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.
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.
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
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
posted by Darren Winters at 4:17 PM
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