Best of both worlds
Gary Shannon
traders lose, and so on and so on. But there is a way (and I'm giving away
one of my "trade secrets" here) to more or less get the best of both worlds.
(except for the tax advantage)
First of all, I day trade for a living. I am not one of those high roller
guys with $100,000 to play with. Everything I do is on a much smaller, and
much slower scale. Where the typical successful day trader might try to
make $1000 or $2000 a day, I quit when I'm $200 up for the day. That's all
I need. But I can do that consistently with a MUCH smaller trading account,
and trading slower stocks where the ticks are measured in 10 - 20 minutes
not 10 - 20 seconds. Eventually, if I get better and better at it I may
start to scale up, slowly and cautiously. But for now, it's small
transactions in slow moving stocks. I need time to react and adjust, to get
my orders entered in a cheap, slow online brokerage account, and most
importantly, to learn how to do what I do better. Also, when I take a
REALLY BIG loss, I'm not out $30,000, I'm out maybe $750 or so. At the
level I play the game that hurts bad enough to teach me something I need to
learn from the experience without bankrupting me.
That said, here's what I do with about half of my trading capital.
Pick a stock that you would feel comfortable holding for the long term.
This is an investment-type stock. One that has shown steady increase in
value for a good long time, and for which ample reason exists to suspect it
may continue to grow.
Now the rule with that stock is just the opposite of the normal day trading
rule. You always, always take that stock home at night. You always end the
day holding 1000 shares of your "investment". That way you eventually reap
the benefits of any long term growth, and you are on board for any over
night good news bonuses.
But during the trading day, you keep your eyes open for opportunities to
sell that stock. The type of situation where another trader might consider
shorting it. Only you don't short it. You sell the shares you own, and if
you were right in your judgement, buy it back later in the day for 1/8 or
1/4 lower. This way you have sort of a psychological edge. When you sell
the stock you already have a profit. Now it just becomes a matter of buying
it back a little cheaper to set up tomorrow's profit.
You started the day with 1000 shares of XYZ and you ended the day with 1000
shares of XYZ plus $100 - $200 extra cash.
And if the stock moves up, you buy it back. Somehow it's psychologically
easier to cut a loss by the action of buying a stock you believe in. And
it's not really a loss, anyway. You just missed a little of the eventual
upward movement that the stock will experience in the long term. After
cutting your "loss" you only had to take a little cash out of your trading
account to get back into the long term position you want to be in anyway.
And the next time your stock ticks up what you lost in cash, you get back in
equity.
So what happens if there's a bit of bad news and your investment stock
falls, say 10%? Well, you still end the day owning 1000 shares of stock and
an extra $200. You don't sweat the short term loss of 10% because you know
the company is strong and it will eventually recover. If you were simply
holding it long term you still would have experienced that 10% loss, but you
wouldn't have that $200 in the bank as compensation. In a way, you don't
really care what today's price of your investment stock is, any more than a
carpenter cares what the market value of his hammer is today. It's a tool
you use from day to day, and, in the long run, there's a good chance it will
someday be worth a lot more than you originally paid for it.
Dollars and cents wise, it's really no different than shorting the stock.
But the PSYCHOLOGY of the position changes completely. It becomes a whole
lot easier to do the right thing at the right time. IMHO.
And another cool little play you can do when you always plan to own the
stock long term is when the spread is wide and conditions seem right to you,
put in a limit buy at, say 5 1/4 and a limit sell at 5 3/8 at EXACTLY THE
SAME TIME. You simultaneously offer to sell, and bid to buy 1000 shares of
the same stock. 80% of the time both orders will be filled by the end of
the day, and you collect $125. That gives you the freedom to pick your buy
and sell points, and not have to worry about which order they get hit in.
If you sell first, by the time you get your buy order in the market may have
moved against you. If you buy first, it might take hours to get your sell
filled. With this technique you could concievably get both your buy and
sell order filled in seconds. For a few minutes, at least, while your
orders are on top, YOU ARE the market in that stock. It's not moving
anywhere without moving through your orders. You've erected a pair of toll
gates, and the stock can't move out of it's current price without paying you
the toll.
--gary
Gary Shannon
millstox wrote in message <384bb46d...@news.rmi.net>...
>"Gary Shannon" <reb...@rio.com> wrote:
<snipage>
>
>how much research do you do on your picks? most of the research i've
>been doing is looking at the chart, but i'm looking more closely at
>fundamentals these days. somehow i feel more confident if i'm riding
>a stock up from a point where i feel it is undervalued. this is not
>to say i won't play something with a price/book of 15 like ADBE, but
>for some reason i feel safer with a smaller stock like GEMS that's
>trading at a price/book around 1 (it closed at exactly book on Friday,
>which i find interesting).
>
>keep it up, we need more posts with meat in them ;-)
>
I start out screening by price. I just feel more comfortable with stocks in
the 4 to 8 range. I understand the way they tend to move, and I have all
the necessary mental calculations down pat for stocks in this range. I
wouldn't know how to interpret a +1 3/8 move in a stock priced at 105.
Besides, it takes $105,000 to trade that stock hoping to capture a 1/4
point. It only takes $8,000 to trade 1000 shares of a stock at 8. And you
know what? If the stock at 105 goes up a quarter you made $250 on your
$150,000 investment. But if the stock at 8 goes up 1/4 you've made $250 on
your $8,000 investment. You make the same profit while tying up a LOT less
capital.
I like stock with average daily volumes between 100,000 and 800,000. I know
most high roller day traders like to see volumes in the millions, but this
is my niche. This is the kind of stock whose price behaviour I understand.
The high rollers need that volatility to make their 8, or 10, or 20 trades a
day. I typically make 1 to 3 trades a day. Some days I might not trade at
all. If nothing clicks, then I just watch.
Before I trade a stock I want to be REALLY familiar with it's moves. How
does it do it's dance? I want to know where it's been, last week, 3 months
ago, two years ago. What is it's price history. I look at charts for all
time spans; from 3 year charts to 1 day charts. I don't want to jump into a
stock trading at 6 1/2 today just because it looks hot, and THEN find out it
was trading at 2 last week, and hasn't really been at 6 1/2 long enough to
"certify" that price as "real". I've seen stocks like that drop right back
to their pre-spike levels in big a hurry.
If the 1 year chart shows at least 6 or 8 months of pretty steady growth I
might consider entering the stock "long" term. If the stock has experienced
a recent pop I try to find out why. Is this a biotech that completed phase
II testing of a new drug? Is that why the stock suddenly tripled last
month? How much of the story has yet to play out? Phase III? FDA Approval?
What is the future sale potential of the drug? That kind of basic
fundamental information.
The main purpose for my fundamentals research is that I like to have a
feeling (even if it's only an illusion, which it probably is) that there's a
real reason for the stock to be trading at the price it's trading. I don't
mind if the stock doubles over night, but I'd sure hate to see it lose 50%
over night! I want to know there is some solid foundation holding the price
up at some reasonable level.
If I'm just going to day trade the stock, then I start watching it daily
behavior more closely. I used to just watch the stock, pretending to pick
my entry and exit points. These hypothetical trades just didn't do any
good. I can't seem to really learn the behavior of a stock until I have
real money on the line. But I don't want any unpleasant surprises, so I
"toy" trade the stock for a few days to let the feel of it really soak in.
By toy trade, I mean I make real live actually money trades. I actualy buy
and sell the stock. In 100 share lots. Obviously I can't possibly make any
money on a 100 share lot. The commisions eat up the 1/8s and 1/4s I make or
lose. But that's not the point. That's the "tuition" fee I pay for a few
days to learn that stock. Then when I enter real money trades for 1000
shares I feel more confident and more comfortable with the stock because
I've already been trading it for 2 or 3 days at levels where I couldn't get
hurt.
Then it becomes part of my regular stable of trading stocks. Recall that
I'm in this just to make a modest living, and I'm happy to get $200/day out
of trading. Anything over that just gets plowed back into trading capital.
And the more capital I have the bigger my safety net, and the sooner I can
retire.
They say you should never fall in love with a stock. Well, I'm in love with
all my stocks. I'm familiar and comfortable with them. They've made money
for me and I understand their personalities. They are my friends, my
buddies. That's how close I need to feel to a stock before I'll trade it.
If you're feeling grumpy you might put on a smile and fool a stranger, but
your phoney smile will never fool a close friend. And when one of my stocks
is feeling frisky, or feeling grumpy, it can't fool me either. I know them
too well. And that's the sole reason why I can day trade by the seat of my
pants. I don't use charts and systems anymore than you would have to use
charts and systems to understand your best friend. You just know what to
do, and you do it.
Never take ride with a stranger.
--gary
millstox
thanks for the interesting post Gary.
how much research do you do on your picks? most of the research i've
been doing is looking at the chart, but i'm looking more closely at
fundamentals these days. somehow i feel more confident if i'm riding
a stock up from a point where i feel it is undervalued. this is not
to say i won't play something with a price/book of 15 like ADBE, but
for some reason i feel safer with a smaller stock like GEMS that's
trading at a price/book around 1 (it closed at exactly book on Friday,
which i find interesting).
keep it up, we need more posts with meat in them ;-)
---
what makes you think i know what i'm talking about?
lemmings die by following. don't go there.
millstox
picks)" there might be stocks of interest there, you know how to pick
the good ones.
millstox
have stocks up to around the $400 range that i watch, i am most
comfortable trading in the $3.50 to $12 range with 400,000 or more
volume. those are the ones that are getting ready to make their
largest percentage gains, and they have reached a price level where
their charts begin to evidence recognizable behaviors. ideally one
would watch for stocks that make large gains after they break $5 (the
penny barrier) and back up a week to buy them, but lacking a time
machine i try to get in when things are still a little risky.
beyond there we diverge. sounds like you daytrade mostly, looking for
predictable small gains. i occasionally daytrade if something i'm
watching closely gets really hot, but mostly i look for stocks that i
think have the potential for a 30-50% increase in the next 1-4 days,
and usually exit after around 15%, though lately i've been trying to
work out the exact methods for maximizing gains and minimizing risk
once a position turns green.
you know your stocks intimately, and avoid strangers. i know the
archetype intimately, and go looking for strangers that fit it.
good luck in the market!
Gary Shannon
millstox wrote in message <384f6ed9...@news.rmi.net>...
>sounds like we're both concentrating on the same area. although i
>have stocks up to around the $400 range that i watch, i am most
>comfortable trading in the $3.50 to $12 range with 400,000 or more
>volume.
Another reason I like these low priced not quite ready for prime time stocks
is that the market makers put their very best ace traders on the biggies
like Microsoft, Yahoo!, Dell, Amazon.com, and so on. The stocks I watch are
covered by the market makers' second string, and rookie traders. They're
still good traders, but the competition is a bit easier to deal with.
>beyond there we diverge. sounds like you daytrade mostly, looking for
>predictable small gains. i occasionally daytrade if something i'm
>watching closely gets really hot, but mostly i look for stocks that i
>think have the potential for a 30-50% increase in the next 1-4 days,
To be honest, the main reason I moved from short term (1-10 day) trading to
day trading was to satisfy my rather immature need for immediate
gratification. I wanted to be able to finish the day by saying "I banked
$300 today." And then be able to actually write myself a paycheck at the end
of the week. The way my twisted psychology works, I didn't feel like I'd
really made any money in the market until I could take it home and go spend
it. On a regular basis.
--gary