Ken, I've been following your posts, and I'm fascinated by your techniques. You are obviously a very good trader, and your track record speaks for itself.
I see your point about “fundamental value” vs. “real value”. However, I've been trading successfully using the idea of “value” – probably breaking some very good rules. I guess I've been lucky, because I've made good money for several months. I wonder if one day soon, the music may stop.
I mostly concentrate on daytrading one stock – MSFT. Occasionally I trade AOL, and other stocks very rarely. I have devoted some 16 months to studying MSFT trading – every trading day. I use LII, and intraday 1-minute chart with volume. From this, I have developed a pretty good feel for how MSFT trades – I also follow AOL, on a daily basis, but mostly trade MSFT.
My original idea was very simple. I figured that as long as MSFT is in an uptrend, then trading it is extremely safe. That necessitates my following news, and reading about MSFT very closely. This is nothing other than fundamental analysis – I know it breaks the rule of “think like a trader, not investor”.
However, my thought was – as long as MSFT trends upward, then it is impossible for me to buy so high, that one day it won't go higher. Here is where value enters. I do a lot of fundamental analysis. I know that MSFT is not a “bubble” stock, so it is not likely to fall by 50% overnight and never recover. There are stocks that can fall 50% and never recover. My super simple idea was: as long as I follow fundamentals very closely, it is not likely that I will miss some development so dramatic, that MSFT will fall by 50% and not recover – and so, MSFT is extremely safe. That's why I decided to trade it – can't lose, must win (as long as I continuously do good FA on it).
Armed with this confidence, I studied MSFT's daily trading patterns for 16 months. I have a reasonable batting average in that I almost never buy at the top of the day. On the occasions where I have been wrong, and the stock goes below my buying price, all I have to do, is exactly what I shouldn't (according to good daytrading principles) – I hold on to the losing trade, and watch it head lower, and lower. However, my secret weapon is – VALUE (yes, I know this is against the principles you illustrated). I know that MSFT is not a stock which will as in your example go from 19, to 18, to 17, to 15, to 10 (and I know this because I follow FA very carefully – another no-no for a daytrader). This is value – a key distinction from the “crap” stocks, and the key reason why I trade MSFT. The longest it took for me to recover from a losing trade, was 11 trading days. That's terrible, to tie up your capital for 11 trading days, if you are a daytrader… but that's where my other principle enters. I keep a good chunk of cash on the side, and during this ‘down time', I trade the other stock which I also watch daily on a streamer (though not on LII or chart) – AOL. So, in a way, I don't “lose time”. And then my MSFT comes back, and my trade is good. **I have never taken a loss on a MSFT trade** - even though I've made losing MSFT trades in daytrader terms. I just wait, and all is well.
I usually make 2 to 6 trades (4-12 tickets) a day in MSFT. Thanks to my experience with MSFT daily patterns, I am right most of the time. When I am wrong, sometimes it will take a few hours to make my trade “good”. More rarely it will take a whole day – and so, I'll only make 1 trade that day. Sometimes, it can take 1, 2, 3, 4 days to make my trade good – during which time I trade AOL (or very occasionally some other stock). But I never take a loss on *ANY* MSFT trade. I tried to daytrade it classically – according to your principles. Get out with a small loss – sound advice, but what happens a good percentage of the time, is that I find myself being stopped out, only to watch the stock go back up and away! Sure, you can say – you set your stop too tight. But if I set it looser, taking several “small” losses adds up nastily. You can say – in that case you are a rotten trader, because you can't tell the trend. Perhaps. But what I found, is that using my method, I win 100% of the time. Using the “traditional” method, even if I were to be the most skilled trader, I'd only win 95% of the time. I'll take 100% any day. Another consequence of the fact that MSFT is in a long-term uptrend, is that I rarely short – because if I'm wrong, the danger exists, that I may NEVER recover if I just hold my bad trade… here I do have to cut my losses. Luckily, I've developed enough of a feel for MSFT trading patterns, that I'm right when I short – but I do it very rarely.
My record of trading the way I described, is quite decent over the past 14 months. I have made significantly more than if I just bought and held (though I do have a big position in MSFT I never touch – it's part of my nest egg at a different broker). I make steady gains. This is not to say there is no downside. The downside is when MSFT has no volatility – sometimes it trades within a range of less than one point, and basically goes nowhere for some time… during this time, I try my luck with AOL. On the other hand, I find MSFT has just the right kind of volatility most of the time – it rarely declines more than 6-7 points a day (luckily I've never been caught in such a downdraft in a bad trade – but it's a comfort to know it won't go down by 50 points in one day, like some net stocks), instead it does nice 4-5 point swings a day. So, my gains are not spectacular, but steady and they all add up – sure, I don't make huge amounts in net stocks (though I have done very well trading AOL), but I try not to envy other stocks. As long as I make steady money in MSFT, I leave AMZN to better traders – I know that you can make infinitely more money in AMZN, but I know MSFT, while I can't be 100% sure that AMZN won't decline 50% and stay there. I can be sure of that in MSFT. So, I'm willing to settle for “small” money, but “safe” money (and guess what, it ain't so small…).
To recapitulate, my principles are as follows:
1) Pick a particular stock, (not just any stock) that's in a long term uptrend – in my case, that's MSFT
2) Follow the news, fundamental research, do a lot of work that an investor would do – not a trader… you need this to know if the uptrend will continue, and helps you anticipate news – such as good earnings, so you can play news with confidence.
3) Try to learn your stock's daily trading pattern as well as you can – it will help you not buy at a short term top, and will help you trade.
4) NEVER take a loss – sit on your “losing” trade – it WILL come back… remember, that's why you are trading MSFT, not some other stock… your FA pays off… VALUE is important – in THIS case.
5) Have another stock you know well – MAKE sure that **in so far as possible**, it is counter-cyclical to your stock (it moves differently from your stock, so when one is useless, the other is trading well) – trade this stock during any “down-time”.
6) Always keep some cash on the side, so you can trade your other stock(s).
7) Take your steady profits, and dump them into long-term holding stocks, while always keeping a cash cushion for blue-light specials on MSFT or whatever other stock you fancy.
As you can see, several of these principles directly violate good trading practices. Yet it works for me. How can it fail? Only if several things occur at once. I make a bad trade AND I do bad FA work (so I miss some terrible development) AND softie falls and never comes back. That's a lot of ANDs. Odds are in my favor. Perhaps one day it will happen – but meanwhile I've made so much in the way of profits, that even if one day a bad trade goes to ZERO, I will have made more in profit than I lose on that trade (I never trade more than 1000-2000 shares at a time – mostly 90% of the time, it's a 1000 share trade – so if MSFT goes bankrupt, I lose 1000 shares – but in profits, I made much more). So, I made these profits with complete safety, and in the end – I would have succeeded with this tactic, even if I was the world's WORST trader (in other words, if I ALWAYS bought at the very top – statistical impossibility) – just by holding, I would come out on top. ALL BECAUSE OF VALUE.
Sorry for such a lengthy post, but I feel that there are many ways of making money – sometimes it pays to get away from somebody else's principles, and be your own man.
So, Ken – to each his own. I find profit in simple thinking, and not listening to “gurus” – no matter how “impressive” they may be. I follow my own ideas – and I follow what works for me.
Now my questions:
If my return on this trading is 65% *better* than if I just bought and held MSFT - as it has been for me during the last 7 months (I can compare, because I also have a "buy and hold" position in MSFT with another broker) - is this too little for a daytrader?
What should a good daytrade expect as a return in a year?
Am I cheating myself of big gains, by not following more traditional daytrading ideas, instead of my own hare-brained schemes?
I ask, because I respect your opinion. In the end I will make my own decision, but I'm always open to hearing different points of view.
Sincerely,
Morgan
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