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This seems self evident - that trading is all about timing, about when to enter a trade (and when to exit), but the fact is that most day traders lose money. Here's an illustration into why:
Consider for example Black Monday, October 23, 1987, where the DOW Jones dropped some 500 points which translated to a harrowing 23% at that time. It took two years for the DOW to recover.
However, on that day when the DOW dropped 500 points, many traders who went SHORT - betting that stocks would drop
What is shorting a stock? What is going long? - Free EBAY, PayPal, Business and Law Forums - Ebay Suspension, PayPal Limited
lost a gang of loot.
And on that same day when the DOW dropped five hunny, many traders who went LONG made a gang of loot.
How? Why? How could anyone MAKE money going long on a day the market crashed, and how could anyone possibly LOSE money going short on such a day?
The answer lies in the SWINGS that the market experienced that day - and any day, for that matter.
On Black Monday, the DOW and S&P at 1:30pm EST were at lows, but suddenly rallied, rising 10% before falling back in a failed recover rally to end the day down 23%. Any trader who went LONG at that time, and sold before the rally faded, made out like gangbusters.
Conversely, a trader who went short right then, at what appeared to be the bottom or anywhere close, but then panic covered as stocks rallied and didn't hold on long enough for the eventual collapse, lost massively.
Today, April 17, 2015, was a great example. The futures (indications of where the indexes will open, before the opening bell), were triple digit in the red this morning. So everyone knew that it was going to be a bad open - and bad it was. And the DOW went as low as some -350 points! during the day, but eventually rallied to close at -279 - still a hefty down day, but not atrocious.
Not to mention my over all theory of the DOW's cycling:
New Rally - Latest Stock Market Rallies - Free EBAY, PayPal, Business and Law Forums - Ebay Suspension, PayPal Limited
During this day of DOW collapse I did NOT shorts. I went long only - and did very well, making money on every trade. How? Why? Well, because I TIMED my trades well.
I traded mostly NFLX today, and was able to gauge where it would keep going up, and where it would go down today (NFLX was actually green - meaning positive - action in a sea of red today, after dipping almost 5 points, NFLX ended the day up close to 10 points, with plenty of profitable swings all day long.
I also traded GOOGL and went long at 531 on it, which wasn't quite the low, but almost (when GOOGL was at 531 it was down about -12 points for the day) and sold at 532 near the end of the day. How did I know that 531 was such a great entry point for GOOGL? Well, for one thing, the stock was having REALLY hard time going even to 531, and while watching it hover between 531.2 and 531.8 I almost lost discipline and went in at 531.5 (not that it would have mattered so much because the stock closed at around 532.74), and also because I checked the recent CHARTS of GOOGL and noticed that the stock had not been anywhere near this low for some time, which to me meant - either GOOGL is finished and about to collapse, or, it's just having a bad day and this is a great buying opportunity). In the back of my mind also, was that EARNINGS were coming for GOOGL on April 23rd, although at the same time my mind was thinking - GOOG missed earnings last time, but still - went up.
Anyway, in the analysis of my trading mind, I saw BUY! and I bought, and it worked out well.
And there you have it - timing, which means that:
1 - It isn't just about what the market is doing, but what you do relative to the market's movement, and
2 - That how long you hold a trade makes all the difference as well.
Now #1 - market timing - takes skill that comes with experience. You also need all the tools you can get - the charts, real time access to analyst releases, and a just plain feel for the market, to do this thing. #2 - holding a trade long enough to make a profit, also has a lot to do with discipline (although - and this is another topic entirely - STOP LOSSES or STOP LIMITS are also sometimes key to allow you to bail out of a losing position with a small loss and then reenter it at a better position), but how long you hold a trade also has to do with how long you are able (financially) to hold the trade.
EXAMPLE: Consider if you have $100,000. in your account, which when margin enabled gives you $200,000. of buying power (margin, these days, for most stocks, doubles your buying power). At most brokerages, you will as well have $300,000. or more of day trading buying power, which is your ability to buy and hold stocks - but only for that day (if you hold beyond that and don't cough up a gang of loot, there are repercussions, including forfeiting any possible profit for what is know as "freeriding" - which means, basically, buying and selling a stock without paying for it! plus getting your account restricted from accessing that day trading buying power for a while).
But in any case, you are at a minimum limited by your buying power from buying an infinite amount of stock, which means that if you decide to enter a trade with ALL of your buying power, and purchase $300,000. of stock all at once, that means that:
(1) You may not purchase any more of that stock - and whatever position you entered will be it (you will have no buying power to purchase more and "cost average down" your cost basis for the stock.
Cost averaging is, very simply, buying more of the same thing in order to lower your cost basis. Consider for example if you buy a chicken egg for $10. If you have only one chicken egg, that egg costs you ten dollars. But if you later buy another egg for $5., then the average cost of your two eggs becomes $7.50 each. If you buy another egg later for $1., the average cost of your three eggs becomes $16. / 3 or $5.33
Same with stock - buy 100 shares at 30 and your average cost is $30. per share, and you must sell for more than $30. (assuming you went long), to make a profit. Buy another 100 shares at 25, and now your cost average becomes $27.50, and you now need to sell the 200 shares for at least $27.50 to break even. And so on.
Getting back to our discussion about using your entire $300,000. day trading power to buy a single stock, you will be stuck with that cost basis and unable to average down if the stock should fall. (Or cost average up, if you are short, and the stock should rise.)
(2) If you go in with all your day trading buying power, which is also $100,000. higher than your normal margin power, that means that you must close the position out THAT DAY. I can't tell you how many times I have observed a stock that I entered I trade for, that ended up being a loser that day, come back to be a solid winner just one day later. In many cases, tying your hands such that you must close out the trade that day and not hold it over night, may become a severe handicap.
Let's consider a real world example: in 1980, when gold was at (for that time) an all time high of $675. due to double digit inflation and geopolitical unrest on the world, market wizard Jim Rogers decided to short it. But instead of going down, gold went UP - all the way up to $800. But Rogers just kept shorting more and more gold positions, until finally, eventually, after holding an ever losing position for long enough, gold fell all the way down to $400. and he covered at a serious profit.
Rogers was able to hold on and raise his cost average for the short, because he did not place all of his buying power into the first trade - he left some of his wherewithal, perhaps a lot of his wherewithal, for adding to his position, and also because he held on to enough funds to cover the potential loss as his position became more and more of a loser.
That is not to say that this always work - the old adage of "good money after bad" sometimes applies and some traders will tell you to NEVER cost average and to just ride the trade out once it becomes a loser (assuming you do not have a stop loss), but at a minimum, do not enter a trade at the extremes of your buying capacity, such that you cannot afford to ride out a potential loss.
In sum: TIME your trades, and leave some money on the table to adjust your position, if needed (do not over leverage yourself).
Consider for example Black Monday, October 23, 1987, where the DOW Jones dropped some 500 points which translated to a harrowing 23% at that time. It took two years for the DOW to recover.
However, on that day when the DOW dropped 500 points, many traders who went SHORT - betting that stocks would drop
What is shorting a stock? What is going long? - Free EBAY, PayPal, Business and Law Forums - Ebay Suspension, PayPal Limited
lost a gang of loot.
And on that same day when the DOW dropped five hunny, many traders who went LONG made a gang of loot.
How? Why? How could anyone MAKE money going long on a day the market crashed, and how could anyone possibly LOSE money going short on such a day?
The answer lies in the SWINGS that the market experienced that day - and any day, for that matter.
On Black Monday, the DOW and S&P at 1:30pm EST were at lows, but suddenly rallied, rising 10% before falling back in a failed recover rally to end the day down 23%. Any trader who went LONG at that time, and sold before the rally faded, made out like gangbusters.
Conversely, a trader who went short right then, at what appeared to be the bottom or anywhere close, but then panic covered as stocks rallied and didn't hold on long enough for the eventual collapse, lost massively.
Today, April 17, 2015, was a great example. The futures (indications of where the indexes will open, before the opening bell), were triple digit in the red this morning. So everyone knew that it was going to be a bad open - and bad it was. And the DOW went as low as some -350 points! during the day, but eventually rallied to close at -279 - still a hefty down day, but not atrocious.
Not to mention my over all theory of the DOW's cycling:
New Rally - Latest Stock Market Rallies - Free EBAY, PayPal, Business and Law Forums - Ebay Suspension, PayPal Limited
During this day of DOW collapse I did NOT shorts. I went long only - and did very well, making money on every trade. How? Why? Well, because I TIMED my trades well.
I traded mostly NFLX today, and was able to gauge where it would keep going up, and where it would go down today (NFLX was actually green - meaning positive - action in a sea of red today, after dipping almost 5 points, NFLX ended the day up close to 10 points, with plenty of profitable swings all day long.
I also traded GOOGL and went long at 531 on it, which wasn't quite the low, but almost (when GOOGL was at 531 it was down about -12 points for the day) and sold at 532 near the end of the day. How did I know that 531 was such a great entry point for GOOGL? Well, for one thing, the stock was having REALLY hard time going even to 531, and while watching it hover between 531.2 and 531.8 I almost lost discipline and went in at 531.5 (not that it would have mattered so much because the stock closed at around 532.74), and also because I checked the recent CHARTS of GOOGL and noticed that the stock had not been anywhere near this low for some time, which to me meant - either GOOGL is finished and about to collapse, or, it's just having a bad day and this is a great buying opportunity). In the back of my mind also, was that EARNINGS were coming for GOOGL on April 23rd, although at the same time my mind was thinking - GOOG missed earnings last time, but still - went up.
Anyway, in the analysis of my trading mind, I saw BUY! and I bought, and it worked out well.
And there you have it - timing, which means that:
1 - It isn't just about what the market is doing, but what you do relative to the market's movement, and
2 - That how long you hold a trade makes all the difference as well.
Now #1 - market timing - takes skill that comes with experience. You also need all the tools you can get - the charts, real time access to analyst releases, and a just plain feel for the market, to do this thing. #2 - holding a trade long enough to make a profit, also has a lot to do with discipline (although - and this is another topic entirely - STOP LOSSES or STOP LIMITS are also sometimes key to allow you to bail out of a losing position with a small loss and then reenter it at a better position), but how long you hold a trade also has to do with how long you are able (financially) to hold the trade.
EXAMPLE: Consider if you have $100,000. in your account, which when margin enabled gives you $200,000. of buying power (margin, these days, for most stocks, doubles your buying power). At most brokerages, you will as well have $300,000. or more of day trading buying power, which is your ability to buy and hold stocks - but only for that day (if you hold beyond that and don't cough up a gang of loot, there are repercussions, including forfeiting any possible profit for what is know as "freeriding" - which means, basically, buying and selling a stock without paying for it! plus getting your account restricted from accessing that day trading buying power for a while).
But in any case, you are at a minimum limited by your buying power from buying an infinite amount of stock, which means that if you decide to enter a trade with ALL of your buying power, and purchase $300,000. of stock all at once, that means that:
(1) You may not purchase any more of that stock - and whatever position you entered will be it (you will have no buying power to purchase more and "cost average down" your cost basis for the stock.
Cost averaging is, very simply, buying more of the same thing in order to lower your cost basis. Consider for example if you buy a chicken egg for $10. If you have only one chicken egg, that egg costs you ten dollars. But if you later buy another egg for $5., then the average cost of your two eggs becomes $7.50 each. If you buy another egg later for $1., the average cost of your three eggs becomes $16. / 3 or $5.33
Same with stock - buy 100 shares at 30 and your average cost is $30. per share, and you must sell for more than $30. (assuming you went long), to make a profit. Buy another 100 shares at 25, and now your cost average becomes $27.50, and you now need to sell the 200 shares for at least $27.50 to break even. And so on.
Getting back to our discussion about using your entire $300,000. day trading power to buy a single stock, you will be stuck with that cost basis and unable to average down if the stock should fall. (Or cost average up, if you are short, and the stock should rise.)
(2) If you go in with all your day trading buying power, which is also $100,000. higher than your normal margin power, that means that you must close the position out THAT DAY. I can't tell you how many times I have observed a stock that I entered I trade for, that ended up being a loser that day, come back to be a solid winner just one day later. In many cases, tying your hands such that you must close out the trade that day and not hold it over night, may become a severe handicap.
Let's consider a real world example: in 1980, when gold was at (for that time) an all time high of $675. due to double digit inflation and geopolitical unrest on the world, market wizard Jim Rogers decided to short it. But instead of going down, gold went UP - all the way up to $800. But Rogers just kept shorting more and more gold positions, until finally, eventually, after holding an ever losing position for long enough, gold fell all the way down to $400. and he covered at a serious profit.
Rogers was able to hold on and raise his cost average for the short, because he did not place all of his buying power into the first trade - he left some of his wherewithal, perhaps a lot of his wherewithal, for adding to his position, and also because he held on to enough funds to cover the potential loss as his position became more and more of a loser.
That is not to say that this always work - the old adage of "good money after bad" sometimes applies and some traders will tell you to NEVER cost average and to just ride the trade out once it becomes a loser (assuming you do not have a stop loss), but at a minimum, do not enter a trade at the extremes of your buying capacity, such that you cannot afford to ride out a potential loss.
In sum: TIME your trades, and leave some money on the table to adjust your position, if needed (do not over leverage yourself).
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