(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. :-)