October 20th, 2020

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New to Trading

What is "day trading", what types of trading are there?

Day Trading is the act of trading to make a profit daily. The aim of the trader is to open and close a position in an asset within the same trading day. This is known as "active trading" or more commonly "day trading". Day trading is just one of many styles of trading. Swing trading is the act of trading to make a profit over a little more time. Typically swing traders hold positions between one and four days. This allows a trader to speculate a price move within a week, but is not exact on what day, so will open a position and let it play out over a few days. A personal favourite, the buy and hold strategy which is the act of buying, and well holding for an undertermined amount of time. Typically for me this is one to three months, but this trading strategy can carry on for years or decades. The aim of the trader is to find a healthy company and make profit from long term growth ignoring short term price movements of bullish or bearish markets. 

Why do people day trade or swing trade?

Day trading for most people is a good way to take advantages on volatile moves in the market while at the same time having a diversified portfolio in the markets to spread risk. There are many good reasons for day trading. The number one reason would be to avoid holding a position overnight which may be at risk to post market news, which will effectively be used to determine an open price the next day. If you are holding and negative news comes out, you will not be able to sell your position until the market open the following day which has higher risk than 'in market' news where you can exit quickly as the market is open for trading. Some traders day trade to avoid overnight fees on certain products. Another advantage is that in one month the price may be $1 higher on an asset but it may have moved $6 up and down within that range. For example, entering a trade at $10 and holding for one month might lead to the equity being $11 so you take your $1 profit. However, a day trader may have traded the equity multiple times within that range getting in at $10 and out at $10.60, getting in again when the price comes back down to $10.10 and getting out at $10.70 and so on. 

How much should I use to trade the markets if all my monies are currently at a major bank and I do not want to risk everything?

Depending on how much you want to return and at what risk level it will vary. However we shall look at one of the lower risk approaches. Let's say you have $100,000 in your bank account which is earning 4% a year. After one year you will have $104,000. Not bad. But if you wanted to increase this you could trade $20,000 while keeping $80,000 in the bank. After one year in your bank you will have $83,200. If you run a low risk strategy to return 10% a year on your $20,000 you will have a return of $2000. $83,200 + $22,000 gives us $105,200 which is $1200 better than what your bank returns and that is a adopting a low risk strategy. And if you trade on a margin of x 4 then you would return $8,000 not $2000. Plus the $3,200 from you bank that's $11,200. $7,200 is better return than you would get from the bank. At the Daily Trader we will give brief you on this and question your goals and give you a report on what is the best method for you to approach depending on what your goals are.

What is the optimal percentage for any position?

  • For over 100,000, the maximum per position is between 5 to 10% with a median of 7%. Going over 10% no matter how good it looks increases your risk dramatically.
  • Between 50,000 to 100,000, the maximum is still 10% but the median increases to 10%. In other words, most trades approaches the 10% level quite fast.
  • Between 20,000 to 50,000, you have to accept greater risk if you are to trade aggressively. You will try to have at least 50 to 100 shares of any trade. Fifty shares over $100.00, seventy-five shares between $50.00 and $100.00, and 100 shares under $50.00. This way, you could have two to three positions at any one time. Try to keep them in multiples of 25.
  • Margin accounts*, (maximum at 50%), and deep in the money options could augment the percentages at this level and the maximum per position is around 20%. Deep in the money options, with little time value, is actually a proxy for the underlying stock.
  • Under 20,000, you are basically at ground zero and would be augmented with the use of margin, (again maximum at 50% and not 70%), and also deep in the money options. The risks are much greater here due to large percentages per position but if the margin is managed correctly, the portfolio will grow accordingly. At $20,000 we would max out any one position at 35% while at $10,000, our max would be at 50%. An example of $10,000 in a cash account would let one buy about 50 shares of AOL and also 50 HWP or 100 shares of AOL and 100 HWP in a margin account, or any possibilities with the combination of options. The most serious risk with options is that you can't get stopped out properly and an additional 25% loss of the option price is possible from any option stop loss due to the "bid and ask" spread. It is due to the fact that deep-in-the-money options are at times quite illiquid.

As you can see, the risks are a lot higher at lower capital levels but as long as you stick to these parameters, your chances of success have increased.

*Margin is the borrowed money from the brokerage firm you deal with. A quick definition is when you buy a $10 stock on margin, you have to put up half, (50% margin), or $5. If the stock falls to $6, you have to put up half of this unrealized loss which is half of $4 or $2. This brings your account to $7, (original $5 plus this additional $2), and the value of your stock is now at $6. If this stock subsequently drops to "0", you would have to pay again for half of this last $6 loss, or another $3. This brings your account to $10, (original $5, plus half of the first loss of $2, plus half of the final decline from $6 to zero which is $3), with the stock now at zero. Now you have fully paid for a stock and the brokerage house has received all their money. This is how margin works so if you are wrong, you will have to put up half of the loss. Or what is known as a "margin call".

An option is essentially a small percentage payment to use someone else's stock with a right to buy or sell within a limited time frame. The analogy is like leasing a car for a couple of months. You pay a small monthly cost, use the car all you want, and then decide whether you will buy the car or give it back. An example with options would be that it cost $1200 to own 100 shares of IBM for four months at a price of 125. The stock is currently around 125 and any price movement above this price is yours on a hundred shares, (instead of investing $12,500 for a hundred shares, ($125 X 100 shares). This is known as a "call option".

So now lets say for the purpose of an example, that you only have $10,000 and decide to trade on margin at 50%; which would allow you to trade a $20,000 market portfolio. Assume you think that Cisco, Microsoft and Google are ready to move. You would then buy 1/3 in Cisco, 1/3 in Microsoft and 1/3 in Google and that would bring the totals to around $20,000. This would be aggressive trading. You are trading 100% of your portfolio while trying to make a minimum of 10% on each trade within a couple of hours to several days. If each stock rose 10%, your immediately return is 10% within this time frame regardless of how many shares you own. The problem most people have is to put all the money on the least expensive stock, or using the previous example, put everything on Cisco. This only works in strong bull markets but the right way to do it is to have at least $5000 in each position and be a touch diversified even though they are small positions or "odd lots." Otherwise it is a "one trick pony" and if doesn't go your way during the day, all is lost. Always remember that opportunities are present every day but capital isn't if you have lost it. So no matter the amount, capital preservation is paramount along with risk management. One may lose 50% of an investment but just to make the same losses back, that investment would have to gain 100%; and how many investments have made you 100%?

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Daily Scalp Trading, Weekly Swing Trading or Postion Trading with various trading models. Day trading ideas are issued live in our commentary section, with watchlists being released weekly for swings trades, and the monthly macro report brings up trade ideas which are intended to be hedged and held over a few months.

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