Advice / info / clarifications on short term trading.

[Boon Trader]

Hi,

I have made a decent return on some shares (150% over 12 months or so). I am now looking to withdraw my initial investment and continue investing or trading with the profit.

I have a few questions relating to day trading and swing trading. Everything I read about day trading is that it is very risky so beware etc etc...Reading this post (What Style of Trader Am I?) I think this question relates more to swing trading.

I will try to explain as best I can:

Say I have £10k to invest in some stock that is regularly oscillating 5% (at least a few times a week) - what am I missing in terms of risk? Since I looked at the stock a few weeks ago, I would have made about £12k profit so far IF I had used the buy/sell prices I was practising with. Trading like this just appears to be similar to investing, but on a much smaller time-scale, and therefore carries the same risk (i.e. you can lose your initial investment - but no more).

I realise these returns are probably chicken feed compared to what others are doing, but for my current needs this is more than sufficient.

My point is, this seems to be too good to be true which leads me to believe I have fundamentally misunderstood something. What's to stop me opening and closing 2-3 £10k trades per day (or longer if day ends with a loss), on the same stock (with a trading balance of £10k in total)?

Is this because I have not considered the fact that day traders close on the same day - regardless of profit/loss? AND they leverage their positions which can multiply their losses.

Please note, I am an absolute beginner here so I apologise in advance for my naive questions...

Thanks in advance for your patience.

 

[Liquid validity]

Say I have £10k to invest in some stock that is regularly oscillating 5% (at least a few times a week) - what am I missing in terms of risk?
Trading like this just appears to be similar to investing, but on a much smaller time-scale, and therefore carries the same risk (i.e. you can lose your initial investment - but no more).

My point is, this seems to be too good to be true which leads me to believe I have fundamentally misunderstood something. What's to stop me opening and closing 2-3 £10k trades per day (or longer if day ends with a loss), on the same stock (with a trading balance of £10k in total)?

Is this because I have not considered the fact that day traders close on the same day - regardless of profit/loss? AND they leverage their positions which can multiply their losses.

Your suspicions are correct regarding leverage.
Forex Leverage: A Double-Edged Sword
That also means you can potentially lose more than you have at risk.
Normally a broker would close the positions before that happened,
but in a fast moving market, you could end up owing your broker quite a bit of cash.

http://www.trade2win.com/boards/gen...on-sizing-compounding-keys-magic-kingdom.html
I generally refer anyone new to the above link when it comes to risk and position size.
It covers the basics well, and will keep you out of trouble.

Which brings me to your account size - 10K, and you mention taking 10K trades.
Essentially your risk per trade would be 100% risk per trade, not good.
Typically 2% risk per trade or less is recommended.

 

[Boon Trader]

Thanks for the reply. Sounds like leveraging carries a similar risk to shorting - i.e. you can get into a lot of trouble very quickly if you don't know what you're doing (or even if you do...).

I will read those other two posts when I get a second.

Just to clarify, trading at a 2% level - £200 - (using the example previously provided), 5% swings on share price would leave me at a loss taking into account fees and commissions etc. leaving no opportunity to cummulate the profits into something more substanstial. This would suggest I either increase my account size, give up or accept a higher level of risk...

Can I assume that everyone that starts out investing using a 2% risk level either starts out making tiny profits or comes to the table with a large investment?

 

[timsk]

Which brings me to your account size - 10K, and you mention taking 10K trades.
Essentially your risk per trade would be 100% risk per trade, not good.
Typically 2% risk per trade or less is recommended.

Hi Boon Trader,
Welcome to T2W.

Further to L_V's comments, this might prove helpful: Essentials Of 'Risk & Money Management'
Tim.

 

[Boon Trader]

Hi Tim,

Thanks for that, and the welcome, I'll add that to the 'to read' list

Hi Boon Trader,
Welcome to T2W.

Further to L_V's comments, this might prove helpful: Essentials Of 'Risk & Money Management'
Tim.

 

[Liquid validity]

Thanks for the reply. Sounds like leveraging carries a similar risk to shorting - i.e. you can get into a lot of trouble very quickly if you don't know what you're doing (or even if you do...).

I will read those other two posts when I get a second.

Just to clarify, trading at a 2% level - £200 - (using the example previously provided), 5% swings on share price would leave me at a loss taking into account fees and commissions etc. leaving no opportunity to cummulate the profits into something more substanstial. This would suggest I either increase my account size, give up or accept a higher level of risk...

Can I assume that everyone that starts out investing using a 2% risk level either starts out making tiny profits or comes to the table with a large investment?

Sounds like you have been buying shares outright, long only with no leverage yes?
Probably through a self select ISA or share dealing account with a bank or similar?
Outright long only share purchase is meant for position trading - buy and hold.
Its pretty much impossible to day trade using that type of account.

Probably the easiest and most accessible way to trade UK shares would be CFD's
where there is no stamp duty, saving you 0.5% straight away.
Also commissions on outright unleveraged longs are much higher than with
derivatives (CFD's being one).

Yes leverage can get you into a lot of trouble if abused.
Leverage trading is basically trading on loan from the broker.
You put the trade deposit down (margin) and thats it.

Really the best way of looking at is not as a way of increasing trade size
to a level you can't afford.
It simply reduces the margin requirements per trade.
As long as you stick to 2% or lower of £10k as your maximum risk per trade (i.e £200 is your maximum loss),
you will be safe enough regarding leverage abuse - provided your stops are not
ridiculously tight.

Main point though, do lots of reading and googling until you
fully understand risk, leverage and margin.
Until then don't put any money on the line.
Demo demo demo, then the absolute lowest stakes you can trade live with

 

[wackypete2]

I'm in the minority here, but I've never viewed day trading as riskier than any other trading style. The level of risk taken lies with the trader. Generally you will complete more trades when day trading, so to minimize risk use smaller position sizes. How you handle the risk is what will keep you in the game during drawdown periods. If you let greed and emotions get the best of you then yes you can lose money faster while day trading, but that is the fault of the trader NOT the style of trading employed. For starters use very small size, keep stops and limits reasonable and hittable within the day, and end the day either in profit or after 3 losses. You can work your way up from there when you begin showing daily profits more often than daily losses.

Peter

 

[Liquid validity]

I'm in the minority here, but I've never viewed day trading as riskier than any other trading style. The level of risk taken lies with the trader. Generally you will complete more trades when day trading, so to minimize risk use smaller position sizes. How you handle the risk is what will keep you in the game during drawdown periods. If you let greed and emotions get the best of you then yes you can lose money faster while day trading, but that is the fault of the trader NOT the style of trading employed. For starters use very small size, keep stops and limits reasonable and hittable within the day, and end the day either in profit or after 3 losses. You can work your way up from there when you begin showing daily profits more often than daily losses.

TBH I agree with you.
I've done all 3, position, swing and day.
As you say, if you keep risk and leverage under control,
day trading has a lot going for it, no overnights, no open gaps,
faster cycling of capital and so on.

For people who don't understand those concepts, it can be lethal...

 

[Boon Trader]

Your assumptions are correct, just for my own understanding, why is it impossible to day trade with this account? Is swing trading possible with this kind of account?

With CFDs, do you have to leverage? Or is what you are saying, the only way to make it profitable is to leverage? Also, I thought CFDs didn't incur capital gains but still incurred stamp duty.

To understand your seond last paragraph, I need to do some more reading...

Which demo platform would you recommend? I have a TD Trading account, is their CFD platform worth using to learn on?

Sounds like you have been buying shares outright, long only with no leverage yes?
Probably through a self select ISA or share dealing account with a bank or similar?
Outright long only share purchase is meant for position trading - buy and hold.
Its pretty much impossible to day trade using that type of account.

Probably the easiest and most accessible way to trade UK shares would be CFD's
where there is no stamp duty, saving you 0.5% straight away.
Also commissions on outright unleveraged longs are much higher than with
derivatives (CFD's being one).

Yes leverage can get you into a lot of trouble if abused.
Leverage trading is basically trading on loan from the broker.
You put the trade deposit down (margin) and thats it.

Really the best way of looking at is not as a way of increasing trade size
to a level you can't afford.
It simply reduces the margin requirements per trade.
As long as you stick to 2% or lower of £10k as your maximum risk per trade (i.e £200 is your maximum loss),
you will be safe enough regarding leverage abuse - provided your stops are not
ridiculously tight.

Main point though, do lots of reading and googling until you
fully understand risk, leverage and margin.
Until then don't put any money on the line.
Demo demo demo, then the absolute lowest stakes you can trade live with

 

[Boon Trader]

I'm in the minority here, but I've never viewed day trading as riskier than any other trading style. The level of risk taken lies with the trader. Generally you will complete more trades when day trading, so to minimize risk use smaller position sizes. How you handle the risk is what will keep you in the game during drawdown periods. If you let greed and emotions get the best of you then yes you can lose money faster while day trading, but that is the fault of the trader NOT the style of trading employed. For starters use very small size, keep stops and limits reasonable and hittable within the day, and end the day either in profit or after 3 losses. You can work your way up from there when you begin showing daily profits more often than daily losses.

Peter

7

Thanks for your reply, will take a bit more reading to get a handle on all of this...
but you are saying that you can manage the risk of day trading by making more, smaller value trades? What would you base reasonable stops and limits on, i.e. how would you calculate this?

When you say, "end the day either in profit or after 3 losses", do you mean your strategy should mean you stop when you make a profit or 3 losses then leave it for the next day?

I guess I'm in for a long slog of losses then reinvesting profits to get up to a decent return level.

One last thing, is day trading synonymous with penny trading? Where do CFDs fit in with these? From my understanding, you can use day trading with CFDs on any instrument, which can include penny stocks...

 

[Liquid validity]

Your assumptions are correct, just for my own understanding, why is it impossible to day trade with this account? Is swing trading possible with this kind of account?

At a push swing trading may work if the holding time is weeks.
Even then, CFD's will have lower costs.
Off the top of my head, as far as I remember, the crossover point is 3 months ish.
In other words, the share dealing account you have now is more efficient
to hold trades for longer than 3 months.
With CFD'd the opposite - max efficient holding time is 3 months ish.
This is due to rollover costs (sometimes called overnight financing).
https://www.interactivebrokers.com/en/trading/pdfhighlights/PDF-CFDs.php?ib_entity=es

With CFDs, do you have to leverage? Or is what you are saying, the only way to make it profitable is to leverage? Also, I thought CFDs didn't incur capital gains but still incurred stamp duty.

You don't have to leverage risk, but a small amount is ok - 5:1
Leverage (finance) - Wikipedia, the free encyclopedia

CFD's do incur CGT, but no stamp duty:
Guide: Contracts for difference | This is Money

Which demo platform would you recommend? I have a TD Trading account, is their CFD platform worth using to learn on?

No idea, thats down to you - google it.
Last time I used CFD's was years ago with IGindex.
I'd imagine TD are OK and you are familiar with them.
Just as well to research all the costs, spreads, commissions and rollover charges
with a number of providers all the same.

 

[timsk]

Hi BT,

Your assumptions are correct, just for my own understanding, why is it impossible to day trade with this account? Is swing trading possible with this kind of account??

I'll leave that to L_v to answer.

With CFDs, do you have to leverage? Or is what you are saying, the only way to make it profitable is to leverage? Also, I thought CFDs didn't incur capital gains but still incurred stamp duty.?

CFDs don't incur stamp duty, but the do incur capital gains. You may be thinking of spread betting which doesn't incur any duty or tax and is the most popular entry route for new traders. There's a whole forum devoted to these two here: Spread Betting & CFDs If these interest you at all, besides the differences mentioned already, you'll need to get your head around their other relative pros and cons. You can do that here: What are the Pros and Cons of Spread Betting Vs CFDs?

To understand your seond last paragraph, I need to do some more reading...?

Check out the 2nd link in my signature and follow your nose from there.

Which demo platform would you recommend? I have a TD Trading account, is their CFD platform worth using to learn on?

I can't comment on TD as I've not used them. But, take a look at our Reviews section. Additionally, for more tips on finding a broker, check out this FAQ: Can You Recommend a Data Feed, Charting Software & Broker?

Enjoy!
Tim.

 

[Liquid validity]

One last thing, is day trading synonymous with penny trading? Where do CFDs fit in with these? From my understanding, you can use day trading with CFDs on any instrument, which can include penny stocks...

Noooooo....
Top tip, in general, steer well clear of penny stocks.
Wide spread, illiquid and prone to manipulation.
There are people who deliberately target them as they
know there is a lot of inexperienced money there, easy pickings.

 

[wackypete2]

7

Thanks for your reply, will take a bit more reading to get a handle on all of this...
but you are saying that you can manage the risk of day trading by making more, smaller value trades? What would you base reasonable stops and limits on, i.e. how would you calculate this?

I'm not saying you should make more trades but in general you will have more trading opportunities than swing trading. Trade using a small size than your swing trading, ie: buy/sell 200 shares instead of 600. This way if you lose 3 trades in 1 day you are not deep in the hole

When you say, "end the day either in profit or after 3 losses", do you mean your strategy should mean you stop when you make a profit or 3 losses then leave it for the next day?

All trades should be closed at the end of the day no matter if profit or loss (day trading!). IMO, as a new day trader you should aim to end the day with some profit rather than a loss even if just a small amount. If you have a few dollars profit then resist the urge to take that last minute trade with less than an hour or so to go. Why risk a losing day when you can end with a few dollars in hand. Eventually you will develop your own risk profile and determine when and what trades to take but keep it very simple to start.

Revenge trading will kill you. STOP after 3 losses. Log out of the the platform, shut down the computer and enjoy the rest of the day knowing you can return again tomorrow. If you are so determined to win a trade at any cost, that's when you will lose a long string of trades all in 1 day or over leverage to compensate and decimate your account. Then there won't be anything left for tomorrow. Some days are just not going to be your day. Learn to stop and wait for tomorrow.

Good Luck!

Peter

 

[Shakone]

Hi,

I have made a decent return on some shares (150% over 12 months or so). I am now looking to withdraw my initial investment and continue investing or trading with the profit.

I have a few questions relating to day trading and swing trading. Everything I read about day trading is that it is very risky so beware etc etc...Reading this post (What Style of Trader Am I?) I think this question relates more to swing trading.

I will try to explain as best I can:

Say I have £10k to invest in some stock that is regularly oscillating 5% (at least a few times a week) - what am I missing in terms of risk? Since I looked at the stock a few weeks ago, I would have made about £12k profit so far IF I had used the buy/sell prices I was practising with. Trading like this just appears to be similar to investing, but on a much smaller time-scale, and therefore carries the same risk (i.e. you can lose your initial investment - but no more).

I realise these returns are probably chicken feed compared to what others are doing, but for my current needs this is more than sufficient.

My point is, this seems to be too good to be true which leads me to believe I have fundamentally misunderstood something. What's to stop me opening and closing 2-3 £10k trades per day (or longer if day ends with a loss), on the same stock (with a trading balance of £10k in total)?

Is this because I have not considered the fact that day traders close on the same day - regardless of profit/loss? AND they leverage their positions which can multiply their losses.

Please note, I am an absolute beginner here so I apologise in advance for my naive questions...

Thanks in advance for your patience.

Be careful about thinking what you would have made. We can all look at a chart and see millions on offer, but it's an illusion. If you could make 12K, then you could reasonably lose 12K as well.

If it seems to good to be true, that's because it is.

Day trading is particularly hard as trading costs tend to drown out your profits in the long run unless you are very good.

 

[Liquid validity]

Which demo platform would you recommend? I have a TD Trading account, is their CFD platform worth using to learn on?

Plus500 | Trading with Demo Money

Day trading is particularly hard as trading costs tend to drown out your profits in the long run unless you are very good.

With Shakone on that, costs are harder to overcome, simply as they are a larger proportion
of gross profit in day trading.

 

[Boon Trader]

At a push swing trading may work if the holding time is weeks.
Even then, CFD's will have lower costs.
Off the top of my head, as far as I remember, the crossover point is 3 months ish.
In other words, the share dealing account you have now is more efficient
to hold trades for longer than 3 months.
With CFD'd the opposite - max efficient holding time is 3 months ish.
This is due to rollover costs (sometimes called overnight financing).
https://www.interactivebrokers.com/en/trading/pdfhighlights/PDF-CFDs.php?ib_entity=es

You don't have to leverage risk, but a small amount is ok - 5:1
Leverage (finance) - Wikipedia, the free encyclopedia

CFD's do incur CGT, but no stamp duty:
Guide: Contracts for difference | This is Money

No idea, thats down to you - google it.
Last time I used CFD's was years ago with IGindex.
I'd imagine TD are OK and you are familiar with them.
Just as well to research all the costs, spreads, commissions and rollover charges
with a number of providers all the same.

Great, thanks for all the info - learnt more on here with your replies that trying to get my head around the more formal explanations on wikipedia et al.

Regarding the tax issue, I believe spread betting is not declared as income, just SD and CGT - is that right? From what I can see CFD and spread betting are similar. Is this the case? What are your experiences with these?

 

[Boon Trader]

Hi BT,

I'll leave that to L_v to answer.


CFDs don't incur stamp duty, but the do incur capital gains. You may be thinking of spread betting which doesn't incur any duty or tax and is the most popular entry route for new traders. There's a whole forum devoted to these two here: Spread Betting & CFDs If these interest you at all, besides the differences mentioned already, you'll need to get your head around their other relative pros and cons. You can do that here: What are the Pros and Cons of Spread Betting Vs CFDs?


Check out the 2nd link in my signature and follow your nose from there.


I can't comment on TD as I've not used them. But, take a look at our Reviews section. Additionally, for more tips on finding a broker, check out this FAQ: Can You Recommend a Data Feed, Charting Software & Broker?

Enjoy!
Tim.

Greatt stuff, thanks for the info and links, I'll get on top of those...

You bring up a question I just asked in another post re CFDs and Spread betting (I thought they were roughly the same thing). Can I ask you what I asked in the other post? What is your experience with using these?

Cheers

 

[Boon Trader]

Noooooo....
Top tip, in general, steer well clear of penny stocks.
Wide spread, illiquid and prone to manipulation.
There are people who deliberately target them as they
know there is a lot of inexperienced money there, easy pickings.

This is pretty much what I had heard but confused myself with the assumption that penny stocks = day trading.

 

[Boon Trader]

I'm not saying you should make more trades but in general you will have more trading opportunities than swing trading. Trade using a small size than your swing trading, ie: buy/sell 200 shares instead of 600. This way if you lose 3 trades in 1 day you are not deep in the hole



All trades should be closed at the end of the day no matter if profit or loss (day trading!). IMO, as a new day trader you should aim to end the day with some profit rather than a loss even if just a small amount. If you have a few dollars profit then resist the urge to take that last minute trade with less than an hour or so to go. Why risk a losing day when you can end with a few dollars in hand. Eventually you will develop your own risk profile and determine when and what trades to take but keep it very simple to start.

Revenge trading will kill you. STOP after 3 losses. Log out of the the platform, shut down the computer and enjoy the rest of the day knowing you can return again tomorrow. If you are so determined to win a trade at any cost, that's when you will lose a long string of trades all in 1 day or over leverage to compensate and decimate your account. Then there won't be anything left for tomorrow. Some days are just not going to be your day. Learn to stop and wait for tomorrow.

Good Luck!

Peter

Great advice, thanks for that. The old addage of 'throwing good money after bad' seems especially relevant here...