Position trading is a very well defined term that shows up in many books on the subject of trading. A position trade technically speaking is a trade that lasts longer than one day. But many seem to make it out to be a "few" days. I did this myself until I found out better. Having specific labels is invaluable. It is a necissary part of the languaging process. From descriptive labels can come understanding , and even something far better: discinctions. Distinctions are "aha" type of concepts once understood that alters a persons frame of mind which much additional thought and understanding can come from..
For example, lets take what makes stocks go up and down. The thoughts (concepts) are: dividends and changes to the dividend, or more specifically, change in yield compared to other insterest bearing instruments, earnings and changes in earnings and the consistency of that earnings growth, new products that are perceived to be successful in the future, economic uncertainty, Fed raising the discount rate, a bond market rally, and so on and so forth. If looked at carefully, there can be as many reasons as people on why stocks go up and down. This is where the disctinction is to be found. The disntiction here is that it is people, the investors, that make stocks go up and down and nothing else. Everything else can be derived rom this distinction, so as an essential thought, everything else is irrelevant and can even change over time. Sounds obvious and not worth mentioning? Think again. IMO this is the single most important concept which many, including many professionals and analysts in the field simply do not understand. They do not understand this as a *distinction*.
So the goal to investing in a particular stick would be to find out what types of investors are investing in that stock and what motivates their purchases and sales. There are telltale clues. As an example, if the stock is offering a significant divident that is comparable to current short term interest rates, this stock will attract many income oriented investors. These are the people who live of of what they make from the dividend yield of the stock. The investment interest in this stock by this type of investor will depend on how the yield of the stock compares with other interest bearing instruments. So the price of the stock will move with the fluctuations of interest rates on instruments equivalent to or safer in risk. If these investors can find a greater yield elsewhere given the risk premium over the income bearing stock, then they will sell the stock and move into that instrument with superiour returns. This wil cause the price of the stock to move down which would increase the yield of the stock. People would stop exiting the stock when the new yield is more inline with that of other interest bearing instruments. So what makes the price go up and down on this type of dividend bearing stock? Generally speaking, the changes in market inerest rates. The reason I am going into all of this is that one or two simple distinctions can provide much in terms of understanding a concept and it ramifications. And labels are an essential part of this process.
So lets take "day trading". Why on earth would anyone want to day trade when you can hold stocks longer than a day for greater returns. Now what are the disctinctions missing here? How about risk? How about risk in the context of returns obtained from small changes in the price of a stock. Profit made on small change in price can be very easily wiped out inside of a day. So it is difficult to make that profit and capture it as cash in your account. The only way to make $$ on small price fluctuations is by purchasing a relatively large block of shares, like on the order of 3,000, or IMO more realistically for a full time day trader, 5,000 shares or more. The stock moves up 1/2 of a point. The day trader has grossed $2,500. But comissions are a very important consideration because this also can very easily take awway a substantial amount of this profit made on 5,000 shares of stock. This quantity of shares turns out to be a substantial amount to risk in the market compared with that of other forms of investing.
So here at the end of the day lets say you were fortunate and made $5,000 on a point change in the stock. Now, would you hold on to your trade to see "what happens" the next day? How possible would it be for that stock to move down one point or more at open? Day traders appear to trade liquid but active issues, stocks that are in front of the public eye. So by holdig overnight, you are essentially placing your trust in these faceless individuals in them acting rationally if news were to break. And this does not have to be news about this specific stock. News that can directly impact stocks can be something as tenuously related as Iran being found to be moving their armorments to the border of Kuwait. Now if the oil sector was already "weak" and leaning to fall, don't you think this news would cause a decline in oil issues, and quite possbily a substantial change. Now what else would be impacted by the decline in oil issues? Airline stocks? What about defense stocks that may have been recently showing improving strength. This woul be a temporary shot in the arm for them which can cause some defense stocks to move up one or more points in short order.
Due to that unpredictable events that can unfold overnight, I do not think you will find a wise day trader holding on to their stock overnight much since they made their profit on one pioint or even a fraction of a point change of the stock. After all, you made your profit on a comparatively small change in the price of the stock, which is your goal. You can do quite well with this approach to trading if you are a successful day trader. Why is it necissary to take additional risks for that extra point of two you *perceive* in making the next day? You have a crystal ball that I am not aware of? But as a day trader, if you stick to the rules, it makes trading on small changes in price workable. Risk is now much more manageable in a game that is very risky by its nature.
So, day trading is an approach to managing the risk in profiting from small changes in a stock's price. Everything else that is to be understood of day trading IMO comes from this distinction.
Am I making sense to everyone here? Ira and Steve, does this fit with what you do and understand about day trading? Am I runner up for the "Big V" award (award for the Most Verbose)? ;)
Bob Graham |
