more than you.

 

 

 

The most important indicator is…

Price.

It seems obvious, but far too many traders either pay it little attention, or ignore it all together. And yet, that one number is the ONLY number you can actually trade, and by extension, is the only number that will determine if a trade is profitable.

It’s not possible to trade a stock’s P/E ratio, nor its earnings outlook, nor its projected sales, nor its potential new product line, nor its CEO’s competence, nor its number of analyst upgrades.

But you can trade its price.

So why not just focus on that? Why not make it the number one indicator?

(click to enlarge)

Trading $SPY – complicated                                            Trading $SPY – simple

SPY complicated                     SPY simple

Trading $WTW – complicated                                                Trading $WTW – simple

WTW complicated                     WTW simple

Which seems easier, and less stressful to you?

And finally, here is the monthly chart of $SPY. Maybe the trend is at or nearing its end, I have absolutely no idea. What I can see though, is that for now, it’s still intact. That might change tomorrow, next week, next month, or next year. But as I have no idea when it will change, I’ll just trade the current price.

SPY monthly

Follow the prevailing trend, don’t fight it. The market can stay irrational or overbought or oversold substantially longer than any of us can stay solvent trying to fight it.

Using indicators is unavoidable. But by keeping them to a minimum, we can avoid trader paralysis, and bring simplicity to our trading, and ultimately make more confident decisions.

(disclosure: no current position in $SPY or $WTW)

Is Jesse Livermore irrelevant?

If you’re even remotely involved in the trading or investing community, it’s hard to avoid hearing frequent references to the 1929 trader, Jesse Livermore. Recently, I noticed a flurry of negative-based comments regarding what would have seemed to be an innocent enough post – a partial list of Livermore’s rules. Some of the comments that rained down on the unsuspecting poster:

Jesse Livermore. Lost his $$$ twice and shot himself. Yet people quote him all the time. LMAO!!!!

I’ve always wondered why he’s so revered on <Stocktwits>

I guess kinda like Bank Robbers still idolize Jesse James too!

He traded during a time before computers. Very little relevance these days.

I wouldn’t call him a “hero”, but I would say I have incorporated a number of his methods and rules into my own trading. And I did so because they just made sense. And a great deal of his rules are risk management based, and so to me, they stand the test of time – “never average down on a losing trade”, for instance, would seem to hold relevance whether it’s 1929 or 2014, or whether you were trading off the 3 minute chart, the daily chart, or the weekly chart.

A failing of his that tends to attract the most attention is his making and then losing his fortune several times. This puzzles me. He certainly hasn’t been the only man to have failed and rebuilt. Ford did as well. So did Edison. So did Musk. So did Oprah. So did Disney. So did Jobs. So did Michael Jordan. And in doing so I’d argue that they have more to offer than those that have never failed…because those that have never failed have likely never strived for greatness.  By Livermore’s own admission, his wipe-outs were caused not because his rules failed, but because he failed to follow his rules. And how important a point is that.

If there is a common thread among his detractors, it would be that he and his methods are from a bygone era and simply no longer have a place. Dismissing anything or anyone in any area of life, based simply on the premise that “too much” time has passed is dangerous. Regardless if a trader is using a telegraph to place orders, or entering them from a 9 screen trading station, rules like “markets are never wrong – opinions often are”, or “Only enter a trade after the action of the market confirms your opinion and then enter promptly” (in other words, wait for your trading signal – whatever it is – to actually confirm, don’t front run it), are completely transferable to traders in today’s, and tomorrow’s, markets.

I’m not saying we should all run out and emulate Livermore, or any other trader for that matter. You have to find your own path. What I am suggesting is that we have an amazing opportunity available to us: through the benefit of hind-sight, we get to review these traders of the past, and see what worked, and what didn’t, and incorporate the best of each of them into our own trading plan. It’s really a remarkable thing. My own trading plans (I have a couple) don’t have an original idea among them. Everything is shamelessly borrowed from other traders, either past or present. The methods and rules I employ are from far greater minds than I, and then cobbled together into something I can use with confidence.

As one of the traders that I quoted above said to me, after I asked him to clarify his post,

His (Livermore’s) life was bold and chaotic. A rarity these days. Agree with the no averaging. Usually a dumb & revengeful strategy.

I couldn’t agree more.

Oh, and just how much money did Livermore make, anyway? In 1929 dollars, around $100 million. For some perspective, that would be about $1.5 billion or so today. Meh, what a hack!

My time in prison

Let’s back up a bit first.

When I was in grade 12, one of the rituals of being in the graduating class was to prank the school in some shape or form. It usually involved relatively harmless late night hijinx directed at a classroom, a hallway, or the school in general. A group of us thought it would be “funny” to fill a hallway with plastic milk crates and real estate “for sale” signs. I don’t know why exactly, as it doesn’t sound all that funny now. Anyway. We fanned out in various cars to procure said crates from local grocery store loading bays and signs from lawns. However we had the distinct misfortune of doing so in a neighborhood that, unbeknownst to us, was enduring a bit of a burgling crime wave and was therefore receiving a heightened covert police presence. That’s how I found my 17 year old self being dragged out of the passenger side of my friends ride at gun-point under the hue of numerous flashing red and blue lights. I can assure you I was the perfect polar opposite of a hardened criminal in how I conducted myself. My partner in crime and I spent that evening in separate holding cells – it only took a few hours for the misunderstanding to be cleared up, but it was enough to permanently etch into my teen-age head that I was not “prison material”.

Jail2

Fast forward about 10 years, and I was working in a brokerage house, having been successfully ‘scared straight’ and dodged a hardened life of crime. One of the clients of a coworker was spending some time in a correctional facility for various assault charges, and for whatever reason, his account somehow migrated to me and I became his gatekeeper into the financial markets. Dennis would call in (collect, of course), and place orders to buy tens of thousands of shares of penny stocks – he was working on the assumption that eventually, one of his picks would hit it big and be his ticket to riches when, or if, he ever got released. As far as I know, neither has happened. But what stood out, aside from my apprehension in placing almost certainly doomed-to-fail trades for someone with documented anger management issues, was his voice. He would call, I would ask how he was doing, and his reply in a quiet but hardened tone was always the same, “Well, I’m still alive”. Despite knowing it was coming, I never had a good response to that. I generally just replied with, “Well, I suppose it’s a good day then”. What else can you say?

Fast forward another 10 years or so, and my then-wife and I had moved to Vancouver. A childhood friend of hers, “Dale”, had moved from the BC interior to the Fraser Valley, about an hour outside of Vancouver. He lived there with his wife, whom he had met at work. Not terribly unusual, except that he’s a corrections officer at a medium security prison. He had always said that anytime we wanted a tour of the prison, to just say the word. Our friend Mike was in town one week, and as he was just as interested as I, we called Dale and asked if there was any chance we could take him up on his offer for the tour. He was happy to oblige, and gave us a date that he wasn’t scheduled to work. We eagerly met him at his home, and off we went to the Big House. Field trip!

Ironically, the date of our tour was the one year anniversary of a major riot within the prison. There had been concern over the preceding days that some sort of unrest might materialize on this day, in which case our tour might have to be abruptly cancelled. Rioting inmates with fashioned shivs don’t make for an ideal touring environment, although they would enhance the realism, I suppose. Dale’s coworkers chatted, and they mentioned that there was an uneasiness in the air, but nothing more than that. He led us through the facility, and gave us a view of prison life that I had not been expecting.

It’s worth mentioning that Dale is not your stereotypical prison guard. He’s fairly short. There’s no neck or forearm tattoos. He’s not exceptionally fit. And he’s not even armed. But once we reached the prison, it was obvious the one characteristic that he did have in spades was Confidence. Something both Mike and I quickly realized we most certainly did not have. As he took us through the various buildings, many inmates were walking freely, and I’ll readily admit that both Mike and I felt vulnerable. But not Dale. He strode amongst them as if he was 6’5″ and 285 pounds with a quiet confidence. He wasn’t mocked, no one threw crap in his face. There was a mutual respect, that was clear. We toured the outdoor exercise area, the trades room, solitary, and the mess room, which as I understand it, is where the biggest potential firestorms can start – many inmates gathered in a confined environment can lead to serious problems. It was an eye-opening experience, to say the least. There is no freedom, little privacy, much boredom, and a never-wavering sense of constant, submerged, Fear.

I learned four valuable lessons that day.

As with many aspects in life, one of the most important elements for success is confidence. For any hope of sustained success, no excess of any other components can compensate for a lack of it. A well armed, but fearful prison guard doesn’t have a future.

The men and women that run facilities such as this earn every penny of their paychecks. What it takes to do that job, and jobs of first responders in general like police, fire and ambulance, is something I dare say few of us could do, much less do with the high level of competence they provide our communities on a daily basis.

Our prisons might be considered tame by comparison in those in the US or abroad, but after seeing the cells, chatting with the inmates, and feeling the steel and confinement all around me, it’s not an easy time. It’s prison, and it sucks ass. Perhaps if more kids that were on the verge of going down the wrong path in life could see first-hand what awaits them, there would be fewer inmates.

And finally, I learned that I most certainly do not have what it takes to make it on the inside. And neither does Mike. But I think we both kinda already knew that.

Jail1

3 simple ways to improve your trading…right now

OK, that sounds a bit gimmicky and for that I apologize. I really am going to give you 3 ways to improve your trading, though. At least, they improved my trading. They also improved the trading of successful traders I’ve had conversations with, so maybe they’ll work for you too. Maybe they won’t. But the odds favor they will. Plus, they’re free, easy to implement right now, and there’s no downside to trying, so what have you got to lose?

They can be used across any time frame, any method you have for entering trades, any market, and whether you’re trading the long side or the short. No, this isn’t the holy grail, but it is a couple pieces of the puzzle.

  1. Limit your risk per trade. Wait! Don’t tune out. Maybe you’ve heard this before, maybe you think this is old news, but if I had to put my finger on only one lesson I’ve learned that helped me improve my trading the most, this would be it. But, you say, if I only risk a measly 1% of my account on a trade, I’ll never make any money! Wrong. Wrong. Wrong. Ever looked at one of your past trades, and said, “If only I had hung in there longer! I sold way too soon. *sniff*” . Then you can begin to appreciate that with less risk, comes less stress, and with less stress, comes the advantage of sitting patiently on a trade. It also means you can be wrong. A lot. And that’s OK, because a) you will be, and b) that’s an unavoidable part of trading. In fact, you can have 10(ten!) losing trades in a row, and still have 90% of your account. But risk 5% of your account on each trade, and be wrong 10 times in a row, and suddenly you’re down 50%…which means you now have to double your money just to get back to even. Risk 10% of your account per trade, and 10 losing trades in a row means you’re all done, thanks for playing. I actually only risk half a percent on most trades – meaning I can have TWENTY losing trades in a row before I’ve lost just 10% of my trading capital.
  2. Have a (hard) stop loss. This is really a continuation of number 1. Before you enter your next trade, decide at what point the stock would have to fall to (if you’re long), or rise to (if you’re short) that would negate your trade. No, not everyone uses stop losses, and of those that do many choose not to enter hard stops. But if you’re struggling, this will give you discipline in your trading, and take the stress out of hitting the sell button. And forget about worrying that the algos are hunting for your stops, because it’s bullshit – no one is hunting for your 100 shares, which is just one of the many benefits to being a small investor. But more importantly, this is the only way you can determine how much risk you’ve got on.

Let’s say you’ve got a $50,000 account.

You’ve decided that you’re willing to risk 1% of it per trade, which is $500.
The stock you like is trading at $20.
You want to make a trade for the long side.
You’re trading off the daily and have decided that a break below $18 would negate the trade based on a trend-line/moving average/ATR stop/tea leaves/your psychic.
The difference between your entry price and your stop is $2.
So you can buy: $500 divided by $2 = 250 shares

By having a hard stop you also avoid the dreaded, “I’ll just wait and see… if it breaks through $17.75/what it looks like at the end of the day/where it is tomorrow/if it comes back. Sometimes they come back. Most of the time they don’t. And what if it does, but in the meantime goes lower, a LOT lower? You OK with that? Because whether you sell or not, a loss is still a loss. And you know that, because at 1:45am when you can’t sleep and all you can think about is how much money you’re down on the trade that you’re still in, then you know – it’s a loss.Take the small loss, and move on. You’ll sleep better.

3. Turn off CNBC. Seriously. Turn it off, because it’s stressing you the hell out, and you probably don’t even know it. Forget the actual programming, do you think the constant bombardment of the same 7 commercials all day long is having a positive, or a negative, impact on your mental health? That’s the sort of thing they play on continuous loop to guests at Guantanamo Bay. Ok, maybe not, but they could, and maybe they do. Have they broken you yet? Are you now a proselytized recruit of Stamps.com? That aside, I spent years listening to CNBC spew verbal diarrhea at me…even when it was on mute. I can safely say, of any trades I’ve entered due in one way or another from something I saw on CNBC, I am net negative. Think about it – do you really believe serious, profitable money managers are sitting around in a befuddled quandary, bemusing “well, I’m stumped. I don’t know what to do now. Let’s see what this guy coming on next suggests.”. No, they don’t. And bear in mind, CNBC wants you – no, needs you – to be stressed out and fearful. Because then you’ll be looking for advice. So you’ll tune in. But they need you to keep tuning in. So they give you one opinion, then a completely different opinion from someone else. Now you don’t know what to do, but you feel “informed”. Maybe you believed one guy over the other because he had whiter teeth, or maybe you agreed with his pontificating, so you go with it. So now you’re in the trade. The stock goes up/down/nowhere. Now what. You tune in. Rinse and repeat. More self-inflicted waterboarding with Stamps.com. Wean yourself off of it if you’re not a cold-turkey kind of person, but I can assure you, you will notice a reduction in anxiety that you weren’t even aware you had. Scary.

As always, your comments, feedback and hateful, alcohol-fueled diatribes are welcomed on the Contact page. Good trading!