Historically the bull-bear cycle lasts about 4 years, with the bull market lasting for about 3 years while the Bear portion lasts for nearly 1 year. Stocks have trended higher throughout the stock market’s history so the odds are with you over time if you trade long as opposed to short selling. These statistics favor being long most of the time and sitting out some market periods that are not the ideal conditions for being long. Those less than ideal conditions also provide another opportunity besides being in cash to get short the market and try to profit from falling stock prices. Selling short in a bear market can be very profitable but it is a much tougher road than being long a bull market. Tonight we’ll discuss why that is.
Many novice traders and even more experienced traders have trouble surviving bear markets. Most of the time, it is because they have a false sense of security as they simply believe that profits will continue even in a major decline as long as they just flip their long strategies into reverse. It’s not that easy folks. Bear markets are much tougher to trade through than bull markets. This is due to the emotional roller coaster of fear and greed that routinely accelerates when stocks are in downtrends. Trend-following tactics are more difficult in downtrends simply because of the sudden bear market rallies that can be quite violent at times. These spikes will often create short squeezes that will induce heavy losses for those who take new short positions at the wrong time.
Bear markets make it much harder to turn short-term profits than typical bull markets. We will actively short stocks in bear markets but understand that during these periods, it is more difficult to turn consistent profits so it is not our desired way to trade. We think it is much more important to prepare for the bear market and the ensuing bull phase that follows so we can survive and profit while waiting for better conditions. Please don’t underestimate the importance of preparing to survive the next bear market so that you are ready for the next bull market.
One reason bear markets are harder to trade is because volume drops sharply through most phases of a broad bear market recession. This induces liquidity issues and dangerous trading conditions. Spreads will widen and slippage will increase for both the entries and exits. Short sale opportunities will vanish as inventories for stocks to borrow dry up at many brokerage firms. The best stocks to short will not have any shares available to borrow. This will be particularly frustrating as the stock you wanted to short continues to fall in a downward spiral and you can’t get in position to profit from it. Volume dries up as fund managers increase cash allocations to satisfy redemption requests and will not put new money to work from any inflows of cash due to fear of stocks dropping further. And many novice traders close up shop due to a lack of interest in the markets during these bear market periods.
Another reason why trading during bear markets can be very difficult is because during these times, actual price declines often take up only a small percentage of the time that the downtrend conditions exist. Just like individual stocks, the indices fall faster than they rise and the selling panic periods tend to be sharp and end quickly. The rest of the time the market meanders back and forth on low volume while trying to heal. Also, the typical bear market doesn't end in the high volume capitulation that most people believe will happen. These capitulation selloffs do happen in bull market corrections but rarely end bear markets. Instead, bear markets end slowly as value investors start to accumulated positions while a market bottom forms. Most other participants will have little interest in stocks because the long basing period doesn’t excite them into entering the market again.
Our strategy for trading a bear market will be one of mostly cash with a combination of short selling and taking some long positions during countertrend rallies. We will act defensively through cyclical bear market conditions unless the intraday charts signal opportunities. Rallies and sell offs do offer excellent short-term setups for trading profits. One thing that we will have to do is tighten our holding time because the market environment will change drastically. We will try to anticipate where short covering rallies will take place and try to get long just before the short squeezes erupt. We will use the short seller's panic to turn a profit, and then attempt to find resistance levels where natural reversals may take place. At this time, we can flip back to the short side for resumption of the downtrend.
As a bear market evolves, follow the daily charts for key turning points and act defensively at all times. Wait for favorable risk/reward opportunities and avoid being whipsawed by the frequent swings of investor/trader’s hopes and fears. All the while we are on defense, we will be looking for accumulation and renewed interest while the market is in the long healing process of forming a base. These basing periods offer excellent long-term potential for those with precise market timing. But remember, entry at these times will require execution against market sentiment. In other words, you will be buying when nobody else wants anything to do with stocks. That is always tough to do but the potential reward if you time it right can be astronomical.
David Colletti
Founder
StockTradersHQ.com
The Headquarters for Serious Traders.
Copyright © 2008 StockTradersHQ.com
Saturday, June 28, 2008
Friday, June 20, 2008
Maximize Your Day Trading Capital for Optimal Returns
How much capital will I need to start day trading for a living?” This is a very common question that we often receive and it is somewhat difficult to answer. That is because each individual is different and has a different set of goals. Each person’s standard of living could be different and what one individual makes with day trading for a living may not be enough for another. The more money you want or need to make will depend on the amount of capital that you have at risk.
Swing Trade for Percentage, Day Trade for Dollars
The answer is that it is different for each person and it is something you must consider for yourself before you start. We can only give some practical guidelines. I personally feel that you should have enough trading capital to purchase between 500 to 1000 shares of any given stock without having to use margin. When we take a swing trade position at StockTradersHQ, we look for gains in terms of percentage points. However, when I day trade, I am looking for dollars to take out of the market that day. I need a dollar figure because this is my salary for my work. It’s how I make my living so I want to make a certain amount of dollars when I day trade.
The price of the stock I am day trading is critical because I normally buy either 500 or 1000 shares, depending on the price of the stock. Ideally, my target when I take a day trade position is a $1.00 move on the stock. I will let the stock run much more than that if I see the momentum is going to carry it up further. I have had stocks move up 2, 3, 4 dollars or more in a single day trade. If I get the move, I will run a trailing stop behind the price to lock in the profit should the stock reverse and fall back. I use the trailing stop because I want to take advantage of any more upside movement the stock might have the rest of the session. If I were to just sell at the $1.00 target, I am really robbing myself of possible further upside in the stock and limiting my potential profit. Remember, when you are trading 1000 shares at a time, you only need a small move in the stock for a worthwhile profit.
Keep Expectations Realistic
If you trade stocks in the $30 to $60 range, this could mean that you need a minimum of $30,000 to start. 1000 shares of a $30 stock or 500 shares of a $60 stock and so on. This of course would be 100% of your capital in any one position, which is very dangerous. If you want to trade 2 or 3 positions at a time, you would need $60K to $90K to start, assuming that you trade the 500 to 1000 share blocks in this $30 - $60 price range and you do not use your margin.
If you are using margin, then you could buy more shares or pick higher priced stocks. If your day trading account balance was say $120,000, you could buy 2000 shares of a $20 stock and still have $80,000 left to put to work in 2 or 3 more trades. For example, if you had bought 2000 shares of SOLF on Friday (May 16th) at the opening price of $19.00 and sold at the close, you would have had a one day profit of $7,680. It closed at $22.84 for a $3.84 gain on your trade. $3.84 X 2000 = $7,680. This is just one example and it is not that far fetched to think that you can’t catch these moves because every day there are stocks moving up and there is always a big mover in the market somewhere. We just happened to have had SOLF on our trade Bulletin and in the pre-market update as a stock to watch for a possible day trade.
In this example, we used 2000 shares but you do not need to trade that many shares. Trade what you feel is in your comfort level. Keep in mind, with lesser shares traded, you will need bigger daily moves in the stocks to make a decent living and there are times when stocks just do not move more than $1.00 in a day, especially when the market is suffering from a flat day. Just remember, if you are starting small, keep your expectations realistic. Certainly, someone trading with $30,000 to $50,000 is going to have a much more difficult time generating $1,000 per day than someone using $100,000 or more. Know your limitations with respect to your capital. Keep things in perspective and try not to expect miracles.
In the Big Leagues
When you get into the bigger leagues of day trading, you can then take on (purchase or short) a block or two of a stock, generally defined as 10,000 shares. You can trade 10K shares of a $5.00 stock for only a 10 cent move and you will have profited $1,000 in that trade. Examples of these types of stocks are CPST ($3.48) had a .15 range on Friday and FINL ($6.77) had a .30 range on Friday. You won’t capture the whole move but you can see the potential if you get a decent entry. Remember; never put all your capital in one trade. Only use 25% to 33% of your available day trading capital in each trade.
This is going to require $150,000 to $200,000 or more of trading capital plus some use of margin in limited situations and for a limited time. When you reach this level, it is easy to see how day trading can become quite profitable but also quite risky. A move of a few pennies across 10,000 shares can return quite a bit of money, quite rapidly if you scalp 3 or 4 trades a day in the stock. Just remember it goes both ways; you can quickly lose quite a bit as well. There is no right or wrong answer with regard to how much you need to start. Simply keep your objectives in perspective and be realistic based on the capital in play.
David Colletti
Founder
StockTradersHQ.com
The Headquarters for Serious Stock Traders
Swing Trade for Percentage, Day Trade for Dollars
The answer is that it is different for each person and it is something you must consider for yourself before you start. We can only give some practical guidelines. I personally feel that you should have enough trading capital to purchase between 500 to 1000 shares of any given stock without having to use margin. When we take a swing trade position at StockTradersHQ, we look for gains in terms of percentage points. However, when I day trade, I am looking for dollars to take out of the market that day. I need a dollar figure because this is my salary for my work. It’s how I make my living so I want to make a certain amount of dollars when I day trade.
The price of the stock I am day trading is critical because I normally buy either 500 or 1000 shares, depending on the price of the stock. Ideally, my target when I take a day trade position is a $1.00 move on the stock. I will let the stock run much more than that if I see the momentum is going to carry it up further. I have had stocks move up 2, 3, 4 dollars or more in a single day trade. If I get the move, I will run a trailing stop behind the price to lock in the profit should the stock reverse and fall back. I use the trailing stop because I want to take advantage of any more upside movement the stock might have the rest of the session. If I were to just sell at the $1.00 target, I am really robbing myself of possible further upside in the stock and limiting my potential profit. Remember, when you are trading 1000 shares at a time, you only need a small move in the stock for a worthwhile profit.
Keep Expectations Realistic
If you trade stocks in the $30 to $60 range, this could mean that you need a minimum of $30,000 to start. 1000 shares of a $30 stock or 500 shares of a $60 stock and so on. This of course would be 100% of your capital in any one position, which is very dangerous. If you want to trade 2 or 3 positions at a time, you would need $60K to $90K to start, assuming that you trade the 500 to 1000 share blocks in this $30 - $60 price range and you do not use your margin.
If you are using margin, then you could buy more shares or pick higher priced stocks. If your day trading account balance was say $120,000, you could buy 2000 shares of a $20 stock and still have $80,000 left to put to work in 2 or 3 more trades. For example, if you had bought 2000 shares of SOLF on Friday (May 16th) at the opening price of $19.00 and sold at the close, you would have had a one day profit of $7,680. It closed at $22.84 for a $3.84 gain on your trade. $3.84 X 2000 = $7,680. This is just one example and it is not that far fetched to think that you can’t catch these moves because every day there are stocks moving up and there is always a big mover in the market somewhere. We just happened to have had SOLF on our trade Bulletin and in the pre-market update as a stock to watch for a possible day trade.
In this example, we used 2000 shares but you do not need to trade that many shares. Trade what you feel is in your comfort level. Keep in mind, with lesser shares traded, you will need bigger daily moves in the stocks to make a decent living and there are times when stocks just do not move more than $1.00 in a day, especially when the market is suffering from a flat day. Just remember, if you are starting small, keep your expectations realistic. Certainly, someone trading with $30,000 to $50,000 is going to have a much more difficult time generating $1,000 per day than someone using $100,000 or more. Know your limitations with respect to your capital. Keep things in perspective and try not to expect miracles.
In the Big Leagues
When you get into the bigger leagues of day trading, you can then take on (purchase or short) a block or two of a stock, generally defined as 10,000 shares. You can trade 10K shares of a $5.00 stock for only a 10 cent move and you will have profited $1,000 in that trade. Examples of these types of stocks are CPST ($3.48) had a .15 range on Friday and FINL ($6.77) had a .30 range on Friday. You won’t capture the whole move but you can see the potential if you get a decent entry. Remember; never put all your capital in one trade. Only use 25% to 33% of your available day trading capital in each trade.
This is going to require $150,000 to $200,000 or more of trading capital plus some use of margin in limited situations and for a limited time. When you reach this level, it is easy to see how day trading can become quite profitable but also quite risky. A move of a few pennies across 10,000 shares can return quite a bit of money, quite rapidly if you scalp 3 or 4 trades a day in the stock. Just remember it goes both ways; you can quickly lose quite a bit as well. There is no right or wrong answer with regard to how much you need to start. Simply keep your objectives in perspective and be realistic based on the capital in play.
David Colletti
Founder
StockTradersHQ.com
The Headquarters for Serious Stock Traders
Sunday, June 8, 2008
The Zero Sum Game
If you have read the book “Trading for a Living”, one of the books we recommend (see recommended books in resource section), then you already know about the Zero Sum Game. But for those of you who have not read that book yet, we are going to talk about it tonight. Dr. Elder discusses this in the first chapter of his book. Why? Because it is so important for you to understand this concept. The Zero Sum Game? What is it? Most people on Wall Street would like you to believe trading stocks is a Zero Sum Game, meaning that the winners will win as much as the losers will lose. For every trade made, there is a winner and a loser and the money simply flows between the two traders to equal a Zero sum. This is false. What people fail to realize is that the winners receive LESS than the losers lose because the industry drains the money in the form of commissions and spreads. Trading stocks is a LESS than a Zero Sum Game, meaning money flows out of the market daily and has to be replaced in order for the financial world to survive.
Every day millions of dollars are sucked out of the market and into your broker’s pockets by commissions. Millions of trades are made each day in the stock market. For every stock you buy, someone is selling it to you. The broker not only makes a commission off of you, but he also makes a commission from the seller. So in the same trade, he gets two commissions for one transaction. If you pay an average commission of $10.00 to buy a stock, then that is $20.00 to the broker because the seller just paid the same commission. This is 20 million dollars for every 1 million transactions. Folks, there are more than a million transactions a day in the financial markets.
These are conservative numbers we are talking about. An example of this less than Zero Sum Game is as follows: if you and I were to make a trade, and I buy $1,000 worth of stock from you, I would pay $1010 for the stock and you would only receive $990 in return. $20.00 in commission goes to the brokers. This happens on every trade everywhere. The point here is, without us little people trading stocks, there would be no Wall Street. They are always looking at inflows of cash into the market. This number is important to them because this inflow of money provides their next meal; it puts food on their tables and feeds their families. They need us to survive, and they love it when new online trading accounts are opened. This is fresh money coming into the market, replacing the millions of dollars that they just sucked out of the market the day before in commissions.
The markets live off of losing traders. Markets will always need a fresh supply of losing traders; these losing traders bring fresh money into the markets, which is needed so the trading industry can survive. The commercials you see on TV every day that want you to open an online brokerage account are not because they want you to get wealthy. Believe me they could care less about you; what they need is the commission they’ll get when you trade, whether you win or lose, all they really want is your money. These new trading accounts are most likely a fresh batch of inexperienced novices being fed to the wolves, many of these new accounts will be sucked dry with commissions and losing trades. They will fail and move on without ever learning the game and be replaced by a new batch of novice trader’s right behind them. This is how the financial markets have survived since their inception.
Markets are set up for you to lose. Being an average trader is not good enough to overcome the commissions that you lose on every trade. You must be better than average; you must be very good to beat the market. There are a very limited number of good traders compared to the masses. Our goal here at STHQ is to help you become one of those limited very good traders.
David Colletti
Founder
StockTradersHQ.com
The Headquarters for serious traders.
Copyright © 2008 StockTradersHQ.com
Every day millions of dollars are sucked out of the market and into your broker’s pockets by commissions. Millions of trades are made each day in the stock market. For every stock you buy, someone is selling it to you. The broker not only makes a commission off of you, but he also makes a commission from the seller. So in the same trade, he gets two commissions for one transaction. If you pay an average commission of $10.00 to buy a stock, then that is $20.00 to the broker because the seller just paid the same commission. This is 20 million dollars for every 1 million transactions. Folks, there are more than a million transactions a day in the financial markets.
These are conservative numbers we are talking about. An example of this less than Zero Sum Game is as follows: if you and I were to make a trade, and I buy $1,000 worth of stock from you, I would pay $1010 for the stock and you would only receive $990 in return. $20.00 in commission goes to the brokers. This happens on every trade everywhere. The point here is, without us little people trading stocks, there would be no Wall Street. They are always looking at inflows of cash into the market. This number is important to them because this inflow of money provides their next meal; it puts food on their tables and feeds their families. They need us to survive, and they love it when new online trading accounts are opened. This is fresh money coming into the market, replacing the millions of dollars that they just sucked out of the market the day before in commissions.
The markets live off of losing traders. Markets will always need a fresh supply of losing traders; these losing traders bring fresh money into the markets, which is needed so the trading industry can survive. The commercials you see on TV every day that want you to open an online brokerage account are not because they want you to get wealthy. Believe me they could care less about you; what they need is the commission they’ll get when you trade, whether you win or lose, all they really want is your money. These new trading accounts are most likely a fresh batch of inexperienced novices being fed to the wolves, many of these new accounts will be sucked dry with commissions and losing trades. They will fail and move on without ever learning the game and be replaced by a new batch of novice trader’s right behind them. This is how the financial markets have survived since their inception.
Markets are set up for you to lose. Being an average trader is not good enough to overcome the commissions that you lose on every trade. You must be better than average; you must be very good to beat the market. There are a very limited number of good traders compared to the masses. Our goal here at STHQ is to help you become one of those limited very good traders.
David Colletti
Founder
StockTradersHQ.com
The Headquarters for serious traders.
Copyright © 2008 StockTradersHQ.com
Subscribe to:
Posts (Atom)
