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Strategies & Market Trends : Momentum Daytrading - Tricks of the Trade
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To: Dave O. who wrote (109)1/8/1998 7:34:00 PM
From: Eric P  Read Replies (2) of 2120
 
Dave:

<<But, why don't you take what the trade gives you, whether it be 1/16, 1/8, ...? For example yesterday I traded XYZ 7 times. Most profits were 1/8 to 1/4, buying back lower than I sold 4 of the 7 times. >>

Any method that consistently makes money is as good as gold. However, be careful when targeting very small profits. Let me give a hypothetical example:

Assume that a trader is targeting only short term moves and exits every trade after a 3/8 point move in his stock. Assume that he exclusively trades 1000 shares per trade and his commission rate is $40/round turn. Let's suppose his "method" is coin flipping and after every 10 trades he has 5 profits and 5 losses. The following would be his results:

Profits:
(5 profits) x [(3/8 point move - 1/8 point spread) x 1000 shares - $40] = $1050

Losses:
(5 losses) x [(-3/8 point move - 1/8 point spread) x 1000 shares - $40] = -$2700

Net Loss = $1650 or $165 loss/trade.

Surprisingly, JUST TO BREAK EVEN, you have to be profitable on over 70% of your trades. ==> The reason for these odds is that the admission price of the game is $40/trade for commission and $125/trade for the spread (assuming 1/8 point). To actually make money for yourself, you would need an even higher winning percentage.

Although the odds seem to be stacked up against you (and they are!), you would have a much better chance of success if you go for larger gains/losses per trade. If you target a one point gain/loss ==> you only need 59% winners to break even. A two point target results in breaking even with only 54.2% winners.

I apologize for all of the numbers... My point being this: Going after smaller gains require a much higher probability of success to offset the fixed cost of the spread and commission. Beware of enriching the brokers ($40/trade) and marketmakers ($125/trade) unless you feel very confident of the potential trade.

Good luck and Happy Trading,
-Eric
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