This week I decided to do something a little different for my blog post, and solicited questions from you, the readers of this blog, for me to answer. I was very pleased with the response. Let’s jump right into it!
Q: Any opinion on the article [Here’s the Proof Day Trading is DEAD recently seen on Wall Street Cheat Sheet and re-posted on ZeroHedge]?
A: Jen, I am glad you posted that link so I can get a chance to comment. First of all, I am living proof that that statement is incorrect. Let me critique each point made in the article.
- The Best in the Business Exited the Business: The author highlights the Schonfeld letter to its traders, calling it evidence that the ‘best in the business’ have moved away from day trading. Actually, the letter from Schonfeld says the exact opposite. From the Schonfeld letter: “Sadly, however, we are re-thinking the notion that less skilled and less successful traders can be here forever without producing sufficiently for themselves and the firm.” I agree with that statement, that less skilled traders should probably move on from the business in its current state. Schonfeld was not saying that the company is leaving the day trading space, but that there was no room for mediocrity in its ranks. Day trading has its ebbs and flows, and right now, in general terms, it has been more difficult for less skilled individuals to make consistent money. This will lead to a retrenchment within the industry, and the traders that survive will be those that adapt and become more sophisticated.
- The Insurmountable Challenges: In regards to computer trading, black boxes have made day trading more difficult, especially for those strategies relying on the level 2. I only use the level 2 to identify areas of concentration I can potentially get out of a trade that goes against me, and that has continued to work for me. In terms of firms being exposed to a greater deal of risk due to SEC v. Tuco, all I will is that, more than ever, firms need to be diligent. You need to educate your traders in regards to risk management and get rid of delusions of grandeur that plague new traders’ minds. As a firm you need to exercise tighter risk controls. Poor market structure is an issue, but that is an issue for everyone. You could hold a company for a year and watch the price appreciate, and then watch all those gains get washed out due to a flash crash, for example.
- The Scary Shape-Shifting from Trading Firms to Training Firms: I think that when you explore getting a formal trading or market education, you need to look closely at what you’re buying. The day trading industry is full of shady characters who make unrealistic promises of instant success and easy profits. That is your first red flag. Someone who over promises success or guarantees anything should not be taken seriously. At this point, almost all firms out there that make those promises or operate under that false premise are out of business, plain and simple.
- Success as a day trader is not probable and it is not easy. It takes a certain kind of person to have success in the stock market, and even then it takes a great deal of time to develop the ‘feel’ that drives the success of the top traders in the industry. At T3, I periodically teach a trading course along with Steve Levay that I wholeheartedly believe in. That being said, it is not for everyone; our style of trading is not for everyone. We try to teach all of the concepts that make us successful and consistent in the markets, and then try to guide students through the execution process. Trading is a performance skill, and you learn by doing. Nothing happens quickly, if at all, and you have to be realistic with yourself. ‘Day-trading’ has a certain connotation that is unfair; there are still certain intraday strategies that work.
- The Industry and Its Future: My general response to the questions raised in this section is that you have to be in the right stocks at the right time. You can’t come in and trade AAPL, GOOG, BIDU and GS everyday and hope to gain any sort of edge. You have to do your homework, find emerging sectors, stocks with news that drives volatility, and look for opportunities, based on technical analysis, to jump on board those stocks early in keeping with the prevailing trend.
- Speed Trading and Order Flow: Pure speed trading, certainly, is dead. That would have been a more accurate article. Due to computers, spreads have tightened and it is no longer feasible to try and capture them. Tell us something we don’t know.
- Order-Flow Traders: In the same vein, strategies based completely on order flow and the level 2 box no longer work because computers are better than you at your own game. They are in and out of trades in a shorter time frame than it takes the synapses in your eye to communicate what you see to your brain. Thanks for the insights, groundbreaking stuff again. Next.
- Relative Strength/Weakness: I agree, the cave-man style use of relative strength/weakness principles does not work. Computers have erased any ‘lag’ time that existed. The only way I look at stocks in the same sector as another is based on volatility and volume. Generally, if a solar stock, for example, sees a volume spike, others in the sector will see more action, too. We recently found REE after noticing MCP in the rare earth space, and while we did not trade them off each other in a primitive sense, we traded each alone using momentum and technical principles.
- Intermarket Price Discrepancies: Same idea, don’t try to do something that computers are better than you at doing, which is exploiting short term ‘inefficiencies’. The markets are manipulated by computers, don’t fall victim to that manipulation. Trade stocks where you have an edge, and use good money management to hold onto profits when they come.
- Technical Analysis: I’m glad the author at least acknowledges technical analysis as the “last man standing” because it will always have a place in the markets, in the same way that psychology will always have its place it medicine. TA is based on the effects on price of human emotion, so as long as humans still have a place in the market it should still be a part of any investment strategy. And if humans no longer have any place in the market, then every type of investing is dead; the markets could be utter, random chaos. That is not to say you buy every bull flag or short every overbought reading. TA is a timing mechanism, and a way to identify stocks that will have heightened volatility and, thus, opportunity to make money intraday. I always trade with the overall trend, and use technical analysis to quantify risk. TA is not a be-all end-all, but nor is any strategy. It is simply another tool, and it will always have significance because of human nature.
Call me a small timer, call me a dying breed, but I am alive and well. To say day trading is dead would be to deny my existence and my success. I have had my best month in a while, and it is because I have focused on trading the rare earth stocks, which fits the bill in terms of the types of stocks that still allow me to apply my skill-set. This article was a gross generalization, and the author chose to have a sensational title so he could get picked up on sensationalist blogs like ZeroHedge. Effective blogging PR, mind you, but ineffective analysis. The truth is that day trading is becoming more difficult, and it takes a higher degree of education and skill to succeed. I don’t think anybody can deny that. It is the same thing as saying ‘buy and hold is dead’ because the DOW is flat over the last decade, a premise that fails to take into account the idea of being a prudent stock picker and trend analyst.
Q: Rare Earth [stocks] have obviously been hot. What do you use to scan for these [type of] stocks? It seems like you execute strictly on feel, or is there a methodology that you use to get in and out of your positions? Different than tiering in and out, but things on the chart or in the level 2?
A: I use simple filters like volume and 52-week high filters, and after stocks make 52 weeks highs, for example, I keep them on the radar. I don’t necessarily trade it through the highs the first time around, but generally stocks making new highs will have a period of heightened volatility. Also, being a part of a community helps a lot too. Thousands of eyes are better than two. Feel is a word that gets thrown around like it is something you are born with, but in reality you gain feel through experience and repetition. Malcolm Gladwell, in the book Outliers, estimates it takes 10,000 hours of practice to master a skill. In terms of methodology, I use a combination of the thing you mentioned. I look at charts to get ideas, use a tier system to limit risk and maximize gains for the momentum move, and use the level two as simply a supplementary tool. It is my rules and discipline that ultimately separate me from the pack.
Q: How do you blow out of size when you are taking a loss? 5-10k shares on these little guys seems like you drive the price down 50 cents sometimes when blowing it out, which skews the risk reward. What is your winning % on a per trade basis? Thanks! Mike can you explain your execution in detail, meaning how you get in and out of these stocks that often have 5-10 cent spreads as I have noticed you usually trade things with spreads: are you using dark pools are you adding or removing liquidity? I always seem to eat wide spreads and end up getting crushed.
A: I only get heavy when I see my out prior to entering the trade. For example, if I take 5k shares off the offer at 50 cents, I am only doing that if there is stock below me. That is where I use the level 2. I don’t keep track of winning trade percentage because that is not my focus. Money is my focus, and I focus on my P&L. If I see that start to slip, I stop.
Q: Mike, I like the fact that you are a very consistent trader, and this is something I am striving for as my primary trading goal. Do you think that this is possible as a swing trader, or do you feel that your consistency lies in the fact that you are a short term momentum trader?
A: I do believe that over time, swing trading can be profitable. However, I have found that for me personally, the shorter time frames are easier for being consistent. Especially in times of economic uncertainty when there is significant headline risk, it is dangerous to take stocks overnight. While moves are often happening overnight, it is a crapshoot in my opinion. When you are day-trading, you are avoiding excessive risk. On a psychological level, too, it is easier to start at zero than to have to worry about overnight losses. It’s all about finding what works for you and aligning a strategy with your strengths.
Q: Mike, can you please elaborate a little on your trading strategy? Previously you mentioned that you were looking for dimes in your trades, but you didn’t give details on what you are looking for. Are you a trend trader? Are you a momentum player? Are you a fader of moves?
A: I am a momentum trader. When I say that, I mean I only get in positions when I feel a strong move is imminent; there must be a compelling reason for me to be involved in a trade. I look at stocks with high volatility, or one that has a lot of eyes on them for any number of reasons, whether it be recent or upcoming earnings, news, important levels, etc.. I almost always trade in the direction of the trend. I find good charts set-ups or stocks in play, look for areas where momentum comes in, and trade in the direction of the trend based on a catalyst. The reason you may have heard me say I take dimes is that I am always piecing in and out of trades, massaging trades. Whenever I have a winner, my goal is to keep it a winner. If I have 2,000 shares and take 1,000 of it for a 10 cent profit, I now have 20 cents of room to break even. Some traders have great ideas that work out, but they lose money on the trade because they add and sell in the wrong places.
Q: Can you share your inputs for how you scan the little guys? What is the best way to trade them? I have a very hard time trading smaller stocks. Thanks.
A: For little guys, again, I just look for extreme volume spikes and 52-week high set ups. Often, I find little guys because I know their big brother. I look for secondary stocks in sectors, which are often easier for me to trade with my style. FSLR, for example, is not a trade I am comfortable with, but, say, LDK is more manageable.
Q: Is the upcoming election influencing your trades?
A: On a micro level, it is not something I consider. On long term trades, of course it is something on my mind. I think right now in general, due to the election and upcoming Fed announcement, this is a period of heightened risk in the market for swing traders. And as you all know, I am risk averse and like to be in control. None of us know what the market is going to do, I do not have a bias or opinion when I trade. I simply track price, look for high percentage trades and attack scenarios with good risk-reward parameters.
Q: How do I pick up women in bars? Saying I am a day trader isn’t working.
A: First of all, I laughed out loud at the comments on this post: “You need patience and discipline and with practice you’ll see the best setups and be able to execute on them. Losses are inevitable but don’t get emotional….reply: ya i need to stop fading the hottest stock/chick and blowing up my pnl/wallet”. Well done, guys, well done indeed. Before I met my lovely girlfriend through my first triathlon training (something I recommend you all do), I was a radiologist, a kinesthesiologist and, every time fleet week arrived in New York, I was a sailor. If you want to pick up woman in NYC, go out dressed up as a sailor during fleet week. In all seriousness, though, getting girls, like trading, like anything in life, is all about confidence and a can-do attitude.
Thank you for all of your questions, I was so pleased to be able to interact with my readers (and get confirmation that people actually do read my stuff). I hope to do something like this just about every month. Thank you also to John Darsie, our outstanding blog editor, who helped me get my many thoughts down clearly on paper. Have a great day and weekend!
