My Day Trading Philosophy

Tuesday, June 06, 2006

My Day Trading Philosophy

My Day Trading Philosophy

When I day trade (which I haven’t been doing while swamped with work on my Master’s Degree) I like to set a simple goal for the day. This goal can be simply to make the best profits I can and sell out by the time the markets close, or make a predetermined amount for the day. Usually I shoot for $100 a day, this is enough where if I have to take small commission losses on non-movers I can still call it a good day. My actual long term goal has always been $250 a day, but my capital has always remained too small for that to be a practical expectation.The real secret to day trading if you ask me is to get enough shares that small moves are real money without getting all your eggs in one basket. This is what originally got me into penny stocks.

Here’s what I mean. If you own 100 shares of a stock that moves one cent, you make 100 pennies profit, or $1. If you own 1000 shares that one cent price change is worth $10, if you own 5000 shares $50, 10000 shares $100 and so on. Obviously if you are trying to make small daily profits you are better off with 5000 shares. With my broker $20 of that $50 is going to go to commissions, and I made $30 profit. That’s a bad day, and doesn’t even sound like it’s worthwhile, but a penny move is just an example. I’m actually looking for a 5 cent move. A stock that moves a nickel a share when you own 5000 shares grosses you $250, and at my commissions nets $230, that’s not a bad day.

The problem is that to buy 5000 shares with $5000 I need stocks trading below $1. To be diversified, so that if one moves and the other doesn’t I can still make money I need stocks trading below 50 cents a share. At $.50 a nickel move is a 10% move. That happens more often than you might think, but not every day. If I had $100,000 for day trading, making $250 per day would be a snap, providing I stayed away from big losers. The way I try to avoid losers is strong fundamental analysis. My ideal stock has shown consistent profits for the last eight quarters. Is trading with a P/E below 5, and looks to me on the chart like it has upside potential. For Day Trading, momentum can be way more important than fundamentals, but fundamentals are the best guard against losses.

The momentum trading or "Mo" game is way different than the fundamentals game. In the Mo game you just want it to move right now today, get in after it starts up, and get out before it can turn. For Mo plays fundamentals don’t men squat. A lot of people day trade this way, but you never know when that stock which exploded on the opening bell will decide to go the other way. Make Mo plays with caution, and only when you expect to sit and watch them closely would be my advice.

The last and probably best way to play stocks for day trading is what I call range trading for lack of a better term. This is for stocks where when you look at the chart it looks like ten “W’s” back to back (WWWWWWWWW). This is usually a two or three day play, but you can try it over and over as long as the chart continues to look like that you will make a fortune by buying the valleys and selling the peaks.

Everybody has their favorite plays, and those are by no means all of the possibilities, just the ones I have experience with. Good Day Trading is like a ballet or a Degas painting with the girl balanced on a tiny pointed toe, or if that sounds to sissified, maybe it’s more like a trapeze act where the beautiful woman is flying through the air and the trapeze guy having just done a double back flip swings in to catch her at just the right moment. To day trade effectively you need to have streaming quotes (I use a Medved freeware program). Anyway, you have to be confident enough to get up on that trapeze with no net and do your thing.The idea is to have a goal, and buy a number of shares that makes that goal possible without too big of a move, and to sell out when you’ve made your goal. It’s very tempting to hold one that’s moving past your goal, and sometimes that is the right play, but it can turn on you. As a day trader it’s best to get your goal and get ready for tomorrow unless you really feel like holding on is not going to hurt your chances of making your daily goal.

A few other tips, trade all or none (AON) to prevent extra commissions, buy even 100’s (or better yet 1000’s) of shares so your broker doesn’t have to find a way to fill in the odd lots and stall your trade. Do your homework the night before after market close, maybe get alerts (I don’t use them) so you know when things happen. Then place your order, surf the web, read blogs, or do whatever you like to do on the web, but keep your tracking open and check it regularly. One alternative if you are the confident type is to put in a limit sell order at your price right after you buy and forget it for the day, but that takes nerve, confidence, and isn’t half as fun as watching and predicting what your stocks will do. OH, and this one is too important to leave for later. Average Daily volume has to me at least 8 or 9 times what you are going to buy and that’s cutting it close., 10 or 15 times is better. Happy trading.

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