Yesterday I mentioned that I was trading in demo mode (basically hi tech paper trading). A few weeks ago I decided that I wanted to shorten my time frame for trading. So I've been experimenting with more of a day trading style. I really like the idea of starting each day with, or near, a 100% cash position. I'll hold positions that close near the top(for longs)/bottom(for shorts) of their range. That allows me to be more objective on a day to day basis. Day trading will also allow me to trade during periods, like earnings season, which my swing trading rules kept me on the sidelines. The final benefit is that I can turn over my inventory (equity) much faster.
While I still believe that longer holding periods can capture bigger gains and is a better way to build wealth I need to earn an income from trading. My goal is to generate consistent profits and I think that shortening my time frame is a better way to do that. I'll leave the wealth building to my long term account.
The new strategy was looking promising but I noticed a couple of issues. The first was that I would almost invariably let the big winners pass me by without ever taking a position. I think there were two main reasons for that. One reason was because that stock that would have made my day, had I traded it, typically already had a large percentage move on the day. So I'd tend to go back to that mindset of thinking that I'd already missed the bulk of the move. Another reason for not taking all the entry signals that I got was because I'd start thinking about my commissions adding up once I'd already entered a few trades. That brings me to the final reason -- my commissions were too high for such active trading.
The solution to the commission problem was easy, I just had to change my commission structure with my brokerage. That's something I should have done a long time ago. I've been on a $9.95 per trade plan for years but my broker also offers $0.006 per share pricing. In order to get the per share pricing I had to upgrade to their "Pro" level of software. I was hesitant to do that in the past because there are fees if you don't trade enough shares per month and there are some tools in that Pro package that I just didn't need when I was focused on swing trading. (Their real-time scanner is sweet!) But now that I'm switching to day trading it makes perfect sense to upgrade to the Pro package.
The $9.95 commissions may not sound bad but they can add up quickly. Yesterday, for example, I would have generated $140 in commissions had I been trading in live mode. I traded six different stocks, taking partial profits in two of them mid-day. Those same trades would have cost me about $19 with per share pricing. So that's a savings of about $120. If that's a typical day those savings work out to about $2,400 per month or $28,800 per year. Once I did that math I changed my commission structure immediately. The problem is that the change won't take effect until the beginning of next month.
That leads to why I'm trading in demo mode. I decided that I should stop making my broker rich for the rest of the month and really get comfortable trading this new style. Hopefully this practice trading will help me to overcome the other two problems I mentioned. I've really been focusing on tweaking my real-time scans to only bring up the best (and fewer) candidates. I've also been keeping a full-blown trading journal for the first time -- something that's been very helpful. Hopefully I'll be ready to go live in June...
Great and thoughtful post. Which trading program are you using...? It sounds interesting.
Hi TraderMike,
I realize this comment might not exactly fit here, but...I was wondering if you have written, or are aware of, a "curriculum" for becoming a trader. If someone wants to learn how to become a trader "the right way," what should one do? I looked for it within your blog via the categories. Thanks again for a great blog.
I pay my broker too much and have also been trying to figure out the best way to keep some of that money. It seems like I'm in a middle ground where I ring up a lot of commissions but don't trade quite enough (or make enough) to justify paying the usual account fees that the brokers require for their very-low-cost plans. CyberTrader charges $250/month for that per-share pricing unless you trade 40,000 shares, and I think I would usually come up short of that number. That $250 represents 35 trades for me at Scottrade, and I think I'm better off using those to hopefully get my account up to a level where I can trade the required 40,000 shares.
The slippage costs I'm paying are another story though. Never having used another broker I can't compare mine, but I'm sure losing a lot of money in slippage. I don't know if it would be worth that $250 though.
It'd be nice if someone would do some kind of slippage comparison between brokers.
David, have you looked at Mikes Trading 101?
Mike,
Thanks for your blog, I enjoy reading it.
FWIW I've been trying to implement swing/long term trading, but have found most of my profits in what amount to day/overnight trading. I think it must fit this market. I'm not comfortable, but it works. My profits/round-trip aren't as big as I'd like (more is always better, right?); I'm working on that. I'll be interested to see how your trading evolves.
Re commissions, I found that if I make fewer, but bigger, trades it works. Fido is a flat $8 regardless of size, if you trade enough, and I'll bet you do. Other brokers have similar deals. I've found slippage is a much bigger cost issue than commissions.
JJO,
I use CyberTrader's platform. They have a simulator that you can download.
David Charles,
I'll try to write a more detailed post about this but the short answer is read everything you can get your hands on and maybe take a course. Some of the books listed in the middle column on this page are good places to start. There's a ton of good info in the forums at EliteTrader.com too.
Chud,
I can certainly relate to your dilemma. My trading volume hasn't quite been enough to hit the 40,000 requirement most months. But now that I'm closing most of my trades each day it's a no-brainer for me. One of the great things about CyberTrader is the quality and speed of their executions. Slippage is not much of an issue for me. It would be interesting to see a study of a broker's "true" cost, taking commissions and slippage into account.
Dave Lewis,
I'd love to be able to do fewer, bugger trades too. Hopefully I'll get to a point where I can filter out the garbage trades. As for the $8 commissions, most of my trades are between 200 and 400 shares. So while $8 is certainly better than my current 9.95 I'd still be doing much better with the 0.006/share commissions (between $1.20 and 2.40 per trade)
The biggest advantage of daytrading to me is not having to worry about those overnight gaps against you that I seem to attract. How have your results been when you hold the stocks that close near their highs or lows overnight? Maybe I've just let a few bad gaps make me timid, but it seems like in this up-and-down market a lot of those that move big one day gap in the other direction the next morning.
Mike,
Thanks for giving that link to the EliteTrader forums. I can't believe I hadn't come across that site until now.
Richard
Chud,
So far the results of the overnight holds has been great (even before switched to paper trading). I've been selling half and holding half on the really strong stocks. I'm not too concerned about having huge gaps against me. I'm nore concerned with getting out of big winners just because it's the end of the day. I know that I still need a bigger sample size though...
One question about day trading..Van Tharp suggests to wait only a couple of minutes for a trade to go in our direction. If it does not, get out and go to the next choice. This might work,but initial losses could be significant,especially if your capital is smaller. Even if you risk only 0.5-1% of your capital,what do you think is the minimum capital for day trading?
thank you
I read in one of Tharp's books that one should (could?) wait for a couple of candles/bars for the trade to start moving. So if you're using 15 minute candles you should wait at least 30 minutes. I agree that trading in such a fashion could be tough with a small account.
As for minimum capital, I guess it's somewhere over 25,000 since that's what's required to day trade. The exact number would depend on the expectancy of the system & position sizing, etc.