(Edit: You may also be interested in my article detailing how I trade as well as my hardware and software setup.)
I've been exclusively day trading for almost three months now. The switch from swing trading has been quite an experience and I've had a few 'light bulb' moments along the way as you'll see below.
The switch was definitely the right move for me to make. I think most people will probably be surprised to hear me say that day trading is much less stressful than holding stocks overnight. Mind you, I never 'lost sleep' because of my overnight holds but it's a nice feeling to be able to start the morning in cash and not care what the market's doing at the open. One of the things that sucked the most about swing trading was walking into a morning move against my positions. I've also taken advantage of being able to just shut things down for the day if the market's not acting well. When I was swing trading I'd typically just sit there watching all day on days like that because I had some positions on.
One of the biggest changes for me was switching my commission structure to a 'per share' basis vs. the 'per trade' structure I was on previously. Now I'm paying $0.006/share instead of my old $9.95 per trade. That change impacts my trading in a couple of ways. First, it's just much easier to break even (or even to make money). I could easily do $100 to $200/day in commissions with the $9.95/trade structure (that's basically $20 round-trip on a stock) With my new commission structure those same trades could cost me well under $40 depending on the number of shares. The per share structure also allows me to scale in or out of positions without racking up even more commissions. So that's made it even easier for me to take partial profits or to just cut & run if I see danger on the horizon.
One thing I'd like to note here is that I should have switched my commission structure back when I was still swing trading. My broker (CyberTrader) announced the per share structure last fall but I never looked into it because I knew that I didn't trade enough shares to qualify for that plan. They require you to trade 40,000 shares per month or you have to pay a $250 fee. Back in April I did the math on my commissions for 2004 and I was shocked and appalled to learn that I would have come out far ahead on the other plan even if I'd paid the $250 penalty each month. So the lesson here is do the math and keep those costs down!
The main 'light bulb' moment(s) had to do with position sizing, risk management and buying power. I've already told you that I'm now using the percent risk model to size my positions. It made perfect sense to me when I read about it and even when I started using it in real live trading. But it wasn't until that Google trade that the light bulb really lit up for me. I remember when the SEC changed the margin requirements & rules for day traders several years ago. Part of the change was that day traders could have 4 times their equity as intraday buying power. I never understood why they gave people so much margin but even more than that, I couldn't imagine who'd be foolish enough to use that much margin. Well now I try to be that fool as often as possible.
The thing that the Google trade taught me was that if I go after high-priced stocks I can put a lot of money to work. As long as I have a tight stop I can still risk X percent of my equity per trade. Here's an example:
Let say there are two stocks that are setting up entries for me. One is $8/share (let's call it ABC) and the other is $80/share (XYZ). For simplicity I'll just say that I want to risk $200 per trade. So let's say that the setup given by ABC dictates a 25 cent stop and the stop on XYZ is one dollar. In order to risk only $200 on each trade I can buy 800 shares of ABC and 200 shares of XYZ. That means that I have $6,400 worth of ABC and $16,000 worth of XYZ. Let's assume that both stocks move 2% higher. So I've only made $128 with ABC but I've made $320 in XYZ. That's 2.5 times the profit even though my risk was the same on both trades.
Hopefully you can see why I'm really trying to focus on high-priced stocks now. I've already had a few days in which I've used all of my intraday buying power on just a handful of trades. I would have never imagined myself doing that just a few months ago. Day trading allows me to use much more buying power compared with swing trading, yet my risk is actually much lower than it was when I was swing trading.
My decision to finally start keeping a detailed trading journal has been a huge help. (I guess I should also give credit to Getting Things Done (GTD) for convincing me that writing things down can be a good thing!) I went through June and most of July just breaking even. But I was noticing recurring problems in my journal that I'd work on correcting. One problem was me initiating positions when the major indices and other general market indicators were telling me to stay out. I remedied that by adding rules about market 'tone' to my trading plan. The biggest problem I had was getting out of winning trades too soon. I always like to push my stops up to break-even when I can but my journal was screaming at me that I was adjusting my stops too aggressively. I kept getting stopped out of stocks that would have been big winners for me. What I noticed was that those stocks would typically have strong moves in less than 30 minutes or so and I'd push my stop up only to get stopped out and then the stock would turn again. So I made a rule that I can't touch my stops until at least 60 minutes after entry. It was one week after I made that change that I had my biggest day in years. And I haven't had the 'stopped out too soon' problem since.
For those that want some numbers -- My expectancy since June is 0.23R, where R is my initial dollars at risk per trade. I made that change to how I manage my stops on July 21st. Before that day my expectancy was 0.09R, since that date it is 0.40R. So I feel good about the positive (and increasing) expectancy and I'm working on getting that number higher. My win ratio is 45.05% right now. (Yes, you really can be wrong most of the time and still make money!) As for P&L, I'm up 19% since June. (Note that I'm not trading bigger as I make more money. I try to keep my equity level the same so if I drop below my initial equity level I'll work to get back to even and if I'm above that initial level at the end of a week I'll pull the excess money out of the account.) I should add that August has been a very slow month. I've had 8 days with no trades at all.
Finally, here are some resources that I've found helpful in making this transition to day trading:
- MaoXian -- You already know about his 'Trading for Dummies' lessons but I learned a lot more from him than that. His trading style taught me that day trading doesn't have to mean scalping, which is something I've never found appealing. He also opened my eyes to using a real-time scanner.
- The trader (Allan) that I sat with for a week when I was considering joining his team as a proprietary trader. (He recently started a blog but it's not very active. Hopefully he'll figure out what he wants to do with the site.) Although his style of trading didn't suit me very well I did learn some things from him and from being in that trading office for a week. All of those guys used real-time scanners (big clue!). It was also during that week that I finally did the math about my commissions. All of the traders in that office were on a low, per-share commission structure and it was really enlightening to me to see how they could trade with such low commissions.
- Stephen Vita for the daily reminders about the market's tone and opening range among other things.
- Van K. Tharp's "Financial Freedom Through Electronic Day Trading" -- Don't let the title of this book fool you! This book isn't just for day traders, it has some great stuff about creating a business plan for trading as well as covering position sizing, expectancy, keeping a journal, etc.
- "Tools and Tactics for the Master DayTrader: Battle-Tested Techniques for Day, Swing, and Position Traders" -- Tons of great info in this book. I'd actually flipped through this book years ago and didn't think much of it. Allan highly recommended it to me so I decided to give it a second chance. I'm glad I did.
- A couple of books to help me get my mind right :-) -- Way of Warrior Trader and The Trading Athlete
- The Traders Affirmations CD from DayTradingCourse.com -- I learned of this CD on Market Monk's site. It's a good reminder of a lot of the things that are in Mark Douglas's "Trading in the Zone". I try to listen to the CD at least three times a week to make sure my mind stays right. :-)
Wow, I cannot tell you how much this post hit home. I just applied on friday for my new broker (to tradestation from scottrade). One of the key factors motivating me to switch is the per share pricing. I agree with what you said 100%. I have been doing an equal amount of swing trading as day trading lately, and I completly agree with the stress of overnight holding.
Until recently I was actually making more money swing trading than day trading, so I think thats what has kept me into the swing of things. The last month I have been using a spreadsheet I made based on your advise on position sizing and it has made a HUGE difference (and kept me out of a lot of bad trades!).
This expectency stuff is very intriguing. I plan to take advantage of that concept immediate. I have been keeping a log of every trade I have done, but I have not kept track of what I now wish I had (overall market sentiment, etc...). Do you have a specific list of recommended things to keep in a trading log, or better yet, do you know of any trading log software?
Thanks for your valuable insight and for your generous use of your time to enlighten all of us who strive to be better traders. I soon hope to make the jump from part time trader to full time trader (and still pay my bills!) and your blog has been a key factor in my (hopefully continually improving) success.
Good post Mike. Your thoughts are informative as are the links you provide. I have found the high vs low dollar stocks discussion an interesting one on many levels. Per share commissions play a role as do bid/ask spreads as a percent of share price. The example given doesn't really demonstrate an advantage for high dollar stocks. The reason the high dollar stock shows advantage in the example is due to the small stop as a percentage of price. The stop assigned to the low dollar stock is a whopping 2 1/2 times larger than the stop assigned to the high dollar stock as a percent of price. This accounts for the profit difference in the example. If a stop of 9 cents had been assigned the low dollar stock I believe you would find the low dollar stock more advantageous. It appears, with the money management technique used here, you would choose the stock with the lowest stop as a percent of price.
There are many more dimensions to the high vs low issue that are interesting and leave room for lively debate.
Thanks for a great blog,
nvdog
Mike,
Great post. I've read the van tharp material also, it's been a while since I brushed up on it.
One thing I did not catch,or missed was how you came to your expectancy rate of 0.23, I did not see the formula for that,only found the dollar amount expectancy derived from the %wins/loss formula.Is that your R multiple of.23 or something else? I need to go dust that book off and re-read that section:-)
I also agree with the use of scanners,every trader I know is using some type of real time scan.And the links to MaoXian are a great read,I actually have been implementing the 15 minute charts more and more thanks to you and him.
RUok,
You're welcome. I'm glad you find my site to be helpful.
About the trading journal, I'll do a post about that later today..
NVDog,
You make a very good point about the stop as a percentage of price. I guess what I'm really trying to say is that in my experience, with my particular trading style, is that it's been much easier to get a tight stop, based on % of the stock price, on high priced stocks vs. low priced ones. One thing that I've always disliked about low dollar stocks is that I have to buy so many shares. At some point you're talking about thousands of shares. Then you have to start worrying about slippage on the way in and out of the stock.
The bottom line for me is that it's a lot easier to put a lot of money to work in high-dollar stocks vs. low-dollar stocks.
TX,
Yes, the expectancy number that i use in this post is based on my R multiple. so it's .23R. I guess I should edit the post to make that clear...
Chairman MaoXian is the man -- he should really write a book. (You listening Chris???)
Mike,
Cool,thanks for the clarification,nice job.
I would definately read the Chairman's book!
Great article.....already ordered the trading CD. Keep the supernatural work coming.
Forgot to mention that I highly recommend the Pristine (Oliver Velez/Gregg Capra) CDs in addition to their book. One of the best chapter in the book: WHEN DISASTER STRIKES!
As a reference, I did attend one of their 2 day seminar years ago.
hey mike
enjoy your posts "greatly"...
I see you post a link to trade-ideas.com
do you use it that much (and is it worth the monthly fee)? and in what ways regarding your swing/daytrading areas?
Thanks in advance for all your help... it's much appreciated from the newbie's
jaz
jaz4us,
yes I've been using trade-ideas all day, every day. You'll have to decide for yourself whether it's worth $45/month to you. The price seems very reasonable to me. I'm going to do a write up on it later which may answer your questions about how it's helpful.
If you're interested in it you should just sign up for the free trial They don't even ask you for any payment information when you sign up so it's truly risk-free on your part.
This comment was emailed to me today and my response is below:
Robert,
There should be a link to sign in right after the sentence that says "You are not signed in. You need to be registered to comment on this site." The link says " Sign in" I wonder why you don't see that. What browser are you using?
To your question, yes, 2% is 2%, but would you rather make 2% on $50,000 or $10,000?
I agree that you can often find more low priced stocks that have big % moves as compared to high priced stock. The issue I'm addressing is can you find a tight enough stop on those super-volatile stocks to allow you to put a good amount of money to work and still keep your initial risk manageable. I just find that, in general, it's much easier to do that with higher-priced, more liquid stocks.
You're right, it's no puzzle to find the big movers with a real-time scanner. But they may or may not give any entry points that suit my trading style.
I guess mm = money management? I described my old position sizing strategy on that position sizing post.
Great article Mike. I put a dynamic position size calculator online last week for all the reasons you stated. It factors in both volatility and liquidity. Also includes correlation numbers so that we don't load the boat in one direction. Here's the link: dynamic position size calculator
Thanks Teresa, that's high praise coming from you. I'll be sure to check out the calculator next time I fire up Internet Explorer. :-)
Mike,
I just recently found your blog and I enjoy reading it every day. I work for LaSalle Futures Group, and I am the currency strategist for LaSalle Forex. I would like to share some of your ideas with the clients I have that trade on their own by sending them to your blog. I am a swing trader due to the hours I work. A lot of people I speak to are day traders. Please contact me at work: smisic@day-trades.com
Hope to hear from you soon,
Steve Misic
Is it harder to day trade with a $25k account or $100k account? Would your strategy change to a goal of 2% gain and take profits? Would the stops be the same?
Are these rhetorical questions? It's practically impossible to day trade with $25,000 since that's the absolute minimum amount required to day trade. Drop down to 24,999 and you're done until you add more cash. That fact alone means it's easier with more money.
My strategy would not change and I can't imagine myself ever using targets like that. That's breaking the rule of letting your profits run. My stops would be (are) the same regardless of my equity -- my initial stop is at a loss of X% of my equity.
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Michael,
I have been working on getting the most R out of my trades as possible. I see you made the rule of not touching your stops until an hour after entry.
Do you have any rules for holding a portion of the position until the close, if the stock is acting well? Working with pivot stops and selling partials has helped me. Curious on your thoughts. Do you rely on market action, your gut, targets, or some other stop-loss method?