| Home | My photos | Forex | My trading | Contacts |
|
|
You Can't Become Rich In Your Pocket Until You Become Rich In Your Mind | ||||
|
Veteran day traders have quietly flipped stocks for many yearsDAY TRADING Fast-execution systems popularize very short-term strategies that attack wide Nasdaq spreads. Direct-access broker-dealers teach their clients these tactics because many of them once worked the market floors and scalped for a living. Many financial professionals can’t teach anything else—it’s the only type of trade execution that they understand. As a result, many participants believe that day traders just scalp and do nothing else. Scalping the spread should not be taught to neophytes. The quick-trigger environment requires a seasoned instinct and understanding of how markets move through buy-sell behavior. Scalping techniques teach players to capitalize on short swings in price and momentum. But most participants need years of practice to develop finely tuned reflexes that can jump quickly in and out of fast-moving stocks. Veteran day traders have quietly flipped stocks for many years. Nightly Pattern Cycle review uncovered many opportunities with very short time triggers. Automatic speed dialers then rang brokers for quick fills as soon as ETs were struck during the next day’s session. Although execution required a phone call rather than Net access, lower market volatility reduced slippage and permitted effective intraday strategies. Successful swing trading does not rely on ECNs, SOES, BDs, MMs, and so on. It depends on accurate prediction of the market’s next move. Participants book profits when they buy low and sell high. They lose money when they don’t buy low and sell high. Common sense dictates that this elementary strategy becomes more difficult as the holding period shortens. Most successful day traders start with investing or position trading. They slowly move to the intraday arena after they master easier tactics and develop profound skills in the prediction of short-term market movement. Position trading teaches all of the skills required for successful day trading but at a pace that the brain can easily assimilate. Day traders must apply instant market analysis and control risk in highly adverse conditions. This requires many years of experience for most participants. Jump into the day trading game with a lack of seasoned market-based skills and expect to be thrown into a meat blender. Neophytes should seek classic technical training and avoid the video game suicide trap. Learn how, what, and when to buy and sell. Then use software systems and other tools to optimize strategies and improve results. Realize that the natural flow of opportunity often requires trade execution contrary to the crowd order flow that mindlessly chases small shifts in momentum. RISK MANAGEMENT Market participants have an amazing capacity to ignore risk management. Caught in the excitement of the game, no one wants to miss the next big thing. Each day we discover that everyone else makes money in the markets. Stock boards crow about huge gains but rarely admit big losses. Newsletters advise how to make a fortune but never how to avoid losing one. And our neighbors all bought hot stocks at the right time and are well on their way to retirement. Swing traders fail when they don’t manage positions. Long-term market survivors learn to control losses effectively before attempting to increase gains. Unfortunately, most neophytes don’t have the required discipline to exercise this sound risk management. They chase positions with no safe exit as the lure of the big gain disables unbiased evaluation. Greed attracts players to the strategies that have the highest failure rates. Danger increases significantly when trading in these high-volatility environments. Wide swings ensure that price moves a great distance in a very short time frame. These hot stocks offer few safe entry levels and many insider shakeouts. Borderline participants always see the upside but ignore the downside when they enter positions into crowd excitement. Whatever happens next is out of their control because they exercise no planning, reward targeting, or risk management. Hot stocks build a sense of invulnerability as they move in the crowd’s direction. Profit feeds the ego and strokes it as markets race higher. Large gains build and silence rational thought. Traders caught in this mindset quickly become investors and lose that predatory edge that finds consistent winners. If the stock turns, the ego says it will always come back. Entire gains vanish as these new investors insist on value instead of technical patterns. Or it can even ride higher and reinforce bad habits for the new conquering king. Positions can move quickly against careless participants and generate strong fear. The charting landscape may offer few escape routes, and the trader freezes like a deer in the headlights as price takes off in the wrong direction. Survival instincts often kick in at this point, and flawed logic decides not to take the loss but ride it back to the entry level or a fresh profit. Anything can happen after that decision because all control has been abdicated to fate and ego. A trading account empties, or a miracle saves the day. In either case the speculator takes the next step toward washout and a safer hobby. Neophytes should choose less volatile markets for their strategies. Look for stocks that move in slower motion and offer more opportunity to take appropriate safety measures. But even this calmer path will set participants on the road to failure if they build inadequate responses to dangerous conditions. Smaller gains in this environment also encourage more frequent trading. Transaction costs build quickly and bleed gains, while nonperforming positions waste capital and restrict other opportunities. The most important rule of risk management requires little interpretation: never enter a trade without knowing the exit. Each ET choice generates a risk profile based on the distance between the entry and major S/R violation level. This level (failure target) determines the point where price action proves that the trade was wrong and should be abandoned. This distance must be acceptable before each trade entry. This exit must not produce a loss in excess of the swing trader’s predetermined risk tolerance. Target a permissible average loss as part of trading style and rule preparation. Smaller accounts must manage smaller losses than large accounts. Risk tolerance also aligns closely with reward measurement. The distance from the entry to the nearest S/R barrier in the direction of the trade (profit target) measures reward potential. Seek positions with reward targets that measure at least three times the calculated risk. Then estimate the actual dollar loss should the position fail and violate the risk level with the expected number of shares. Many good positions should be avoided or exited quickly. Markets work well when setups yield profits, but trouble starts when they don’t. Each promising trade has high odds for failure that must be considered before entry. Many participants fall into a gambling mentality when things go wrong. They rely on luck to get them past the risk and into a profit. Never follow this dangerous path. Do not execute a position unless the effect of being wrong matches the individual risk tolerance. Slippage increases transaction costs. Actual trade fills may fall far from expected execution prices. Swing traders can exercise more slippage control on entries than exits by using limit orders. Exits must often be taken quickly and through any door available. This leads to losses that consistently exceed risk measurements. Slippage and increased transaction costs must factor into reward:risk calculations. One easy method just pulls a half-point off the ratio. For example, the final number won’t exceed 2.5:1 if the original setup measures 3:1 reward:risk before real-world impact. Seek low-risk entry whenever possible. Find setups with ET levels very close to S/R or look for deep pullbacks in well-established trends. Narrow-range bars offer safer entry than expansion moves. Spreads narrow and permit swift execution at specific prices in a quieter environment. Filter time as well as price. The first and last trading hours carry sharp volatility and higher risk. Avoid execution through discount brokers during this time or face high slippage and late fill reports that defeat loss management. And always consider the quiet lunch hour to enter positions for afternoon rallies. WINNING AND LOSING Swing trading success depends on the chosen path to profit. Some push hard for the big gain but risk big losses when the action suddenly turns against them. Others slowly build each profit and watch defensively for a quick exit when wrong. Choose the focus that matches your trading personality but prepare to deal with the consequences of the decision. You have to be very, very good before you allow yourself to be bad. Measure ongoing performance using win-loss calculations. The simple %WIN ratio compares winners to losers and tracks the success of new strategies. Average winners (AvgWIN) and losers (AvgLOSS) measure results against risk tolerance. These calculations look at trades in the following manner: %WIN = winners/total trades AvgWIN = total profits/winning trades AvgLOSS = total losses/losing trades Example: The swing trader books profits of $300, $350, and $400 and one loss of $175 is recorded. Profits come from three out of four trades: %WIN = 3 winners/4 trades %WIN = 75% AvgWIN = ($300 + $350 + $400)/3 winners AvgWIN = $350 AvgLOSS = $175/1 loser AvgLOSS = $175 Different strategies emit different risk profiles. Scalpers tend to exhibit high %WIN and low AvgWIN, while position traders reflect low %WIN and high AvgWIN. Strong momentum markets incur high AvgLOSS. Momentum players must compensate for this increased risk through higher %WIN if possible, but that often fails. Swing markets increase %WIN but limit both AvgWIN and AvgLOSS. Swing traders can impact results through time frame and strategy choices more than any other market player. They may wind up at either extreme, depending on their risk approach. Trade risk shifts dramatically through small changes in %WIN, AvgWIN, and AvgLOSS. High%WIN traders can absorb much higher dollar losses than low-%WIN traders and still profit. Many markets limit AvgWIN by the nature of their inefficiencies, but swing traders can often narrow AvgLOSS through careful risk management practices. Consider how AvgLOSS impacts performance from the 25% to 75% %WIN levels. And here’s the kicker: most professional traders have a %WIN under 50%. Guess how they got to be professionals? The markets offer only three ways to improve profitability, regardless of trading style: raise the %WIN, raise the AvgWIN, or lower the AvgLOSS. Intraday traders have fewer profitability options than position traders. Price tends to move away from entry as a function of time. So intraday profits (AvgWIN) tend to be smaller than longer-term gains. Very short-term time frames also frustrate attempts to raise %WIN because short-term traders must demonstrate perfect timing while position traders can wade through many whipsaws to get to their profit. Intraday traders can control losses more efficiently than position traders. Price-time tendency now works to their advantage. In other words, incurred losses will be smaller on average because positions are held for a shorter time period. This allows loss distribution closer to zero than position trading. But frequent intraday executions often wash out this advantage through higher transaction costs. Loss-side management increases profits more quickly than chasing gains. Take what the market gives and move on to the next trade. Successful participants know when they’re wrong and execute a well-rehearsed exit plan. Learn this skill quickly because most traders lose more often than they win during a typical career. Enter every position with an exit door close to the entry to cut losses when wrong. Keep another just behind advancing price to protect gains when right. Expect some frustration along the way. Many stocks will whipsaw through S/R and shake out good positions just before taking off sharply in the right direction. Experience will reduce these unpleasant events but will never eliminate them completely. Seek liquidity at all times. Swing traders need fast execution with low slippage, and that won’t happen unless there’s an active crowd flipping the stock. Less liquid issues also carry higher transaction costs and erratic movement that will undermine sound risk management. Avoid stocks with volume less than 500K to 1M shares/day for 1-3-day positions. Intraday traders should focus on issues that trade 2M shares or more each session. Special conditions will change these guidelines. High-level shock events turn thin stocks into excellent swing trading vehicles for short periods of time. Shocked stocks that trade 3-5M shares or more produce excellent profits with low transaction costs. |
|
|||||||||||||||
Previous Issues
|
| ©2007 Olesia | Home • My photos • Forex • News • My trading • Contacts |