So why do I trade US shares intra-day?
The prime mover market in the world is in the US. Here in the UK we are essentially influenced by the US economy and its stock market. How many times, for example, have you seen the London market open at a level dictated by what happened in the US the previous evening after London closed? Of course, the Far Eastern and European markets have an influence, but although they, like the UK, do have substantial domestic and local factors, they are also largely driven by the United States.
Clearly there are advantages to trading the principal world stock market rather than the others. For example, you are in at the beginning of a move, seeing the immediate reaction to changing dynamics and trading accordingly, rather than after everyone else has had the opportunity to analyse and digest those factors and then position themselves appropriately.
The US is open from 0930 Eastern to 1600 Eastern, 1430 GMT to 2100 GMT. For the full-time trader in the UK or Europe this means a large part of the day's trading takes place in our afternoons. The US lunch time usually tends to be somewhat choppy on about 70% of days, so that provides a good break from around 1700 GMT to 1900 GMT. The US afternoon then starts and coincides with our evening here in Western Europe. During these last one or two hours there are frequently excellent moves to trade profitably and consistently. Of course this provides an ideal opportunity for those who have a day job to start trading the US afternoon after they arrive home from work.
Let's look in a little closer detail at some of the many advantages to trading US stocks intraday.
- Plentiful opportunities compared with other markets.
Some people think shares must be a great deal more difficult than forex, currencies, commodities, index futures etc. I don't see it that way. For example consider futures or forex pairs. You only really have a handful of liquid trading instruments in these types of instruments. With stocks there are literally thousands of trading vehicles. This means thousands of opportunities to find the type of stock you are looking for, whether they are trenders, reversers and bouncers, whatever. What percentage of the time does a forex pair or an index actually spend trending rather than sitting in a range? Only a minority. Remember that apart from a few option strategies you will only actually have the chance to make money when your trading vehicle is moving.
No movement = no potential profit.
Money tied up in stagnant positions is money not earning its keep.
Most people employ methods which take them into mediocre probability positions because they are constantly looking for a reason to take a trade in their chosen index, forex pair etc. because there are so few high probability situations available - their universe of choices is severely limited.
Compare that with the many thousands of stocks available to trade. In this far greater universe it is so much easier to find trending vehicles - ones that are actually moving in a clear readable direction. You are now in a scenario of choice and opportunity.
Many people fear they might be overwhelmed by that choice. They worry they will be swamped and unable to find the right stock to trade. Well of course there are ways of finding what you are looking for in this business - and it is a business - just as there are ways of finding most things in life if you know where to look.
- Stamp duty
The United States Treasury does not believe in taxing people 0.5% on every trade they do. They want a vibrant economy and stock market and to encourage their citizens to take part in their great capitalist enterprise. Even as a non - US citizen you too have the chance to participate in their markets. And you pay normal UK taxes, not US taxes - but you don't pay
stamp duty.
- No overnight risk
The great beauty of intraday trading is that you finish the day flat. You have no long or short exposure. You do not have to worry about any event causing the market to gap one way or another between market close one day and open the following day. This is a very real risk and is considerably more likely than you might think.
It is not only a matter of some terrible terrorist strike like 9/11. There are a whole host of risks which can and do cause financial damage overnight and in my opinion that risk is simply unacceptable. For example the oil price might leap up - just consider the volatility in oil in 2004. This normally causes most stock prices to gap down. There are many geo-political events which strongly influence markets, threats of war, (although markets tend to rise once wars start), decisions by Central Banks, changes of government and so on.
And then we have more market specific factors. Has a major investment bank upgraded or downgraded a stock or set a raised or lowered price target or revenue or EPS figure? Perhaps the company has come out with results or unexpectedly altered their guidance for the quarter or year or even announced a vital new contract has been gained or lost. Perhaps a major company in the same sector has announced major news and many companies in the same sector might be affected. Or perhaps they have announced that their Chief Financial Officer has resigned with immediate effect to spend more time with his family on their island home in a state without an extradition treaty with the US????
Most of these things are unpredictable and you are vulnerable to them if you hold positions overnight. In effect you are reducing your control over your funds and increasing the level of risk from the unknown. Why should you do that as a day trader? People do because they get greedy and hope and wish their position will become even more profitable if they are long by gapping up on the open or if they are short they hope and wish it will gap down. To me this smacks of gambling and if you succumb to that so-called entertainment and thrill you will eventually lose your money. Go to Las Vegas instead. I've been and had a great time without gambling a single dime.
The markets are about steely self discipline and "wish" and "hope" are four letter words which have no place in this business.
- Almost instant fills
I'll discuss CFDs and Spreadbetting briefly a little later, but I trade using Direct Access. This means you are trading directly into the
Nasdaq market with other participants. You see on your level 2 screen the other market participants and once you understand how to use it you can sometimes see what is going to happen before it appears on a chart. Under US regulations you must have a minimum of $25,000 in your account to be able to have unlimited day trades in any one day. You also get 4:1 gearing so that amount lets you trade up to $100,000 of positions. Under $25,000 and you are limited to three days in any five day rolling period. These rules do not apply to CFDs and spreadbetting.
One of the great advantages of Direct Access is the speed of fills. If you place a market order your fill with the broker I use is normally under one second. In a very fast moving market it might be as long as four or five seconds, but that is exceptional. The implications are obvious, you suffer very little slippage and normally get your fills at or extremely close (a cent or two) to the price you see on your screen. Without a doubt Direct Access is the way to go for a professional Nasdaq trader.
The Nasdaq market is fully electronic and fills are first come first served so again it is much more transparent. The rules on the NYSE are rather different and trades go through a "floor specialist"; often delays are involved and transparency is, in my opinion, rather poorer.
The spreads between bid and offer with CFD/Spreadbetters are normally much larger and sometimes you can get requoted in a moving market, often to your detriment. The number of stocks in which the CFD/Spreadbetters make their own market is also usually very limited so that results in a much reduced universe of stocks you can choose from. The great advantages are the ability to trade with far smaller capital, perhaps only £2,000, and much larger gearing, 10:1 or even 20:1.
- Tiny spreads
In active heavily traded Nasdaq stocks the spread between bid and ask is normally one cent. Yes, that is correct, one cent. In some stocks it can be slightly larger. In others, particularly recent IPOs and very speculative stocks the spread can be 15 cents.
However, Direct Access allows you to almost become a Market Maker yourself. You can buy on the bid by placing an order one cent better than the existing best bid and you then become the next in line for someone to sell to. Having bought your shares you can, if you wish, immediately put them out for sale on the offer side, probably at a level 15 cents or so higher, thus making the spread for yourself, i.e. almost being you own market maker. Get plenty of experience trading more conventionally before venturing down that route, however.
- Tiny commissions
Direct Access, is in my opinion, extremely cheap for the trader. The broker I use charges $2 total round trip ($1 in and $1 out) for trading 100 shares and $15 total round trip ($7.50 in and $7.50 out) for trading 1000 shares. It can easily be seen that this sort of fee structure enables a learning trader to start small and safely with minimum risk and gradually scale up position size as experience and success build confidence and profits.
These low charges also enable you to trade much more efficiently and with far less concern. After all, with fees like those you no longer concern yourself with the actual cost of exiting a trade which might be going against you. If it turns back in your favour you can always re-enter for minimal cost. That sense of being reluctant to exit and re-enter again because of high
commission costs is simply non-existent.
- Technical analysis and transparency
My experience of using technical analysis on both the UK and US markets is that it does work much better in the US. Over there it is a normal, accepted way of helping to understand market movements and sentiment. Although its use in the UK and Western Europe is steadily growing it is still decried by many amateurs. Naturally enough, the more something is used the more it becomes a self-fulfilling prophecy. Indeed the US use of technical analysis is more sophisticated than in Europe and its limitations better understood.
I am also convinced by experience that their markets are a great deal more transparent than others. I do not deny a lot of things go on in America which are less than open, but compared with this side of the pond, the regulations are stricter, the oversight more sophisticated and keener. Federal and exchange rules are becoming progressively tighter and the imprisonment of many high profile individuals and fining of corporations is leading to a rush to openness. This is an approach we would do well to emulate.
I think you can probably see why I much prefer to trade the US intra day. I suppose I am a little bit of a control freak with my trading funds. I like to trade in as "clean" and transparent an environment as possible and want to minimise the risk from the unknown. I find it difficult to understand why anyone would want to do otherwise.
The prime mover market in the world is in the US. Here in the UK we are essentially influenced by the US economy and its stock market. How many times, for example, have you seen the London market open at a level dictated by what happened in the US the previous evening after London closed? Of course, the Far Eastern and European markets have an influence, but although they, like the UK, do have substantial domestic and local factors, they are also largely driven by the United States.
Clearly there are advantages to trading the principal world stock market rather than the others. For example, you are in at the beginning of a move, seeing the immediate reaction to changing dynamics and trading accordingly, rather than after everyone else has had the opportunity to analyse and digest those factors and then position themselves appropriately.
The US is open from 0930 Eastern to 1600 Eastern, 1430 GMT to 2100 GMT. For the full-time trader in the UK or Europe this means a large part of the day's trading takes place in our afternoons. The US lunch time usually tends to be somewhat choppy on about 70% of days, so that provides a good break from around 1700 GMT to 1900 GMT. The US afternoon then starts and coincides with our evening here in Western Europe. During these last one or two hours there are frequently excellent moves to trade profitably and consistently. Of course this provides an ideal opportunity for those who have a day job to start trading the US afternoon after they arrive home from work.
Let's look in a little closer detail at some of the many advantages to trading US stocks intraday.
- Plentiful opportunities compared with other markets.
Some people think shares must be a great deal more difficult than forex, currencies, commodities, index futures etc. I don't see it that way. For example consider futures or forex pairs. You only really have a handful of liquid trading instruments in these types of instruments. With stocks there are literally thousands of trading vehicles. This means thousands of opportunities to find the type of stock you are looking for, whether they are trenders, reversers and bouncers, whatever. What percentage of the time does a forex pair or an index actually spend trending rather than sitting in a range? Only a minority. Remember that apart from a few option strategies you will only actually have the chance to make money when your trading vehicle is moving.
No movement = no potential profit.
Money tied up in stagnant positions is money not earning its keep.
Most people employ methods which take them into mediocre probability positions because they are constantly looking for a reason to take a trade in their chosen index, forex pair etc. because there are so few high probability situations available - their universe of choices is severely limited.
Compare that with the many thousands of stocks available to trade. In this far greater universe it is so much easier to find trending vehicles - ones that are actually moving in a clear readable direction. You are now in a scenario of choice and opportunity.
Many people fear they might be overwhelmed by that choice. They worry they will be swamped and unable to find the right stock to trade. Well of course there are ways of finding what you are looking for in this business - and it is a business - just as there are ways of finding most things in life if you know where to look.
- Stamp duty
The United States Treasury does not believe in taxing people 0.5% on every trade they do. They want a vibrant economy and stock market and to encourage their citizens to take part in their great capitalist enterprise. Even as a non - US citizen you too have the chance to participate in their markets. And you pay normal UK taxes, not US taxes - but you don't pay
stamp duty.
- No overnight risk
The great beauty of intraday trading is that you finish the day flat. You have no long or short exposure. You do not have to worry about any event causing the market to gap one way or another between market close one day and open the following day. This is a very real risk and is considerably more likely than you might think.
It is not only a matter of some terrible terrorist strike like 9/11. There are a whole host of risks which can and do cause financial damage overnight and in my opinion that risk is simply unacceptable. For example the oil price might leap up - just consider the volatility in oil in 2004. This normally causes most stock prices to gap down. There are many geo-political events which strongly influence markets, threats of war, (although markets tend to rise once wars start), decisions by Central Banks, changes of government and so on.
And then we have more market specific factors. Has a major investment bank upgraded or downgraded a stock or set a raised or lowered price target or revenue or EPS figure? Perhaps the company has come out with results or unexpectedly altered their guidance for the quarter or year or even announced a vital new contract has been gained or lost. Perhaps a major company in the same sector has announced major news and many companies in the same sector might be affected. Or perhaps they have announced that their Chief Financial Officer has resigned with immediate effect to spend more time with his family on their island home in a state without an extradition treaty with the US????
Most of these things are unpredictable and you are vulnerable to them if you hold positions overnight. In effect you are reducing your control over your funds and increasing the level of risk from the unknown. Why should you do that as a day trader? People do because they get greedy and hope and wish their position will become even more profitable if they are long by gapping up on the open or if they are short they hope and wish it will gap down. To me this smacks of gambling and if you succumb to that so-called entertainment and thrill you will eventually lose your money. Go to Las Vegas instead. I've been and had a great time without gambling a single dime.
The markets are about steely self discipline and "wish" and "hope" are four letter words which have no place in this business.
- Almost instant fills
I'll discuss CFDs and Spreadbetting briefly a little later, but I trade using Direct Access. This means you are trading directly into the
Nasdaq market with other participants. You see on your level 2 screen the other market participants and once you understand how to use it you can sometimes see what is going to happen before it appears on a chart. Under US regulations you must have a minimum of $25,000 in your account to be able to have unlimited day trades in any one day. You also get 4:1 gearing so that amount lets you trade up to $100,000 of positions. Under $25,000 and you are limited to three days in any five day rolling period. These rules do not apply to CFDs and spreadbetting.
One of the great advantages of Direct Access is the speed of fills. If you place a market order your fill with the broker I use is normally under one second. In a very fast moving market it might be as long as four or five seconds, but that is exceptional. The implications are obvious, you suffer very little slippage and normally get your fills at or extremely close (a cent or two) to the price you see on your screen. Without a doubt Direct Access is the way to go for a professional Nasdaq trader.
The Nasdaq market is fully electronic and fills are first come first served so again it is much more transparent. The rules on the NYSE are rather different and trades go through a "floor specialist"; often delays are involved and transparency is, in my opinion, rather poorer.
The spreads between bid and offer with CFD/Spreadbetters are normally much larger and sometimes you can get requoted in a moving market, often to your detriment. The number of stocks in which the CFD/Spreadbetters make their own market is also usually very limited so that results in a much reduced universe of stocks you can choose from. The great advantages are the ability to trade with far smaller capital, perhaps only £2,000, and much larger gearing, 10:1 or even 20:1.
- Tiny spreads
In active heavily traded Nasdaq stocks the spread between bid and ask is normally one cent. Yes, that is correct, one cent. In some stocks it can be slightly larger. In others, particularly recent IPOs and very speculative stocks the spread can be 15 cents.
However, Direct Access allows you to almost become a Market Maker yourself. You can buy on the bid by placing an order one cent better than the existing best bid and you then become the next in line for someone to sell to. Having bought your shares you can, if you wish, immediately put them out for sale on the offer side, probably at a level 15 cents or so higher, thus making the spread for yourself, i.e. almost being you own market maker. Get plenty of experience trading more conventionally before venturing down that route, however.
- Tiny commissions
Direct Access, is in my opinion, extremely cheap for the trader. The broker I use charges $2 total round trip ($1 in and $1 out) for trading 100 shares and $15 total round trip ($7.50 in and $7.50 out) for trading 1000 shares. It can easily be seen that this sort of fee structure enables a learning trader to start small and safely with minimum risk and gradually scale up position size as experience and success build confidence and profits.
These low charges also enable you to trade much more efficiently and with far less concern. After all, with fees like those you no longer concern yourself with the actual cost of exiting a trade which might be going against you. If it turns back in your favour you can always re-enter for minimal cost. That sense of being reluctant to exit and re-enter again because of high
commission costs is simply non-existent.
- Technical analysis and transparency
My experience of using technical analysis on both the UK and US markets is that it does work much better in the US. Over there it is a normal, accepted way of helping to understand market movements and sentiment. Although its use in the UK and Western Europe is steadily growing it is still decried by many amateurs. Naturally enough, the more something is used the more it becomes a self-fulfilling prophecy. Indeed the US use of technical analysis is more sophisticated than in Europe and its limitations better understood.
I am also convinced by experience that their markets are a great deal more transparent than others. I do not deny a lot of things go on in America which are less than open, but compared with this side of the pond, the regulations are stricter, the oversight more sophisticated and keener. Federal and exchange rules are becoming progressively tighter and the imprisonment of many high profile individuals and fining of corporations is leading to a rush to openness. This is an approach we would do well to emulate.
I think you can probably see why I much prefer to trade the US intra day. I suppose I am a little bit of a control freak with my trading funds. I like to trade in as "clean" and transparent an environment as possible and want to minimise the risk from the unknown. I find it difficult to understand why anyone would want to do otherwise.
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