The turn-about...early morning day trading

Well,


It appears that I have come almost full circle in my search for a successful method to trade and make some money.

I have ended up with a rather long entry this time but bear with me. The following entries will be shorter as I decided to cover more stuff with a new plan all in one go this time. I also went through a "should have" which I don't like to do, but it is a bit more than just speculation as the only difference between not doing it and pulling the trigger was a 30 second hesitation and a drive to follow my plan as it unfolded this morning...yah I kicked myself but I also realize that these will happen again and hopefully they will be firmly in my sights.

I started out with long term value investing as the goal...too slow among other things so it didn't work out. My next foray ended up with me trying my hand at day trading with limited success. Then came swing style, counter trend, position and a number of variations in between. While the plans were mostly of my own concoction they shared common elements with these other styles of trading. Some worked, some didn't work so well. Most were restricted by my start up capital, very small loss allowance or my exuberance.

My current project is another run at daytrading with a few variations. Over the last 6 months I have had the chance to read about some day trader's great losses, other claimed huge profits and the more moderate line that you can't make a living trading but they have a decent system that makes them some money.

Of all of the things that I have gathered in my perusing, here is the list of those that I felt were of most use to me:

• there are certain times or even days that are better for trading than others
• get comfortable with a few stocks
• get to know them and how they tend to react to certain market shinanigans
• be consistant
• set strict loss guidelines
• set goals that are not too out of reach
• treat trading as a business, not a hobby

It's hard to know whether I came to these realizations myself or read or heard them along the way.

So, to the trading....Stock Selection

I have selected a list of some of the most volatile stocks on the TSX following these criteria:

• an average daily swing of $1 or more, often more than $2 and as high as $4 or more.
• volume greater than 200,000 shares a day traded...the higher the better
• priced between $40 and $75, this let's me have the option of trading two at once
• The price regularly does most of it's moving in the morning, off the start

Of all the stocks available I ended up with 10 on my short list.

• Agnico-Eagle Mines Ltd. (AEM.TO) - Average daily swing >$1.5, 60 days >$2, ~$50
• Inmet Mining Corp. (IMN.TO) - Average daily swing >$2, 21 days >$4, ~$50
• Suncor Energy, Inc. (SU.TO) - Average daily swing >$1.5, 47 days >$2, ~$50
• Teck Cominco (TCK/B.TO) -Average daily swing ~$1.5, 40 days >$2, <$50
• Addax Petroleum Corp. (AXC.TO) - Average daily swing ~$1.5, 39 days >$2, <$50
• Canadian Pacific Railway (CP.TO) - Average daily swing >$1.5, 36 days >$2, <$75
• Imperal Oil (IMO.TO) - Average daily swing > $1, 34 days ~$2, ~$50
• CIBC (CM.TO) - Average daily swing ~$1, 35 days >$2, <75
• Magna Intl, Inc. (MG/A.TO) - Average daily swing ~$2, 40 days >$2, <$75
• Canadian Natural Resources (CNQ.TO) - Average daily swing >$2, 30 days >$4, ~$75

Of these CNQ and IMN are my favourites as they average over $2 daily swings and have swings as large as $4 often...having said that I have not traded them for real yet.

Keep in mind that stocks in the $100 and higher range swing far more than these but it really restricts the cash available and a larger swing means that a loss can add up quicker than I might expect. I watched a trader make three trades on one stock that was $164 or so and make over $700 trading with 100 share lots over a 1.5 hour period....without breaking a sweat. I picked up a lot just from watching him do this. Consider that he was using $16,400 to trade (could have been $6000 and margin) so the return for the day was 4.26% (based on margin use it could be 11.6%).

On a side note, this same trader only trades four stocks...ever...and makes decent money doing so and has been doing this for over two years. He is familiar with the stock enough that he can tell what it might do under certain market conditions.

PLAN A

So, my original plan was to buy the stock as close to the opening of the market as possible to get the first trades at the opening price, take my chances with the price move, cut it short if it went against me and let it run if it went in my favour. Pretty simple sounding. I was assuming a 30-40 cent loss and the gains would be in the neighbourhood of $1 or more...roughly 3:1, not bad even if I could nail 50% of the opening moves correct. Doing the math, for every 10 trades I would make at least $5 per share and loose at most $2 per share traded...net minimum $3 over 100 share trades is $300 less commissions ($10 per completed trade) leaves $200. that only averages out to $20 per trade and maybe two trades per day...not very promising.

The Returns

Looking at the percentage returns this looks a little better. It boils down to $200 per week, working with $5000 capital that is 4% per week. Ignoring compounding for now that is 208% per year assuming the odds stay the same and the average is 10 complete trades each and every week.

The Scrub

The downside...I tried getting these entries and I could not. For any number of reasons my trades are always delayed long enough to not get the opening trades and the price moves VERY fast in that first few seconds. Fast enough that a loss can accumulate while I think about pushing the sell button if I did get the order filled. Didn't leave me feeling all warm and fuzzy.

OK, Plan B.

Wait for the first minute to settle out and see what it is doing. Well, this puts me in the position of true day trading as I am now watching a chart while the price moves to determine if I should buy or not...and when. I was trying not to do this as it can be time consuming....which is why I decided to pick volatile stocks with large morning moves in the first place...gets the job done early.

So...I call the trade in the last 5 minutes leading up to the market open (the research) as I can see the bids and asks as they move around. This gives a clue as to where the price is likley to go off the start. So I ready myself, watch the market open and wait for the first minute to pass. What the price might do, and how I decide when to buy or short is more complicated than I can get into now...suffice it to say that making hundreds of practise trades over the last six months has shown me many things about how a price moves. I might also add that these same patterns that I see in one minute increments are apparent in daily increments as well...they are just happening faster so there is not much time to decide if it will follow the emerging patern through.

I'm afraid that this is where the fun is.

Within the first fifteen minutes I will have either made the first trade entry or I may have passed on the stock alltogether. I will always have at least two ready to go but for now I will concentrate on the first one that moves as I like.

Today's Initial Trade

Today was interesting as I entered a short order for AEM and made a net $44 (had I followed my rules that would have been $127, but I was more interested in making a quick buck this morning than letting it ride a bit and only breaking even). The alternate trade was MG/A, I was going to buy long, AEM looked like the better setup so I only watched MG/A

MG/A ranged almost a full $1.50 in the first minute...there was no way I could get in fast enough to ride that. Even if I did it then dropped right back to the bottom and $1 down farther. I could have shorted at the top and rode it down covering near the bottom so I could have seen a $150 to $250 profit depending on my timing...I left it alone, too fast for me right now. My gut screamed to go long at the new bottom though...and I watched it sit there for thirty seconds. I had decided to stick with AEM, a decision I soon came to regret....15 minutes later I would have been up $250...and $300 by 1000h or so. I would then have just set a Virtual Trailing Stop Order (VTSO) for 50 cents off and let it go at that point or just closed for a nice profit. I checked afterward, had I VTSOd I would have automatically closed the trade in the afternoon for a tidy net $512 profit.

Well. Obviously I can't pick them all right...I wouldn't mind a few of those though, which is the joy of this new plan. I can choose to trade every day, time permitting, or particular days of the week and if I am consistant I will get to ride these roller coasters when they appear. It would appear that most of the trading will be done in the first 30 minutes and anything beyond that will be letting a trade go on autopilot with the VTSO set appropriately to allow a certain minimum profit from that point on...Usually I would do this after the first $1 move in my favour then set the VTSO 30-50 cents off the current price as it continues along.

I made a second trade on AEM slightly later, entry was off so I got out too soon, lost a bit of my gains so counting commissions my day was up 0.12%...that's all of $6. Although it is too much work for such a small gain it is still a simple 31% annualized return...more than many other types of investments out there are likely to gain.

I'll update my original CTP goal and recalculate it to date and see if I can catch it. GAME ON!

JD.