The fake trade...dollars and cents

I managed to keep my money in my pocket this morning and do some live fake trading.

In order to make things more interesting, seeing as I had no money on the line I traded three stocks simultaneously...that was interesting.

My hit list consists of four stocks selected from my short list of 10, which I posted in The Turnaround a few days ago and I just reposted to keep it separate on The Short List

My hit list had AEM, CNQ, MG/A and SU.

As a result of today's activity I dropped MG/A from my hit list and added CM. I like the trending pattern of CM (CIBC) and didn't like the choppy action of the MG/A and found that it didn't really track well with the TSX...one of my indicators I use for deciding when to exit a trade. CM, doesn't follow the TSX well either but it is more consistant.

My CM fake trade was entered at about 1015h for $59.60. I would have placed a VTSO of about 30 cents at 1100h to let it go on autopilot and checked in at 1200h I would either place a 50 cent VTSO or just sell for $60.80 for a $110 profit (only 100 shares traded).

Considering that I missed the nice initial moves due to reluctance to enter the trades until I got more familiar with the price movement and indicators along with the three stock monitoring I don't think I did too bad. That and I was fighting the urge to put money down...I had to close the order box in case I got twitchy. $127 net commissions with six trades...add the CM trade bumps it to $227 net.

AEM for $16 net
CNQ for $77 net
SU for $34 net
CM for $100 net

Goal number one is to not lose money. I only had one actual losing trade for SU. The others were just not moving that much at the time. Maximun was three trades per stock.

I was done trading at 1100h except for the CM VTSO...which does not need me to monitor it.

Checking the previous moves before I started tracking trades there was another $350 net fudging against me already or even $175 if you cut that one in half again. 10 additional trades. Had I been using my money there might have been 3 or 4 trades that I would not have entered and those were the $10-$30 trades...bad entry but no loss accrued.

For sake of argument let's take the two worst stocks today, AEM and SU...$50 net gain, add the average of the previous possible trades...at the worst case $43.75 ($175/4) and the total is $93.75.

Based on my $5K capital (which is not that high anymore due to my playing) I would have seen a 1% - 1.9% portfolio gain for the one day gain. Translated into simple annualized returns that grows my portfolio to over $10K in one year assuming that the 1% return is the average daily return and assuming that I do not use any of the growing capital to trade larger lots or higher priced stocks for larger moves.

So much for the "would have"s. I will fake it again tomorrow and perhaps go real on Monday and see what happens.

JD.

The short list

My Trading Stock Selections

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.

To day trade...or not to daytrade...I'm afraid that is the question...

My initial plan was to call the price move off the start, place a trade, ride or close and enter the reverse trade to capture most of the rest of the move. This was not really day trading as there was to be little to no technical analysis and it looked REALLY good ...in theory.

I now see that was a pipe dream for a good number of reasons.

So, now I am directly into the daytrading realm...once again. I believe that I am better prepared for it this time as last time I was really green and I think lucked out for the most part.

Having said that, this is not something that I would suggest anyone try. It is very cut throat, more so than trading over longer time periods even if a lot of the same rules apply. I may continue to blog my results and whatnot but there will be little usable by any who are not of the daytrading mindset.

If anyone reading happens to be doing some day trading, drop me a line.

JD.

The day after...lessons driven home.

True to form I could not fake trade yesterday or today...in fact I entered trades on three different stocks.


Lessons:


1) Pay attention, the prices can move very fast off the start


The first trade was a small loser. I had my eye on the next trade in another stock most of the time as I expected it to move better so I exited for a loss...I was going to trade both but the prices are just a bit too high to allow me to do that. Just as well.


Back to the lesson. I entered a long position with CNQ...one of the larger movers and wasn't paying attention. To be honest I think I was talking to someone and was distracted...cost me $120 as the price dropped.


Entered long at $81.00
Gained to $81.23
Dropped to $79.80 before I got out
Reverse trade as a correction short at $79.73 10 seconds later
I was on the ball then....losing $120 tends to do that to me.
Price dropped to $78.60 over the next 20 minutes
Covered as the price rose to $79.09, up $64.00, would have sooner but again, price moved fast.


It really looked like a gap continuation rather than a fade...of course the price only went 23 cents higher and dropped like a stone....so much for the continuation.


It should have gone like this:


Entered long at $80.50 (this stock is on my early hit list now, second minute trades)
Gained to $81.23 and headed back down
Dropped to perhaps $80.60 before getting out, MACD and volume indicated $81.23 peak likely
Reverse trade as a correction short at $80.60 to $80.40 seconds later
Price dropped to $78.60
Covered as the price rose to $79.09, ($131 gain)


There were enough indicators to tell me not to enter the long trade when I did (decreasing MACD with increasing price, decreasing volume...classic "ready for the short" stuff) but I was still thinking of the indicators off the start that did say to go long.(price jump off the start after a $1 gap, worth at least a try...but would be a break even call as the price should fade)

2) Stick to the loss allowance for the day

I set a daily loss limit of $50...might be a bit low but I didn't stick to it...either day. So I am down about $300 or so after two days. That's a little much.

Seeing as I really needed to get a handle on how the order entry works I consider this a cheap lesson. Now I know. Placing an order off the start is not successful. I tried that today and it seemed like forever between hitting the order button, waiting for the order to be received, accepted then executed. It made a $50 difference on a trade that I was attempting to enter...that is not a good way to start.

New Rule

New rule will be to wait until the few three minutes after before placing a trade to miss the rush at the gate. I may even set on eto wait three minutes AFTER deciding to place a trade before actually placing it...and only if it still looks like a good trade at that point. I may go from a 1 minute chart to a 3 minute chart as a result...

Where I am now:

I can now tell what my entry price is going to be based on the bid ask quotes to within a few cents so I think I will do some fake trading now to get a better feel for how the trades fare. I was getting great results doing historical blind testing but there is a certain level of detachment that affects actually figuring where and when to place a trade. There is also the factor of doing these tests on 10 stocks at once. Seeing as there is no way to monitor that many trades at once in this timeframe with my current software I will restrict my studies to three stocks which I will select on the weekend after checking over my historical test results for the last two weeks. I will further restrict my actual trading to just one of those stocks. Once I am comfortable that I can execute consistantly profitable trades then I may pick up another.

I still see that the best time to trade for the largest possible price moves is early in the day...preferrably before 1000h or 1030h. So that is up to one hour of trading. If a trade goes longer than that it will be best to set a VTSO and let it go...once Questrade fixes the VTSO software issue as it doesn't work right now.

The next best time might be near the end of the day but only sometimes and the idea is not to let the trade go overnight as there are large gaps from the closing price to the opening price and it looks like there is no way to predict those...big possible losers.

JD.

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.

ETF hedge trading

Well, I think that this idea is just plain too complicated to pull off easily without having a fairly heavy duty trading platform. I still think that it has merit and I will adjust my fake trading account to drop the losers and let the winners run and see where I end up. I may work on it another time.

Meanwhile I have come up with another plan that I think is more workable, has nothing in common with my previous CTP plan and, once again, requires no research into company politics and accounting. I do believe in the CTP plan, I just like to play, and I will fall back to it once I am finished playing unless something else turns out to be more profitable.

It invloves using the most volatile stocks (I have eight selected out of a posible 127) at the most volatile times within certain price ranges and with very strict rules. I have tried to put into writing a couple of times and I just cannot get it clear easily...so rather than spending time trying to put it down now I will work it for a bit and see what works and post it another time.

JD.