Trade Management Advice

Trade management

We are regularly asked our views on when to enter or exit a position and what stop should be used once in it. At this point I would suggest that there are no hard and fast rules, this article just gives my thought process. You may want to assume that we are talking about a stock here but many of the rules may apply just as well to commodities and currencies. I am also assuming we are looking at going long (buying the stock), you would simply reverse the rules if shorting.

BEFORE YOU ENTER

It is assumed at this stage you have made sure hat the equity that you are about to trade meets any fundamental criteria if used, otherwise we are looking purely at a technical play.

What should be an obvious question, but is often overlooked by many, is what is the target price gain. Subject to your trading mechanism, i.e. shares, options, spread betting, you should consider how much the underlying instrument needs to move to be profitable taking into account any trading costs and spread. If the risk does not provide a better reward than keeping your money in cash in a high interest account, then what is the point?

Subject to what technical indicators you are using to manage the trade, you should decide on an entry point and exit point. Note the latter does not have to be set in stone, as we will cover later although as already mentioned essential to calculate risk/reward. If you are using the Market Matrix system you may have some quite accurate points although you should also consider at least one fibonacci level either side. For the purpose of this article I will refer to these as support and resistance.

ENTERING YOUR POSITION

Timing of your entry is critical subject to the amount of movement expected. When you enter must be down to your attitude to risk and carefully managed. Lets assume you are looking to catch a turn, there is a saying that you should never try catch a falling knife, many believe it is the same for the markets. You may feel it is safer to enter a position when the price has turned.

In the example shown in figure 1, my analysis is showing that it is due to hit a 61.8% retracement level in price. As confirmation, it had gapped down three times, the last is known as an exhaustive gap. My expected support level is around $80 and my target resistance is $98 giving an $18 move.

With such a move you have enough room to ensure that the turn is in, thus a target entry point of $81 may be safer than catching the $80 point. This is really up to you and whatever indicators you may be using. However the next step is to decide where to put your stop.

PLACING A STOP

The initial stop should be placed immediately following the purchase order being accepted. If you prefer you can place the orders together as an OSO. (figure 2)

Where you set your stop must take into account a number of factors. Firstly look at how volatile the stock is, if you place your stop at $1 below the current price yet the stock has regular daily range of movement of $4 then you are very likely to get stopped out very quickly. This volatility can be magnified significantly if you are using leverage such as options so you must take this into account.

You may decide to set your stop just below the support level you have identified. I say below, as the support may be tested a fraction before you see the move up continue. If using Fibonacci retracements you may consider using the next number (only if using the full range rather than the 3 common figures) but this is of course subject to the distance that it is away, in terms of price and volatility.

Some people set stops using a percentage, although the same percentage is not necessary right for all stock prices.

MANAGING YOUR POSITION

The key here is to let your winners run whilst keeping your losses short. You have already placed a stop but this should ideally be managed to lock in profits.

Many investors get knocked out of a position far too early as they move their stops up too tight before the price has run its ground. As a rough rule here, we would only move the stop for the first time once it has cleared twice the amount of average daily volatility. As soon as possible thereafter move the stop to the break-even point.

As a move is rarely a straight line but a number of waves (Figure 3) the stop should then be moved within two to three times the average days volatility until it closes on your target resistance where you may reduce it to one or at most two times. If it breaks through your expected resistance level you may want to move it to a fraction below the previous top to allow for any further test. Of course if you have calculated that a turn is due and any other indicators you use are showing that the stock price may be overbought then you can either move the stop up even tighter or simply close out (Figure 4).

In this example you would have bought at say $81 and sold at around $97.40, a profit of $16.40 (20%). You many have squeezed a couple of extra dollars out of the trade but you would not have left too much behind. Key to this process is that you have a plan, that being to take as much
profit as you can






Regards Darren Winters
Investment Training Seminars

How to trade the 5 minute time frame.....

There are no hard and fast rules that apply to trading on this time scale as opposed to trading on a larger time frame. For instance, some investors will use certain technical indicators that work well for them, and others will use other tools that work equally well. Needless to say, the age old rule of money management is an all important factor here as it is anywhere else.

Decent real time charting software will be needed in order to trade on this time frame. As we trade mostly US stocks, we are comfortable using TCNet, the big brother of TC2000. It costs $99 per month which is actually cheaper than most real time charting packages. You can use Metastock which is superb but will cost you much more for the privilege.

If you decide to use an independent charting package, then your data feed is another cost that will have to be accounted for.

INDICATORS

Firstly, indicators that you may have set on a daily chart may not be suitable for when trading a shorter time frame. For instance, when using time segmented volume, I prefer to use a 67 period on the shorter scale, but an 18 and 28 period on the daily chart. The same is true for a stochastics indicator I use with a higher value applied to the 5 minute time frame and a lower value used for the daily scale.

You will need to play around with your indicators to see what suits the 5 minute timescale and is best for you. Essentially, when you are trading the 5 minute time frame, you would use indicators in the same way that you would use on a daily chart. You should always be mindful of the larger timeframes and regularly switch to a 10 minute, half hour, hourly and daily chart to ensure you are aware of the larger movements in progress.

For instance, you could be using indicators such as TSV, moneystream and stochastics on the 5 minute chart that are indicating a down move but the hourly chart may be suggesting something entirely different. If there is a conflict (and there often is), then it may be better to wait for a better set up to occur in another stock.

I still use moving averages over the short term and am constantly mindful of a stocks movement between the 20, 50 and 200 period moving averages. These averages act like magnets to a stock either attracting or repelling during the day. I particularly like set ups when a stock has moved below a moving average, then moved back up and tested the underside of that average twice before finally failing. If, after the second attempt to get back above the average, the stock fails, that will often give a nice short term move to the downside. The opposite is true when you reverse this situation.

Fibonacci retracements can be of vital importance when trading. I start by placing them on a daily chart I also use them intra-day and will measure any short term highs and lows. If a stock is on a down move after making an intra-day high, I will place fib levels onto the chart to see where the retracement may end, thus giving a good entry level for an upside move.

A personal favourite of mine is to trade intraday gaps. I have often traded the QQQ which frequently gaps at the open only to get filled during the session. After it gaps, I watch to see if the stock looks like turning to fill it and I can often make a nice trade just out of that relatively small move.

MANAGING THE TRADE

I’m making an assumption here that most readers are spread betting considering the tax advantages and relatively low costs of entry. You would still need to work out what type of stocks you can trade, depending on how much you have in your account. Be mindful of the golden rule that you should never have any more than 1% of your entire account at risk in any one trade. That means you need to position your stop/loss in an appropriate area that does not exceed this limit.

So as soon as you open a trade, you need to place a stop/loss. This will vary dependent on the trade. For instance, on one trade, you may be able to draw a trend line beneath a series of higher lows and use that as your stop. In others, you may have witnessed a key reversal pattern on a candlestick and so use the lowest price on that candle as your stop.

Assuming your trade starts going in the right direction, you can keep raising your stop until you are at breakeven point. At this point you can literally walk away from your screen and let the trade do what it is going to do. If you stay watching the screen, you could end up closing the position early when it was unnecessary to do so. By leaving it for an hour or more, you may end up taking larger profits. Of course there will always be the occasion when you have been stopped out, but at least you haven’t lost anything that way!

CONCLUSIONS

Trading on this time scale is not going to be of interest for all our readers, but it may be for any traders out there. As always, managing the trade with stop/losses and allocation of funds are some of the most important aspects. You can lose 60% of the time and still make money by applying strict money management rules.

Regards
Darren Winters

Show us your money - Free cash flow - By Darren Winters

Show us your money! —free cash flow

Everybody likes cash; we’re certainly no different when we are analysing stocks that we cover in the newsletter. More to the point we look at ‘free cash flow’, now don’t you go moving on to the next article! This may actually ensure you do not lose your shirt one day.

Any business owner will know the importance of good cash flow. In fact the reason for many of the country’s failed new businesses each year is not because the goods or services are not in demand, but because the cash flow was not managed well enough.

Now due to accountants being accountants, they have managed to invent a whole magnitude of types of cash flow, probably to try and bamboozle the layman and to ask for higher fees from their employers. There is plain old ‘ operating cash flow’, ‘operating free cash flow’, ‘discretionary cash flow’, ‘residual free cash flow’, discounted cash flow and good old ‘free cash flow’. Now if I have missed any out please do not write to me.

To confuse matters a little, not everyone can totally agree on what should be included and excluded in the calculations, so to keep things simple I have used the description that was taught to me on my MBA course.

But before we get onto boring equations, why do we like free cash flow so much? Well in short, this is what a company sets out to produce. It is the excess cash the company is generating from operations that can be used to benefit the shareholders through dividends, share repurchases, new investments, acquisitions, paying back debt etc. It is a real measure of the company’s financial strength.

A company can increase sales year on year, it can show great net income figures and brilliant earnings per share, but all of these can be manipulated quite easily. The earnings per share measure is probably the most manipulated of all yet this is often the headline figure that many judge a company by. Free cash flow is much less open to such manipulation. However there are two areas where a company might try and manipulate it. These are if they sell all of their stock and do not replace it within the same financial year, or if they stop spending money on capital investment. Both of these are can be checked within the accounts and normally can only be adjusted temporarily.

Okay, to the calculation this is reasonably simple, you just take the ‘operating cash flow’ (sometimes listed as the ’cash flow provided by operations’) and subtract

1. the taxes paid,


2. the cost of maintaining equipment (this is rarely seen as a figure in the company’s accounts so it is common practice to use the depreciation charge if the figure is not available)


3. The interest paid.

You will probably be thankful that many companies now actually quote this figure in their accounts, unless of course they do not have any!

If we look at the accounts for Rolls Royce (RR.L), they have actually shown their calculation of the free cash flow. They have been very transparent with their calculations as well. That said they have shown the cost of rationalisation as a deduction from the operating cash flow, it could be argued that it should sit above the line.

I have shown their first half figures just as an example of what we would be looking for in a turnaround business. Here we can see that their free cash flow has been increasing year on year. As previously explained this means that they have more money to pay their investors or to use for the betterment of the business going forward.



Whilst I have not completed the exercise for Marks and Spencer, having taken a quick look at the balance sheet it would suggest that their free cash flow has been reducing on a year on year basis just by looking at the operating cash flow.

There have been a number of studies carried out that show that a company that has a strong free cash flow will outperform the market. This is not too surprising as they are most likely to be in good financial shape.

Some analysts are now looking at free cash flow as a ratio to the number of shares, thus occasionally you will see the term free cash flow per share. This must not be mixed up with cash flow per share; the word ‘free’ is essential. The calculation is simply the amount of cash flow divided by the number of shares outstanding.

When looking at free cash flow (FCF) it is recommended that you look at more than one period as in the example above. It is also wise to compare each year with the earnings per share (EPS) over the same period. This way you may notice any anomalies if the EPS is continuing to rise yet the
FCF is up and down. There may be good reason for this but you would then investigate further.

So in summary it may take a few minutes to calculate free cash flow, but it should not be ignored if you’re serious about buying a stock and holding it for any period.

Regards
Darren Winters

Market maker or market manipulator by Darren Winters

We refer to market manipulation in our opening article and refer to our own experiences and research in this area. Whilst market makers are often referred to as manipulators, this is normally done so by traders who have lost money and have become emotional. From our research it is not the market makers that are the culprits of manipulation, just the tool!

THE MARKET MAKER

The market makers are usually large banking organisations such as Rothschild, Citigroup, J.P Morgan, Bear Stearns etc. Their role is ‘make a market’ in the shares of one of their clients. What we mean by this is, to ensure that there is always a market so that investors can buy and sell the shares of their clients. For example; -

If you imagine that a listed company has hundreds of thousands of shares distributed amongst thousands of shareholders. If somebody wants to buy or sell shares they need a central figure through which to trade. Firstly they will normally approach their broker who in turn will contact a market maker who deals in those particular shares.

A single market maker normally only trades in a relatively few number of companies. They have a contract with each of their clients. The company that appoints market makers will keep the number of official market makers to a minimum.

It is a widely viewed misconception that market makers set the price of the shares. In fact the price is actually set by simple supply and demand. The market maker only tells the brokers what it is, based on the demand, or lack of demand.

In reality the price they may quote may be too high for those that want to buy and they may not have any buyers, conversely they may encourage too many sellers from who they have to take the shares subject to certain criteria. They do not want to be left with a miss-balance of shares or they may end up holding more than a small float, which could leave them significantly out of pocket. They simply want to match buyers and sellers.

Their role for their client is to keep the shares as liquid as possible. The client may wish to increase the number of shares in the market at some time in the future, this may not be so easy if the shares are rarely traded.

HOW DO THEY MAKE THEIR MONEY

The market maker has to ensure they make a profit from their dealings of matching buyers with sellers. They do this from the spread between the bid and offer prices.

If a stock is particularly volatile, the market maker will increase the spread to safeguard their own position. This takes out more of the day traders who do not want to risk such wide spreads, as to make a profit between buying and selling, the stock will have to move a significant amount.

This answers why high volume stocks such as Vodafone have smaller spreads versus lower volume stocks. For example on a normal day's trading the Vodafone spread was 0.25p with volume of 104 million shares whilst Antofagasta had a spread of 11p on 400 thousand shares.

THE MARKET MAKERS OBLIGATIONS

To ensure that the markets remain liquid, once the market maker has quoted a price to buy or sell shares then they are obligated to either take or deliver those shares to/from the broker. That is being subject to the Normal Market Size (NMS). This varies subject to the volume of shares traded, thus on a company such as Vodafone this may be 200,000 shares whereas a company with less daily volume may have a NMS of 50,000 shares. Any share beyond these levels may be offered a price that reflects the change in the market. They must also always give you a price.

They also have to post their transactions, although subject to the size of the order it can be delayed to avoid either panic or rushes from smaller investors trying to keep up with larger institutional orders.

BUT DO THEY MANIPULATE THE MARKET?

There are some that say they manipulate the market as they alter the price before the market opens. Realistically as already explained they have to match buyers and sellers. Therefore if there is some significant news announced after the bell, they might adjust the opening prices to take this into account.

They may also do this after the Sunday papers have provided their tips on buys and sells. This answers why the stock price may rise then fall after a tip has been given and profits are often made by shorting the stock at its artificially high price. In both these cases they are only paring supply and demand by using price as a regulator.

Should institutional buyers give a market maker a large order and if there are too few shares available from sellers, they have been known to momentarily drop the price to encourage people to sell. This often causes investors stops to be taken out thus more shares become available. They are thus able to fulfil the order at a reasonable rate for their institutional buyer. This is known as shaking the tree and whilst not good for those with the close stops it ensures liquidity in the stock which is one of the market makers main roles and by many may be likened to management rather than manipulation, sort of!!!

A marker maker aims never to hold too many shares in any of the stocks they make the market in, as if there was a market crash they could find themselves severely financially embarrassed, as in the case of Nick Leeson and Barings!

Regards Darren Winters

Strategies for spread betting by Darren Winters

As more and more of our subscribers are turning to spread betting, we thought we should cover some simple mechanics that will enable you to trade more efficiently. The beauty with Spread betting is that it caters for a broad cross section of investors. You can start trading with as little as 50p per point or as much as £1000 a point depending on your capital and experience.

For those who have never spread bet before, you buy and sell in just the same way as you would with an online stockbroker. The difference is that you are betting on the future direction of a particular stock as opposed to actually buying or selling shares. You have to decide how much you want to bet per point of movement in the underlying share. So for example, let’s assume you were going to spread bet the FTSE 100 index which currently trades at 4,770 for £1 per point. If it moved up to 4,780 you would make £10 and the reverse if it moved down 10 points.

Now there are some elements of spread betting that are worth considering when investing using this platform.

PHASING PROFITS

We have always been advocates of ‘letting your winners run’ when trading in the markets and this can be done whilst spread betting too.

In order to do this, you need to place a minimum of £2 per point on a trade (assuming the spread bet firm’s minimum bet is £1). Now we would not recommend this strategy if you do not have a lot of funds in your account or are still building experience. The reason for this is that although £2 per point doesn’t sound like much, you only need to take a few losses at this level and you could be down a couple of hundred pounds.

Anyway, by placing a £2 bet on a stock or index, when it has moved into a healthy profit, you may want to take some money off the table. You can do this by selling just £1 of that bet. So for example, You bought the FTSE at 4700 and it moves up to 4760. So after the spread of 5 points, you are up 55 points or £110 on your £2 bet. In order to take some of the profit off the table, you place an order to sell £1 of the FTSE at the new market price, thus banking £55. You can then allow the remaining position to run further if it carries on moving up in price.

You can move your stop higher which will protect your remaining position but at least you don’t feel the pressure to have to bank some gains. Obviously, if you bet more than £2 per point, you could stagger your trade even more as you gradually realise profits.

KEY ENTRY LEVELS

If you, like us, want to see a stock move through a key level before entering a position, then utilising certain orders can be of great value.

For example, if you believe that the S&P 500 is getting close to a key resistance level, you may not want to buy unless it manages to break through it first. So you can use a ‘buy stop’ order to buy the S&P when it reaches a certain price. If it doesn’t manage to break through the resistance, your order doesn’t get filled and you cancel it.

Alternatively, let’s assume you think that if the S&P breaks through a key support level, then it will go much lower. So this time you would enter a ‘sell stop’ order to sell the S&P if it breaks below the support level.

This type of trading gives you plenty of time to undertake your technical analysis and identify key support and resistance levels. A classic example of this was when the S&P broke through the key 1131 resistance level at the beginning of November. It brought more buyers into the market which kept the price moving higher. Obviously you can get false breakouts but very often, a move through a significant level will bring about a continuation for a period in which a quick profit can be taken.

ADDING TO POSITIONS

We never advocate adding to a losing position in order to average down, but adding to a winning position is perfectly acceptable in our view. Let’s assume that you have entered a position which you are now up 50 or 100 points on. The stock is in a confirmed trend now and could still have much more to run. Well, you can add to your position in order to take advantage of further movement in the stock in the current direction.

If you had gone long on the stock, you would now simply place a new buy order at the current price in order to build your position (although you may want to wait for a pullback first). This will have the effect of increasing your average entry price so you will need to raise your stop in accordance with that. Now that you have added to the position, any further upside in the stock will give you even more profits. Bare in mind that you should not add any more than what your original bet was.

Alternatively, if you had sold short the stock and it had moved down 50 or 100 points in your favour, you would now add to the position by placing a sell order at the new lower price. Remember in this scenario to move your ‘buy stop’ lower.

These ideas are simple, but we utilise them in our own trading frequently in order to maximise our returns.

Darren Winters

Technical Analysis - Breakouts by Darren Winters

Talking about breakouts makes me think of my favourite Foo Fighters album track where David Grohl is singing about wanting to ‘breakout’ of the relationship he is in. I guess it’s not dissimilar to a stock that is trying to breakout of a trading range it’s been in or above a key resistance level!

Breakouts can form the beginning of an exciting new rally for a stock or alternatively, the start of a large downward leg. There are simply too many types of breakouts to go through each one individually, but if we give some examples, you should be able to get a feel for how they develop out of a multitude of chart patterns. We will also cover the ‘false breakout’ that can often leave inexperienced traders scratching their heads.

CONSOLIDATION BREAKOUTS

Consolidation patterns come in many forms, but some of the strongest patterns that develop out of a consolidation are perhaps ‘flags’ or ‘pennants’. We have covered these patterns in previous editions of the newsletter so wont go into long winded explanations at this point.

Essentially, consolidations occur when a stock has been trending in one direction or another. For example, if a stock has been rallying, it will get to an area of resistance where sellers enter the market and halt its advance. At this point, the stock starts to move in a sideways direction where the number of sellers matches the buying pressure. Once all the selling has taken place and if there are still buyers, the stock can then start to rally again.

It is at the point when a stock ‘breaks out’ of this consolidation pattern that traders can take advantage of the next rally leg.



The chart above shows a classic example of a stock forming a flag before breaking out to the upside. Of course we can see the opposite of this bullish formation in down-trending markets. It is worth noting that you want to see an increase in volume on the breakout to help confirm the move. If volume starts to fall, you may want to tighten stops or even close part of your position. Sometimes a stock may come back down and ‘retest’ the area that it broke out from so it is worth bearing this in mind.

The best way of trading breakouts is to get plenty of practice first. Using your charting software, flick through as many charts as you can, searching for these consolidation patterns. You can then look to see how each stock reacted to the breakout and what happened to the volume. These breakouts work best in strongly trending markets.

FALSE BREAKOUTS

Although we see breakouts occurring all of the time, so too are false breakouts. When you consider the number of traders who are well aware of consolidation patterns and waiting for a breakout, you also have to be aware that market makers can have fun with these.

Let’s assume a market maker has some very large institutional sell orders coming in on a stock that is just sitting below a key resistance level. It would be very easy for that market maker to start pushing the price up above the key area to entice buyers into the market. This surge of buying can then enable them to fill their large sell orders for the institution and thus the price comes crashing back down.


Watch for a breakout on light volume, or a shooting star candle as this can tell you all is not well.

Both genuine and false breakouts can be taken advantage of. Watch volume to give you confirmation of any moves and watch for non confirming indicators should a breakout turn out to be false.

Darren Winters

Investing for a living - The day trader by Darren Winters

We have spoken to numerous people who have said that they would like to trade the stock markets for a living. We have also spoken to quite a number of investors that actually successfully trade full time for a living. It is quite interesting that the majority of the group that do, have reached the point where they would rather not. It is probably a case of the grass is always greener on the other side. That said, if you get it right, you could make a very comfortable living and improve your lifestyle significantly.

THE PSYCHOLOGY

To start with when we discussed how it was to be trading for their main source of income there seems to be a stock answer; ‘It becomes different, initially every trade is watched closely.’ The consumption of coffee, fags and booze all increases. The psychology needed is different; it is easy to start just staring at the screen watching each trade. From the people we have spoken to, many initially started losing money due to no longer following their own previously successful rules.

Back in the dot com days the number of people that gave up their jobs to invest often hit the news. Unfortunately a good number of these failed to succeed and were put off investing for life. From the successful investors we know they have developed a strong set of rules and stuck by them, this article highlights some of these.

How you get your own head around things will be up to you, but here are some useful rules that work for our friends.

Firstly, if you are going to be trading with either borrowed money or your last few pounds, forget it! Desperate people do desperate things and this is not a place for them. The money you are trading with has to be spare, if you lost half of it there would be no problem. If you start like this there is significantly less pressure.

Secondly, if you have never traded before, forget it! We make our money from the markets from people that are not so good with theirs. You should be reasonably experienced before considering going full time.

Thirdly, you need to have realistic targets. Some of our friends have a $1 stock move a day target, others less. Personally with my spread betting account I look for 20 points, once I have achieved this I might just finish for the day, whatever, once I have made it I will not give it back. The good thing about looking at it as just a number of points is that it takes away the emotion of pounds so if you have £1, $10, £100 or £1000 on a point, you are still targeting points movement.

A good strategy Alan Rich uses is to have 5 positions to work on. This spreads your risk plus takes the emotion out of having all your eggs in one basket.

Close your positions before the market closes. This ensures you sleep well at night and safeguards you from potential huge gaps pre-market when there are more buy or sell orders than there are takers. Whilst you might think you would miss out on such a good potential move in the direction you are trading, the odds may be against you and leave you with a game of catch up for the day. You can always re-enter the position the next day. If your target was to make £100 and you start off £50 down then you may not be in such a good frame of mind.

You may not always hit your target. If you find yourself in one bad position after the other it might be time for a break. Take one, then reassess your positions that you have been in with emphasis on the reason you entered each one. If you stick by the rules of money management it really does not matter, as your winners will out strip any losers.

MONEY MANAGEMENT

We often talk about money management within this newsletter but as it is such an important element to trading I will run over it again.

Firstly you should never be risking more than 10% of your entire trading capital on any one trade, thus if you have £5000 your maximum purchase would be £500.

Next with that £500 worth of stock you should only be risking 1% of your entire trading capital in any one position. Thus 1% of £5000 is £50. Most traders will use margin or other leveraged trading methods as discussed below, so you should be aware that a quick move in the wrong direction could soon take out your stops.

POSITION MANAGEMENT

Once into a position, good management is where the money is made. Stops are essential even if they are held just in your head. Once you have set your stop, it must be held, there is little sense in relaxing it, as you believe it is about to bounce back. If you genuinely believe this is going to be the case, simply close the existing position and re-enter it when it moves back in the right direction. Once in a position that is moving in the right direction move the stops up a bit at a time. It is so frustrating if you start giving it back. If you get closed out remember you can always move back in when it moves back in your expected direction. Let the move ride as long as you can, moving the stop with it. The only time you should close it is if it hits your stop or it is the end of the day. Whilst you may miss out on some more profit, if you leave the position open over night you could lose all of the profit you made the previous day. You can re-enter a position if you believe there is further gains to be made.

If using physical stops once you have moved them into a profitable position, leave it alone, staring at the screen makes you eyes go funny! I know of at least one investor that will go and watch Coronation Street whilst trading the Nasdaq. Whilst there is no need for such extremes, a few minutes concentrating on something else is often a good move. Most good trading platforms and charting software provides alerts, set these and leave it.

INVESTMENT METHODS

Most day traders use some form of leverage. These range from straightforward margin accounts to contracts for difference and for some spread betting. Options can be used but are more suited to being held for longer periods. With most straight forward brokers you will get at least 50% margin on stocks although some will allow you up to 90% subject to your funds. With CFDs you normally have 90% leverage. If you have sufficient funds and are happy trading the Nasdaq, you can do so straight on the level 2 screen cutting out the broker.

INVESTMENT INSTRUMENTS

The key criterion for an investment instrument for intraday trading is volatility and volume. Subject to your trading method you would be looking for the instrument to have a sufficient amount of daily price movement, as obviously this is where you make your money. Volume is also essential, as you want to be able to buy and sell with the smallest spread between the bid and ask as possible.

The general rule of thumb for people trading on the US stock market is to select those where the price is above $40, the best stocks are around the $90 mark. The reason for this is simple, you only need a relatively small percentage move for the stock to move up or down by a sufficient margin for you to take a good profit. For example if a $90 stock moves just 2% in a day that is $1.80, for a $20 stock to move the same amount in price you would need to see a 9% increase. If you are trading in the UK the same applies, companies such as Vodafone and Antofagasta (or ‘Aunties fag and pasta’ as I heard it called recently) both have good day trade potential.

Aside of individual stocks there are numerous indices that can be traded in a number of ways. Alternatives to stocks are the commodity and foreign exchange markets. The pound/dollar (also known as the cable) has some fantastic intraday moves.

It is worth selecting a group and getting used to them. Trading the cable in the morning and the US markets in the afternoon keeps many a day trader busy.

WHAT DO YOU NEED?

Well aside of some investment funds you need a reasonable computer or laptop with a internet connection. Trying to intraday trade from the Bloomberg TV would be like starting a 100 metre sprint with a smoke signal. You need a good trading platform, most brokerages offer reasonable online facilities. If your using dial-up rather than broadband you may consider using a platform that you actually download onto your PC, this means only the data feed will be sent up-line.

Good charting software is essential, if it comes with the trading platform, make sure that it is real-time and you can add any technical indicators that you wish to use. For the US markets Wordon Brothers TCNet offers great value and reasonable data together with a full range of standard
and proprietary indicators. A good source of up to the minute news is also important.

Although not completely necessary, having at least one additional screen is useful particularly when you’re opening trades and moving stops.

SUMMARY

It seems a romantic idea to just roll out of bed in the morning in your own time, have a relaxing breakfast and prepare yourself for another busy hour or two in the office. Make your target, turn off your screens and go sip a gin and tonic in the conservatory. It may not be quite like that though, when starting out more time would be needed and if you want to capitalise on some of the biggest moves of the day in the UK market you better get up at 07.00 hrs and get down and read the pre market news. Ok if your trading those lovely liquid US markets you can lay in a bit longer, but you can soon find yourself in front of the screen until 21.00 hrs or later.

If you are considering trading full time, you might start by trading in the US markets, as these are open until 21.00 hrs.

If you can get to grips with it, follow your rules and move money into other safer asset classes as you progress, you can live very comfortably and produce a living and quality of life many dream of. Some words of caution though, forget the rules and you will be soon forgetting the dream.

Darren Winters