High Velocity Trading In A Post-Bubble Market
As
a precusor to reading this article, we highly recommend that you become
familiar with Dave Floyd’s trading strategy. Click
here to read an interview with David in which he describes his
methodology.
The game has changed. While this is no surprise to anyone who has been
actively involved in the markets over the last 18 months, it does warrant discussion and
a strategy, as it relates to intraday trading. Traders now find
themselves in the position of adjusting to the dynamics affecting the market
currently, most noticeably, the erosion of stock prices. However, other factors
are at work that make trading challenging, and at times, quite baffling. This
lesson, however, needs to be prefaced with an ample dose of recent
history.
When I first got involved with daytrading back in 1994, the markets were in
the midst of embarking on yet another leg of the bull market. (The economy was
coming out of the brief recession of the early ’90s). At the time, mutual funds were the rage and the latest
en vogue financial product, as espoused to us by
every financial journalist and marketing guru within the industry. “Save
for retirement” was the mantra, and Americans dutifully drained their once
beloved FDIC bank accounts to latch on to the 10% Total Return Train.
This reallocation of capital from savings accounts to portfolio managers only
further strengthened the bull market with massive infusions of capital. Add to
this all the 401(k) money, and in retrospect, you have a demand-driven bull
market, as opposed to one driven by fundamentals.
Fast forward a few years. Suddenly, online direct-access trading was
appearing on the horizon. This not only occurred at a time when technological
advances made it possible to offer this to retail customers, but it also
occurred when many portfolio managers were having a difficult time beating the S&P
500 on an annual basis (not that that is an easy task when you need to
deploy large amounts of capital). Combine this with the early stages of Internet
mania, and it was an easy decision for individuals who wanted to get in on the
action via discount brokerage accounts vs. the now disdained common stock fund.
Publications and financial news channels only added to the desire for
individuals to get involved.
While the concept of individuals changing their savings and investing habits
due to demographic changes is admirable and well intentioned, it set many up for
a rude awakening when reality set back in, or as many call it, the reversion to
the mean. Things in life go on for only so long before unforeseen events, or the
“randomness” of the market catches everyone off guard. Suddenly, the
song is over and there are no chairs.
With all the money that was being thrown at stocks during this time, it made
the whole notion of intraday trading a whole lot easier.
First off, you had
massive share purchases and sales by large institutions, which not only provided
large intraday price swings, but also the volume to navigate in and out, with
ease. In fact, many trades during this time were “shoot from the hip”
trades, as opposed to trades that are stalked and executed with absolute
precision, which is the way the game is again being played now.
Secondly, you had rampant speculation in tech stocks, further adding to the
market being awash in liquidity.
The point being is that everyone in the world was trading stocks. Everyone
was an expert. And by the returns some people put up, it was hard to dispute
otherwise. However, the market has a nasty habit of testing one’s resolve. The
current period is one such time. Gone are the times of picking up half and whole
points with a couple of mouse clicks, at least for now. Sure those trades still
exist intraday, but they seem a bit more elusive then they were, say, just six months ago. Today, as daytraders, we are forced to dance in and out of the
market, picking up small amounts each time.
I hear a few rumblings in my office about the futility of trading for 10 and
20 cents per trade. This is a sure sign of one’s unwillingness to adapt. It also
indicates that perhaps the traders intention for trading is for entertainment,
rather than for income stream. I will trade for 10 and 20 cents all day,
provided the setups are there. This approach will get me through the lean times
and allow me to further refine my skills. Sure, I’ll admit this is not the most
exciting approach, but I am still here after many (outside my office) have
either been wiped out or simply gave in when it came to down to brass tacks.
Add to the mix the introduction of decimalization, the seemingly overnight
disappearance of billions of stock market capitalization, and unfortunately, an
economy heading — or already in — recession, combined with a looming Middle
East crisis. The result is truly epic. Those who adapt will surely survive;
those who continue along without making some adjustments, will surely be tested
and may not survive.
So how does one adapt? First off, you need to have already been playing the
game under certain guidelines. Even during the height of the market frenzy in
2000, basic rules still applied. Today they are even more important. Let’s
review these rules:
- Trade with the trend, as defined by the one-minute
Moving Average.
“Safe Catchers” and “Top Callers” put the odds even
further out of reach. - Trades are commenced when the futures make a sharp move in the direction
you were anticipating, and cease when the futures stop going in the direction
you were anticipating. Are the S&P and Nasdaq futures moving enough
intraday to justify trading? For the S&Ps, that range is a minimum of
3-5 points, and for the Nasdaq 10-15 points. - Less is more. Trade only high-probability setups, and focus on just one,
maybe two stocks. It is very easy to have a few losing trades, get
discouraged, and go looking for another stock to trade. This is
counterproductive. Stocks have personalities. Take a few days to watch the
price action. You will be surprised at how much it will reveal.
A phrase is starting to catch on in my office —
“It is what it is.”
What do I mean by this? If the setup is there and you have your trigger
point…execute the trade like a machine. There is no time in this market for
thinking or second-guessing. Given the fact that the institutions are
participating less, you are trading predominantly with other traders, the
specialist or market maker. The veteran trader will not flinch, will you? This
rather simple idea/observation should allow one to successfully navigate the
current market.
On the bright side, there is ample empirical evidence that bear markets on
average last roughly 36 months. Assuming history repeats itself, the market may
in fact become a bit more robust in the months to come. Additionally, the
introduction of Single Stock Futures (SSFs), will certainly add some
opportunity, as well as change the playing field for stocks. This means only one
thing — adaptation to a new way of conducting business which will result not
only in inefficiencies early on which can be exploited, but also yet another
angle to approach stock trading. There is little doubt that SSFs will offer
tremendous potential for intraday traders.
So keep your powder dry, don’t swing for the fence on each trade and
constantly hone your skills. When the markets re-awaken, you will have become a
far better trader. As the old adage says, “What does not kill you, will
only make you stronger.”
P.S. Keep your eyes peeled as TM and I
roll out some innovative products and services in the months to come, with regard
to SSFs.