Transcript dka - An Introduction to Intraday Trading

An Introduction
to
Intraday Trading
Continue at your own Risk
Disclaimer
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This presentation contains many observations, some of which
the author feels are good universal “rules” and some of which
merely reflect his current thinking about intraday trading.
The author does not mean to represent that a trading strategy
herein hinted at is better than any other trading strategy.
He does mean to represent that he has thought seriously about
his subject and understands the fundamentals.
He fully expects that any trading program he may work on (note
the logical leap) will be the aggregate of the thinking of many
smart and experienced people.
• Fine Print: Trading involves substantial risk of loss and may not be suitable for everyone.
Overview
On Trading
Cardinal Rules of Trading
Key Considerations
Charts
Going Live
You Want More?
On Trading
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Trading vs. Investing
Trading vs. Gambling
On Fundamentals
On Technical Analysis
A Trader’s Mindset
Trading vs. Investing
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Investors invest in companies; traders trade stock.
Investors count years, traders count minutes.
It still puzzles this author why investors persist in
examining their portfolio’s net worth, DAILY, when they
know full well that they aren’t going to act on their fear or
greed and that, more often than not, they’ll find
something to get upset about.
Good advice for a trader is usually bad advice for an
investor.
Investors who begin to think like traders ask for trouble.
Investors: stay away, this presentation is not for you!
Trading vs. Gambling
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Good traders love gamblers, they provide them with their
income.
Why most traders lose is they are gamblers; they crave
action and trading certainly provides it.
Casino owners are not gamblers, casino players are.
Good traders emulate casino owners; they are in it to
make a good living, not to get a rush.
On any given trade, the trader may take a loss. The
good trader, like the casino owner, is OK with this.
On Fundamentals
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If you “like” a company, DON’T trade it. If you must do
anything with a company you like, put it into your
(separate) investment portfolio.
Don’t trade on the News, it was factored into the price
days ago by folks closer to it. The only way to play the
News is to play against investors, but this is risky
because traders, your real competition, determine shortterm price more than investors.
Tips: ignore them or test them. * If you act on another’s
advice, it’s your choice and your results.
On Technical Analysis
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Learn as much as you can; but rigorous Technical
Analysis has little place in trading, it’s too fast. *
On the other hand, thinking LIKE a technician has
everything to do with succeeding at trading.
T. A. Indicators for the most part describe the past, not
the future.
Nonetheless, Technical Analysis “works” because:
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T.A. maps human behavior (the trend is your friend maps
“everyone loves a winner”).
T. A. works because enough people believe it and act on it.
A Trader’s Mindset
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The successful trader learns from other traders; but he
cannot be a clone of another trader and succeed.
Traders who need to be “right” don’t win in the market.
The successful trader has a well-defined strategy that he
follows mechanically.
If it works, he knows what’s
working; if it doesn’t work, he knows what isn’t working.
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He also knows that what worked yesterday may stop working
tomorrow.
The successful trader knows the risk he can handle that
will let him sleep at night, and he trades within that risk.
Cardinal Rules of Trading
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Rule #1: Protect Your Capital
Rule #2: Protect Your Capital
Rule #3: Protect Your Capital
Rule #4: Manage Your Money
Rule #5: Trade Smartly
Rule #6: Exit Strategy
Rule #1: Protect Your Capital
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No trade should be greater than 5 - 10% of your trading
capital.
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The surer you are about a trade, the more dangerous it may turn
out to be. There is no such thing as a “sure thing.”
Putting a second and third helping of eggs in the same basket,
while sometimes a good idea, is a bad idea if it breaks this rule.
Multiple trades intentionally in the same Industry or Sector is
another form of putting too many eggs in the same basket.
Always going Long is a bad idea too, for similar reasons.
Rule #2: Protect Your Capital
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Cut your losses: set tight Stops.
More importantly, obey them.
This is called “discipline.” 
Rule #3: Protect Your Capital
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If today’s trades are going against you, stop trading for
the day.
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Rethink your strategy and your executions and begin afresh
tomorrow.
Even if you’re a computer program!
If today’s trades are with you, be thankful, and careful.
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Being “smart” can cost you dearly.
Rule #4: Manage Your Money
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This one is nearly as important as Protect Your Capital,
but it’ll cost you to see it. *
No trade should be smaller than 2-3% of your trading
capital.
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Diversity can easily slide into futile dilution.
A hint…
• Do you remember the one about the Dutchman Peter
Minuit getting the best of those foolish Indians by giving
them $24 worth of trinkets for Manhattan Island? Well, if
the tribe’s Medicine Man had whipped out his trusty H-P
Calculator, and if he had told the Chief to put the tribe’s
new-found wealth into a C.D. paying 7%, that simple
wampum would now be worth more than $8.5 trillion!
Even at 6% it would be worth $200 billion, arguably a fair
price for all of Manhattan’s Real Estate.
Rule #5: Trade Smartly
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Pre-select a small universe of stocks to watch.
When a pre-determined set of conditions trigger a predetermined action, take it.
Cut your losses and ride your winners. * Easy to say,
right?
Rule #6: Exit Strategy
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A trader with a good and disciplined Exit strategy can
prevail even with random trades. *
Use Trailing Stops for Exiting positions. *
Be watchful around “magical” Support / Resistance
levels. *
Employ tight Stops; either your timing is right or you
don’t want to stay in the trade. *
If you stall (Buyers and Sellers in balance, Supply and
Demand equal), Exit your trade.
Key Considerations
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Spreads
Volatility
Liquidity
Timing
Direction
Safety
Commissions
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Did I forget to mention commissions? Too obvious…
Commissions are enough by themselves to sink an
otherwise successful trader.
Keep commissions low.
That’s not low enough!
A $15 flat commission is WAY high for a 100 share trade,
not good for a 1000 share trade, and great for a 10,000
share trade. Relativity rules in equity trading too.
On Spreads
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If you play with low spreads (.01 or .02 max.), you’re
playing against a casino (51% edge); you have to be
smart to win consistently.
If you play with high spreads, you’re betting at the track
(65% edge); you have to cheat to win at all.
The Swing-Trader is less inclined to heed this advice, to
his cost.
On Volatility
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Volatility is the short-term trader’s friend.
Volatile stocks are an investor’s Hell and a trader’s
Heaven.
Pre-select stocks that are volatile and liquid.
Get in early in the direction you want. The risk of a 2day bounce is less than that of a 9-day trend. *
Relative volatility is more important than absolute. R.V.
is biased toward low priced stocks. If you don’t like low
priced stocks, keep in mind that a $50 stock that moves
$2.00 moves 4% while a $100 stock that moves $2.00
moves 2%. Cheaper means more leverage.
On Liquidity
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It is good to trade a stock whose trading volume will
allow you to exit when and where you want to.
If you can find a highly liquid stock with a wide spread
(not likely), you can play the spread for a small profit. *
On Timing
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Take account of how the weather and news events affect
traders.
Take into account how regular market events affect the
markets.
Take into account how Day of Week and Time of Day
affect the markets.
Shun the 1st 45 minutes of the day, or learn to trade
them.
More… *
On Direction
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Tend not to trade against a stock’s own trend (obviously,
trend reversals are a big exception to this).
Tend not to trade against a strong {market’s | industry’s |
sector’s} direction.
Look for “Maverick” stocks that go against the market,
their industry and their sector; they can be interesting
exceptions to this rule.
Be wary of going Long near Resistance or Short near
Support.
On Safety
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If you crave safety, what are you doing trading?
There’s “safety in numbers”: make lots of smart trades
and you’ll win in the trader’s game.
Safety can look like good value or support or a good
price or a trend.
Charts
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What are Charts?
What Charts Show
What Charts don’t Show
The Art of Seeing Chart Patterns
Interpreting Charts
Using Charts to Win
What are Charts?
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Charts are 2-D graphical visualizations of Number Series across
N dimensions. A Trader’s Charts are visuals of a financial
instrument’s Price (and Volume) activity, over Time.
A chart’s vertical axis (1st dimension) maps price (and volume).
Its horizontal axis (2nd dimension) maps time.
Static print Charts are the sine qua non of the technical analyst
and of interday traders. Dynamic Real-Time charts are the sine
qua non of the intraday trader.
Charts portray the past; they do NOT predict the future. While
the past cannot predict the future, what else have we to look at?
And if we don't learn from history, it will surely repeat itself. "Ahhhh!" says the astute trader.
What are Charts? (2)
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A chart's smallest unit of information, one Time period, is
drawn by a point, a bar or a candlestick. Points are
typically connected by lines to suggest continuity.
A point typically locates the Closing price of the security.
A bar typically reveals the equity's (Open, ) High, Low, and
Close. A candlestick shows all four prices.
Candlesticks' advantage over bars are their ability to show
2-period relationships more clearly.
Charts with no security name, no price-axis, and no timeaxis values, ought to be viewed with suspicion.
What are Charts? (3)
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Dynamic, computer-based, charts can be customized to the
user’s preferences.
The time-frame (30 years, 1 year, 2 months, 1 day) that a chart
maps from end to end is chosen by the user.
The time-interval (1 year, 1 week, 1 day, 1 tick) that is mapped
by one period on the chart is chosen by the user.
Only Real-Time charts can display time-intervals less than 1 day.
A trader ought to know what is his time-frame and use charts
appropriate to that choice.
IOW, one-minute charts are
appropriate to the extreme intraday trader, not to swing traders.
What Charts Show
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Charts show a security’s price and volume activity over time.
That is ALL they show that is not derived or invented.
HOWEVER, Price/Volume charts ARE often overlaid with all
manner of quasi-magical points and lines.
“Indicators” or “Systems” are arithmetic functions of price,
volume and time data. They all mean something objectively
(their mathematical definition). But it is their subjective meaning
that gives them power. Traders make decisions based upon the
meaning they give them. Thus, they mean what the trader
thinks they mean.
Some popular Indicators are: Moving Averages (various), Bollinger Bands, On
Balance Volume, Relative Strength Index, Stochastics (various).
What Charts don’t Show
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On the other hand, “Patterns” are not overlaid on top of a
Price/Volume chart. Patterns are “recognized” by the astute
trader looking at the raw price/volume data. Thus, a trader will
see “trends”, “breakouts”, “reversals” and “consolidations”.
Most traders believe that the chart they are looking at actually
shows the patterns they see. However, the pattern(s) a trader
sees is much like interpreting a Rorschach inkblot. *
While each pattern is supposed to suggest a trade -- one way or
the other, sooner or later -- it is up to the trader to see the
pattern and to act on it. The chart will only show what a security
WAS doing, not what it will do.
Some popular Patterns are: Head and Shoulders, Double Tops, Triple Bottoms,
Cups & Saucers, Triangles, Flags & Pennants (and a host of Candlestick patterns).
Art of Seeing Chart Patterns
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Clearly, the simplest pattern to see is an “up trend.” Consider:
A security’s price must go up, go down or remain the same. If a
security’s price persistently goes up, it defines an up trend.
"Well, duh", you say.
But how long is "persistent"? Several months, days, or just
hours? How consistent is persistent? 60% or 80% of price
movement? How steep must be the price climb in order to call it
a trend? Does the daily chart show a trend and the weekly not?
Must it meet all or some of these criteria? Which ones?
Thus, even recognizing a simple pattern like an up trend
requires human judgment.
Interpreting Charts
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In short, while the gift of System interpretation and Pattern
recognition are necessary to become a successful trader,
it is still an art not a science; and most likely it will be
learned over time, at great cost.
The successful trader will concentrate on a small number
of systems or patterns to look for, in choosing a security to
watch or a time to pounce. Without this discipline,
decision-making would be rendered impossible. And the
trader would not know what technique to credit or blame
for his results.
Using Charts to Win
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A trader I know likes to say: "Any fool can see that this stock is
trending." But he just talks about it, he rarely acts. Who fails to
act on his chart’s interpretation is wasting somebody’s time.
Personally, I look for long trends (against the market direction),
with the beginnings of a reversal showing up over a few days. *
There are thousands of diet books: no diet is for everybody.
There are hundreds of books on trading successfully: no method
is for everybody. The good trader has his OWN strategy.
Interpreting charts is personal: you'll see what you see. Charts
are utterly invaluable. But they are NOT the key to the treasury;
the dragon is sitting on that. And the dragon is the trader's own
psyche.
The Holy Grail
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Beginning traders hope, and many not-so-new traders believe, that there
is a technique or a strategy, some combination of patterns and
indicators, to guarantee making money in the markets, a “Holy Grail” of
trading, and that it lies just around the corner, just waiting for them to
discover it. Folks who buy black box programs believe this; folks who
pay lots of money to learn someone else’s “secrets” believe this.
What “worked” on one market doesn’t work for another, what worked
for one sector doesn’t work for another, what worked for one security
doesn’t work for another, what worked for one security yesterday
doesn’t work tomorrow, and what works on a weekly chart doesn’t even
work on the daily chart of the same security over the same time-frame.
There is no substitute for experience, developing a well-defined and
personal strategy, and the ability to adapt to change. Sorry.
Going Live
Playing for Keeps
Pre-selecting Stocks
Entry and Exit Points
Selecting Stocks Real-Time
Playing for Keeps
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The only patterns a trader can love are Reversals, Trend
Continuations and Breakouts.
The surest way to lose in this game, after bad Exit
executions, is by trading stocks that don’t move.
Spreads, commissions and slippage are the cost of
playing this game; slow movement can result in a slow
death.
Pre-selecting Stocks
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Stocks have personalities: trending, choppy, and trading
range. All of these personalities are viable for trading. Do
their personalities conflict or coincide with their breakouts and
reversals? Back-test.
Events that make a stock potentially attractive for trading:
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Gapping Up or Down
New Highs & Lows
Volume Surges
Most Actives
Biggest Gainers & Losers
Impending Splits
Trend Line Continuation (various types)
Reversals (various types)
Entry and Exit Points
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Support and Resistance points are logical places to be
watchful for Entry and Exit.
On entry, I never bet against short-term tick movement
Fibonacci numbers (if enough traders believe in magic,
you will see proof positive of it in the market every day).
More…
Selecting Stocks Real-Time
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Sharp moves are often followed by sharp reversals, mild
moves often persist.
1 minute charts reveal different information from 5
minute charts from 15 minute charts from hourly and
daily charts. If you wait until they appear to tell the
same story, you’ll wait too long.
Chose which charts to look at. Daily charts are useless
to the 1-minute trader. And 1-minute charts will only
aggravate the longer-term trader (let Stops take care of
themselves).
Really, this game is not THAT hard!
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Being a Successful Trader is not difficult, it demands
only that you be able to:
pick the right stock
time it right for a big move
get its direction right
get in at your price
suffer no slippage, small spreads and small commissions
and get out with a Big gain
OR
be great with Exits
Some Random Observations
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Anyone who claims to predict the future in the markets is a fool or a
fraud; the best you can do is weigh the evidence, make your trade, hope
for the best, and be prepared to get out quickly if your trade goes in the
opposite direction.
When the Fed Chairman changes rates once or twice a year, he is giving
chiropractic to a patient’s ailing back; when he drops the rate a dozen
times in a year, he is dosing a very sick patient with chemotherapy.
“Good” news can be disappointing news.
Most market players are optimists, so “denial” can be a shared vision.
Bet the “truth” against the market’s “denial” and you will surely lose your
cookies. -or- “He who spits against the wind spits in his own face” (I
love clichés!).
More Random Observations
• Rising earnings support a bullish market, as does higher
productivity.
• But pay for this with decades of M & A’s, massive layoffs, stagnant
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retail sales, reduced consumer spending and saving, and you’ve
found the recipe for economic disaster.
But don’t bet on this anytime soon. The shit will eventually hit the
fan, but I’d be the last to predict when.
Can we prevent this economic calamity? Sure; but first we have to
talk about it and act in obvious but painful (to some) ways.
• Programmed trading has saved the market more than once.
• Well-paid trading gurus talk about “patterns that work.” There is
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no such thing: what there is is patterns that have worked in the
past in a limited way and may continue to work for a time.
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You Want More?
• Really, this game is not THAT hard (if you are adequately
capitalized)!
• But, if you insist…
• You want more, here’s how to find me.
David Abraham
212-410-9261
[email protected]