Thursday, August 25, 2011

Simple Steps to Profiting from Day Trading

If you have received life coaching from me then you will recognize much of what I have to say here. Today I am going to give a brief lesson in profiting from Day Trading.

The recent market volatility as measured by the VIX is the darling child of the Day Traders. If you are a learned student of Psychology inclusive of the sub-categories such as group think, extrinsic motivation and the other factors that relate to fear and greed then you are well on your way.

It helps to have a cursory knowledge of economics but alacrity in this field is not mandated. I am a psychology based Day Trader. That is I base my purchases or sales of stock as to the relationship between the price compared to actual economic conditions and overwhelming market psychology.

More simply stated, when the market is declining because traders fear that bad economic conditions are on the horizon and sell -- I buy. Conversely, when positive news bearing on the anticipated economic condition and potential profitability is released and traders feel they better start buying now before missing the next extended leg up -- I sell.

It's the old adage -- buy low, sell high.

Here's another adage -- You know how to get a million dollars Day Trading? Start with two million.

It is true; most Day Traders fail. The primary reason is that they respond to the market emotionally. That is their downfall. I am not saying be a sociopath but through my life coaching I have come to the realization that a significant portion of the troubles that befall most people are based upon an uncontrolled or adverse emotional reaction to an uncontrollable situation or one they perceive as such.

That emotion that I bring to your attention in this context is greed. So here is where I introduce you to the distribution plan that keeps greed at bay and maintains your ability to take advantage of opportunities.

Market rules require that Day Traders have an account balance of at least $25,000. However, to make it worthy of your time I suggest an account balance of $100,000 or more.

The first thing to do is pick your trading vessel. That is the company, fund or index that you will be trading. You want to ensure that yours is a liquid trading asset which is simply saying that it is traded regularly and in high volume.

I trade SSO which is a leveraged ETF [Exchange Traded Fund] that tracks the S&P 500. It is designed to move at twice the rate of the S&P 500. If the S&P 500 moves one percent then SSO will move two percent.

The initial trade

You first trade is going to be applying 10% of your cash balance towards purchasing your trading vessel. It is likely that you are choosing to start Day Trading following a market sell-off. So, don't try to time it, jump right in and buy.

So if you had done this yesterday then you would have purchased SSO around $40 per share. SSO has a 52 week range of around $33 as a low and $55 as a high. You are in the low end of the range, a good place to start.

I have no formula for selling but I do for buying to limit downside risk and maintain a cash balance for buying opportunities. Having a set buying schedule and a plan for holding shares that have lost value will ameliorate the losses and keep you from dumping at the moments immediately preceding a rise in value.

So here is the buying schedule. I can only accumulate shares upon a 5% drop until I have spent half my funds, then the next 30 percent of funds on incremental 10% drops. The final 20 percent is applied to a 25% drop. Additionally I always keep a limit buy order open for the next step down plus one at a 25% discount just in case we get a flash crash again. If more people did this that flash crash would have never happened.

Here is this buying schedule with $100,000 trading SSO starting at $40 per share.

$40.00 - Buy 250 shares = $10,000
$38.00 - Buy 263 shares = $10,000
$36.10 - Buy 277 shares = $10,000
$34.30 - Buy 291 shares = $10,000
$32.58 - Buy 307 shares = $10,000

then we move on to 10% drops

$29.32 - Buy 341 shares = $10,000
$26.39 - Buy 379 shares = $10,000
$23.75 - Buy 421 shares = $10,000

then the remaining 20% is set for bottom fishing at a drop of 25 percent

$17.81 - Buy 1123 shares = $20,000

This is the worst case scenario. Hopefully you don't buy in just as the market is starting a free fall into the abyss but if you do this plan limits your downside and provides great upside potential. You would now own 3652 shares at an average price of $28.38. That's about half of its 52 week high which I am confident will be achieved again. If it takes 10 years to achieve the previous high again that would still be a 7% annual return on your money plus the dividend.

However, In a market driven by volatility that is unlikely to happen. What I hope for is a roller-coaster pattern. Ups and downs over a period of days or in one day. So let's examine my trades for the past week which were quite modest as I have been very busy and did not have time to sit around watching the market and trading. The prices shown include the $7 transaction fee applied at both the purchase and selling points.

18-08-2011 - BOT [250] $40.38 = $10,102 - and the market kept going down
19-08-2011 - BOT [275] $37.70 = $10,374
22-08-2011 - SELL [275] $38.80 = $10,663 profit of $289
22-08-2011 - BOT [275] $37.85 = $10,416
23-08-2011 - SELL [275] $38.54 = $10,591 - profit of $175
24-08-2011 - SELL [250] $41.01 = $10, 245 - profit $143
24-08-2011 - BOT [250] $40.00 = $10,007
24-08-2011 - SELL [250] $41.12 = $10,293 - profit $286

That is a weekly profit of $893 based upon just a few transactions while dedicating less than an hour a day to this. Not a bad hourly rate.

As for selling I have no formula other than to sell for a profit. I make my sell decisions based upon momentum only. When I see the index moving higher than I feel is justified I sell. I usually aim for not less than a 1% move up in the index from my buying point.

If you have the self-control to not get caught up in the momentum of the herd Day Trading is a great vehicle to make money with little risk to your capital. Unfortunately for most people they lack the discipline to make wise decisions that are in their best interest.

Emotional decision making in parenting, business/finance and personal well-being exacerbates already existing difficulties oft times leading to a tumultuous lifestyle. If you need assistance with instilling discipline in yourself and achieving your goals please visit my website and contact my scheduler to make an appointment to meet with me.

If you would like to follow my activities more closely then send a friend request to my Political FaceBook page.

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©2011 Stuart Showalter, LLC. Permission is granted to all non-commercial entities to reproduce this article in it's entirety with credit given.


Thomaschrishan said...

I think thats a really simple question to answer. This is usually a lack of discipline and a strong day's trading rules. Sometimes it is under-capitalization and fear.

Day Trading

Trading said...

Day trading strategy of the trader enables them not to worry about the tomorrows market. Proper knowledge of the market is quite significant to speculate for day traders and also need to be very well versed in performing a respective job properly. Thanks a lot.

Day Trade