madasafish
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Confessions of a Dow Daily Trader Part 1 September 29th, 2001-09-29
Having retired early 2 years ago and taken up the markets, like many others I have found the last year difficult to consistently make money.
For a variety of reasons (which are irrelevant at present) I am pessimistic about the markets for the next 12 months and maybe longer, but I need to make money on a regular basis whatever the market does.
After several months, I have come to the conclusion that daytrading the Daily Dow offers the potential to do this and started full time after the US markets re-opened after the WTC disaster. It has been a very interesting and demanding education.
For those unfamiliar with the daily Dow movements, on Friday it closed up 140 at 8847 but as it gapped up at the start by some 50 points, on paper a buy at the open and hold to the close would only gain some 90 points. That assumes of course you were certain it would close up, as many were calling for a gap up and then selloff.
In practise , however, it opened at 8682, gapped up to 8742 – which was not tradeable- fell to 8713 by 9.45EST, rose to 8798 by 10.22EST , fell to 8748, rose to 8830 by 11.32EST and so on. Volatile is the description!
The High for the day was 8856, the low 8682 a daily range of 174 points.
The type of daytrading I am trying to master is the “scalping” of these 20 to 50 point intermediate swings, which if added together account to over twice the daily range or some 350points. IF I can only capture 25% of them or some 90 points per day every day 4 days a week at £5 per point that’s £1800 per week. And spreadbetting it is tax free.!
Well that’s the theory.. the practice is of course something very different.
Firstly to do this requires some good TA skills: the ability to recognise trends, trend changes and when NOT to trade. I thought I was a reasonable chartist: I have had to go back to my books and charts and brush up. When on-line you MUST be able to recognise patterns within minutes as they develop – or fail – or turn into another pattern. You have at times no space for humming and haaing. With one minute chart bars, the index can easily move 10 points in under a minute.. so if you are long and the index falls and you hesitate..and hesitate.. a profit can quickly become a loss.
Secondly and perhaps even more vital: You canot afford to have ANY preconceived ideas of what the market is going to do. No-one knows from 1 minute to the next-let alone within 8 hours – what is going to happen. You may have an idea but you have to discard it. The adage “trade what you see, not what you think” is VITAL. Preconceived ideas lead to holding losing positions, emotional conflicts and losses. TA suggests what is likely to happen .. but nothing is 100%. So if the price goes up, when you think it should not , you will miss trades or react late.
(I have watched on Friday a Very experienced trader tell us at 9.30 EST on the chat line I use on Trade2win that the Dow was going to go down as this level was unsustainable. Fortunately I listened to him.. and ignored him because it fell .. and then kept going up. He lost some money but being experienced compensated through other trades)
Thirdly: control your emotions. Emotional traders lose money. If I get concerned or worried, I take deep breaths and if I still cannot control my emotions I stop trading. Fear and greed are the killers: they prevent me trading what I see. It has taken me several weeks to arrive at a trading mode: concentrated, no firm views on the market, calm before it opens, calm during trades and when I win, calm also.The biggest losses come when you are overconfident and make silly trades. I found John Pipers “The Way to Trade” very useful.. but a correct mental state takes months to achieve imo.
Fourthly: Use reliable and hassle free tools. The kind of scalping I do requires speed, accuracy and reliability. Nothing expensive is required BUT the last thing you need during the day is the hassle of breakdowns, bad software and unreliable or slow brokers. More of that in a later issue.
Confessions Part 2 September 29th 2001
Software and Timing
You can purchase/rent very good and very expensive software systems for daytrading. You can also do on a shoestring and risk minimal amounts of money.
What you require is: a reliable price feed showing candlestick charts by the minute, 2 minutes, 5 minutes and 10 minute charts. Easy to use with the ability to draw trendlines, use some TA indicators and preferably fibonacci retracements. (If you do not understand these terms I refer you to Technical Analysis of the Financial Markets by Murphy and ask if you should be trading).
A simple free feed is Lycos which shows each trade:
http://finance.lycos.com/home/livecharts/bare.asp?symbols=$INDU&option=rt&wd=900&ht=500
That charts the Dow and has 2 Explorer Windows – one is blank and can be ignored.
For S&P 500 replace $INDU with $INX, for Nadaq $INIC.
Although free and widely used it is limited and stops working when heavily used.. not much use if you are doing a lot of trading then.
I use AIQ Realtime which with exchange fees can be leased for $80 approx per month with a 30 day free trial period. It can also be used for UK stocks and End of Day analysis (small extra cost involved). Feed is internet. It’s very easy to use.
There are loads of other packages mostly US. I have used Updata Trader Pro 1 and tried Pro 2 but it fails to meet my requirements.
AIQ has very easy to use charting switchable at one click to to any of 6 preset time views. Charts are one minute intervals.
Now the key question that RA raised. “Unfortunately, finspreads seems 2 B ahead of Yahoo by a few seconds & so tends 2 predict the price of Yahoo rather than the other way round which would B far more useful.”
To understand this you must understand the way spread betting companies operate. They have an eight point spread on the Dow (varies by company) so if the index is say 8850, you would expect the bid/ask to be 8846-8854. That’s a neutral bias : they are neither bullish or bearish.
But that’s not the real world.. most of the time the index is going up or down.. so they bias accordingly
So if it’s going up they may quote 8850-58 and if down 8842-50.. or if it’s a very fast move even more biased . Their software effectively biases the price I suspect based on the volume of buying versus selling they have at any one time and the index direction. So if you wait for a price reversal to happen and the price starts going up (and people buy) your purchase price could be 8858, whilst if you bought when they were neutral you would have paid 8854.
Similarly if you come to sell.. say the index has risen to 8870. A neutral bias is 8866-74 but if it’s falling you would be quoted say 8862-70.
The result is that a 20 point index move at could end up with a buy/sell price difference of
Neutral bias 54 to 66 =12 points
Up/down bias 58 to 62 = 4 points.
That’s a simple example and it can be much worse.
On the other hand if you can buy when the market is about to turn up but the spreads are on a negative bias and sell when the index is about to stop but the bias is positive, you can reverse the position in your favour. (and equally so when shorting)
So timing of entry and exit points is key. Not only prices but the spreadbetting firms bias.
There are ways around this. If the trend is an uptrend, wait for a pullback and buy before the price has started to rise again, if in a downtrend, sell when there is a small rally or just before the bottom.
The key is to recognise these entry points. Buying or selling momentum blindly (i.e. in the middle of a fall or rally) usually leads to paying huge premiums due to the bias being much (up to 10 points) more than I have quoted above. So your chances of loss if the rally or fall stops are high.. and remember in these markets a 40 point rally on its own without a correction is a big one.
Now I am definitely NOT an expert but bottoms and tops are recognisable from a combination of candlesticks, indicators support and resistance and patterns. So if you have a rising trend which is levelling off, a doji at the top and RSI and stochastics/MACD are overbought and it’s at resistance, the chances are it will fall. If it then executes an evening star it’s a definite reversal (about 90% or so of the time).
At a bottom, a final sharp fall or a rounding bottom, a doji and a morning star indicate a bottom especially when indicators say oversold.
There is automated software which does all this – very expensive and sometimes wrong. Or you can learn to do it yourself.
You must also draw trend lines which should follow from various hours or days. if you are still in the same price area. It is amazing how prices walk up and down the extension of a trend from several minutes or hours back..
I’ll talk more about charting later.
Having retired early 2 years ago and taken up the markets, like many others I have found the last year difficult to consistently make money.
For a variety of reasons (which are irrelevant at present) I am pessimistic about the markets for the next 12 months and maybe longer, but I need to make money on a regular basis whatever the market does.
After several months, I have come to the conclusion that daytrading the Daily Dow offers the potential to do this and started full time after the US markets re-opened after the WTC disaster. It has been a very interesting and demanding education.
For those unfamiliar with the daily Dow movements, on Friday it closed up 140 at 8847 but as it gapped up at the start by some 50 points, on paper a buy at the open and hold to the close would only gain some 90 points. That assumes of course you were certain it would close up, as many were calling for a gap up and then selloff.
In practise , however, it opened at 8682, gapped up to 8742 – which was not tradeable- fell to 8713 by 9.45EST, rose to 8798 by 10.22EST , fell to 8748, rose to 8830 by 11.32EST and so on. Volatile is the description!
The High for the day was 8856, the low 8682 a daily range of 174 points.
The type of daytrading I am trying to master is the “scalping” of these 20 to 50 point intermediate swings, which if added together account to over twice the daily range or some 350points. IF I can only capture 25% of them or some 90 points per day every day 4 days a week at £5 per point that’s £1800 per week. And spreadbetting it is tax free.!
Well that’s the theory.. the practice is of course something very different.
Firstly to do this requires some good TA skills: the ability to recognise trends, trend changes and when NOT to trade. I thought I was a reasonable chartist: I have had to go back to my books and charts and brush up. When on-line you MUST be able to recognise patterns within minutes as they develop – or fail – or turn into another pattern. You have at times no space for humming and haaing. With one minute chart bars, the index can easily move 10 points in under a minute.. so if you are long and the index falls and you hesitate..and hesitate.. a profit can quickly become a loss.
Secondly and perhaps even more vital: You canot afford to have ANY preconceived ideas of what the market is going to do. No-one knows from 1 minute to the next-let alone within 8 hours – what is going to happen. You may have an idea but you have to discard it. The adage “trade what you see, not what you think” is VITAL. Preconceived ideas lead to holding losing positions, emotional conflicts and losses. TA suggests what is likely to happen .. but nothing is 100%. So if the price goes up, when you think it should not , you will miss trades or react late.
(I have watched on Friday a Very experienced trader tell us at 9.30 EST on the chat line I use on Trade2win that the Dow was going to go down as this level was unsustainable. Fortunately I listened to him.. and ignored him because it fell .. and then kept going up. He lost some money but being experienced compensated through other trades)
Thirdly: control your emotions. Emotional traders lose money. If I get concerned or worried, I take deep breaths and if I still cannot control my emotions I stop trading. Fear and greed are the killers: they prevent me trading what I see. It has taken me several weeks to arrive at a trading mode: concentrated, no firm views on the market, calm before it opens, calm during trades and when I win, calm also.The biggest losses come when you are overconfident and make silly trades. I found John Pipers “The Way to Trade” very useful.. but a correct mental state takes months to achieve imo.
Fourthly: Use reliable and hassle free tools. The kind of scalping I do requires speed, accuracy and reliability. Nothing expensive is required BUT the last thing you need during the day is the hassle of breakdowns, bad software and unreliable or slow brokers. More of that in a later issue.
Confessions Part 2 September 29th 2001
Software and Timing
You can purchase/rent very good and very expensive software systems for daytrading. You can also do on a shoestring and risk minimal amounts of money.
What you require is: a reliable price feed showing candlestick charts by the minute, 2 minutes, 5 minutes and 10 minute charts. Easy to use with the ability to draw trendlines, use some TA indicators and preferably fibonacci retracements. (If you do not understand these terms I refer you to Technical Analysis of the Financial Markets by Murphy and ask if you should be trading).
A simple free feed is Lycos which shows each trade:
http://finance.lycos.com/home/livecharts/bare.asp?symbols=$INDU&option=rt&wd=900&ht=500
That charts the Dow and has 2 Explorer Windows – one is blank and can be ignored.
For S&P 500 replace $INDU with $INX, for Nadaq $INIC.
Although free and widely used it is limited and stops working when heavily used.. not much use if you are doing a lot of trading then.
I use AIQ Realtime which with exchange fees can be leased for $80 approx per month with a 30 day free trial period. It can also be used for UK stocks and End of Day analysis (small extra cost involved). Feed is internet. It’s very easy to use.
There are loads of other packages mostly US. I have used Updata Trader Pro 1 and tried Pro 2 but it fails to meet my requirements.
AIQ has very easy to use charting switchable at one click to to any of 6 preset time views. Charts are one minute intervals.
Now the key question that RA raised. “Unfortunately, finspreads seems 2 B ahead of Yahoo by a few seconds & so tends 2 predict the price of Yahoo rather than the other way round which would B far more useful.”
To understand this you must understand the way spread betting companies operate. They have an eight point spread on the Dow (varies by company) so if the index is say 8850, you would expect the bid/ask to be 8846-8854. That’s a neutral bias : they are neither bullish or bearish.
But that’s not the real world.. most of the time the index is going up or down.. so they bias accordingly
So if it’s going up they may quote 8850-58 and if down 8842-50.. or if it’s a very fast move even more biased . Their software effectively biases the price I suspect based on the volume of buying versus selling they have at any one time and the index direction. So if you wait for a price reversal to happen and the price starts going up (and people buy) your purchase price could be 8858, whilst if you bought when they were neutral you would have paid 8854.
Similarly if you come to sell.. say the index has risen to 8870. A neutral bias is 8866-74 but if it’s falling you would be quoted say 8862-70.
The result is that a 20 point index move at could end up with a buy/sell price difference of
Neutral bias 54 to 66 =12 points
Up/down bias 58 to 62 = 4 points.
That’s a simple example and it can be much worse.
On the other hand if you can buy when the market is about to turn up but the spreads are on a negative bias and sell when the index is about to stop but the bias is positive, you can reverse the position in your favour. (and equally so when shorting)
So timing of entry and exit points is key. Not only prices but the spreadbetting firms bias.
There are ways around this. If the trend is an uptrend, wait for a pullback and buy before the price has started to rise again, if in a downtrend, sell when there is a small rally or just before the bottom.
The key is to recognise these entry points. Buying or selling momentum blindly (i.e. in the middle of a fall or rally) usually leads to paying huge premiums due to the bias being much (up to 10 points) more than I have quoted above. So your chances of loss if the rally or fall stops are high.. and remember in these markets a 40 point rally on its own without a correction is a big one.
Now I am definitely NOT an expert but bottoms and tops are recognisable from a combination of candlesticks, indicators support and resistance and patterns. So if you have a rising trend which is levelling off, a doji at the top and RSI and stochastics/MACD are overbought and it’s at resistance, the chances are it will fall. If it then executes an evening star it’s a definite reversal (about 90% or so of the time).
At a bottom, a final sharp fall or a rounding bottom, a doji and a morning star indicate a bottom especially when indicators say oversold.
There is automated software which does all this – very expensive and sometimes wrong. Or you can learn to do it yourself.
You must also draw trend lines which should follow from various hours or days. if you are still in the same price area. It is amazing how prices walk up and down the extension of a trend from several minutes or hours back..
I’ll talk more about charting later.
