Trading strategy 101: Position vs. Daytrading

[Stockwizardry]

Have been observing and trading the market for the last ten years. For a period of 3 months during the summer of 2001, I was able to daytrade the QQQ's several hundred times a day. Commissions were free at Financial Cafe, so I could buy and sell constantly without the commissions eating up my profits. I made a minimum of $150/day and a max of $900. Then one day, the brokerage called me and said I had to STOP trading unless I did 20,000 shares per order, in which case, the market makers would conveniently delay my order and execute at whatever price was best for them.

The keys to my daytrading success were free market order commissions, lighting fast executions at the stated AMEX quote. and a reliable minute by minute leading price indicator, which at the time was ISLAND ECN. Presently, they have forced the various exchanges to show the same QQQQ quotes. Previously, Island ECN would ALWAYS preceed the AMEX official quote. Wherever the Island quote was, that's where the national AMEX quote was about to go. There was a lag factor between the two exchanges, which I noticed and exploited.

Absent any such foolproof conditions for rapid fire daytrading, I DO NOT recommend it. The market makers and specialists do it, but they have all the leading indicators of where the price is about to go in the next few minutes; they don't have to pay commissions and they can get in and out quickly. With all the control and information they have at their disposal, they KNOW moment by moment which side of the trade to be on. The average Joe sitting at home has no clue. He has to guess.

Mindful of these conditions, POSITION trading is by far the best way to go. The end goal is to BUILD winning positions. Strategy begins with deciding the trend, based on charts, then assuming either a SMALL short or long position in that stock or index according to the trend. If the trend is down, assume a short. If the trend is up, assume a long.

Let TIME tell you if your initial guess proves right BEFORE you do anything else. Take a small loss if you have to, the moment you realize the trend has reversed. BUT NEVER ADD to a losing position. YOUR GOAL is to build a winning position NOW, not later. Once a price moves away from you, you have ZERO control. It could get further and further away from you. If you continue to add small positions, you will continue to lose more and more capital. On the contrary, if your initial guess is right, and the stock trend moves with you, you can be bold enough to add another small position, because your built in profit from your starting position will act as a buffer for possible losses. The idea here is to sell or short incrementally as prices decline, and to buy or cover small batches as prices increase.

Anyone sitting at home who risks a lot of money on one small price change is asking for an early heart attack. Nevertheless, stock trading has much better odds than regular gambling because there are only two possibilities, UP or DOWN. It's the trader's job to guess the shortterm trend and to be flexible enough to adjust to a change in trend.