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Daytrading

Some Day Traders enjoy significant profits over a long period, and some make profits for a while then give it all back in losses. Most reports indicate the majority of Day Traders close their accounts within a year, either because of cash losses, or through realizing they don’t have the time available to commit to making it a success.To become a profitable Day Trader is difficult. It requires study, preparation, discipline and time. One common mistake that is often made at the outset is to set a profit target, and even worse, think of that as required income, for example, “I need to make $2,000 per month to pay my bills”. Don’t start there!The alternative approach is to measure trading performance in terms of percentage points rather than in absolute terms. Ask a professional portfolio manager at an institutional asset manager what their performance is like and you’ll likely be answered in terms of “Up or down x% on the month and Up or down y% on the year”. These guys, being paid salaries to trade, don’t talk in absolute cash terms until it’s time to negotiate their end of year bonuses. What’s more, the majority are going to be delighted if they make a 20% annual return. In fact, a portfolio manager with returns over that number would have to work hard at attracting new institutional grade investors. Some investors would draw on their gut feeling that ‘somewhere in there’ the risk return ratio must be skewed towards risk. Others might argue that “OK, you obviously had a good idea that worked out, but I really needed to be in the trade from the beginning”.If you’re looking to open a day trading account and have £5,000 capital available, then taking the account to £6,000 over the period of a whole year would in percentage terms put you in line with successful institutional investors. On the other hand an annual return of £1,000 might not be the kind of number you were thinking of when running with the idea of taking up Day Trading. It’s clear at this point that profitability in cash terms is dependent on the amount of capital you put up and the risk return profile you decide to run.Step back for a moment and consider how your trading methodology would be different if your target was to achieve a relatively modest return (say 10%), but not to exceed it, and are given a long-time window in which to trade. You may have twenty trading ideas that you are currently looking to put on. But in this different environment it’s not a question of which of the twenty would be proved to be good trades, it is more, which few of them are the best to use to meet the target. This cherry-picking of trades does mean you might not put on trades that turn out to be very profitable which is obviously frustrating but is what demo accounts are for. It does however mean you might not put on the other trades that would have gone on to lose you money and that is crucial.
VWAP is typically used to help youtrade intoand out of positions improved price levels. VWAP is the ratio of the value traded to total volume traded over a particular time period. It is a measure of the average price at which a stock is traded.If you are looking to enter into a long position over the course of a day, then you’d be ‘buying the dips’ which can be thought of as buying when price is lower than the daily VWAP. As you could sell short, or at least take profits when price is above VWAP we begin to see how a sideways market creates the opportunity for profits to be made by trading around VWAP.It’s worth considering the crucial implications of the market changing from ‘sideways’ to ‘trending’, or vice versa. Interpreting VWAP to be in essence a short-term moving average allows you to consider a ‘break out’ of price action as not only a signal that momentum is building but also, in what direction it is heading. Instead of trading the regression back towards VWAP, you would build a position into a momentum trade.Of course the two strategies involve putting on completely different positions. If you were selling in a sideways market, you’d be buying in a trending one. Getting that wrong can clear out your account in next to no time which is why being able to identify whether a market is sideways, or trending is so crucial to your trading performance.The trading strategy ‘Opening Range Breakout’seeks to profit from price action signals at market open. It’s a popular strategy among day traders looking to trade short term, specifically intra-day, momentum. Some traders use Technical Analysis and candlestick charts to identify breakout is occurring. The VWAP, and more specifically, a situation when short term price crosses VWAP, can also be used as an indicator of breakout. In practice you’d probably use both indicators in conjunction.The below chart taken from Interactive Brokers shows: VWAP as a yellow line and price action as red and green candlesticks. The blue and purple lines are the high and low standard deviations range, respectively. Half way through today’s trading session we can see the market today has been moving sideways. Selling when price was above VWAP and buying when it was below would have been profitable. Trading a breakout strategy would have brought about significant losses.Source: Interactive Brokers Demo Trading Platform 20181129Getting down into the detail of the calculation we see the supporting text from this broker explains the exact details of their methodology:“Intraday Volume Weighted Average PriceTracks VWAP throughout the day and displays as a colored line linking VWAP values at varying times throughout the one-day period. By default, the line that tracks Intraday VWAP is bracketed within a high/low standard deviation range. The standard deviation is calculated for the same period as the VWAP, and the range can be adjusted by modifying the number of Standard Deviations within the settings of the Intraday VWAP.Intraday VWAP is calculated as: VWAP=[sum (Volume_bar_i * Typical_price_i)]/sum(volume_bar_i) where i is the intraday bar number. If we use a 1 min daily bar chart, the calculation is made from the first minute with i=[1;N] where N is the last bar number of the chart, Typical_price_i = VWAP_on_bar_price_i => This is the VWAP we currently store and volume_bar_i is the volume for the bar i. If no volume is available for the product (i.e. for IND, CASH and CMDY), use 1 as volume for each bar.”Source: https://www.interactivebrokers.com/en/software/tws/usersguidebook/technicalanalytics/intradayvwap.htmVWAP is a useful tool that allows opportunities to finesse entry and exit into positions. It is also a useful indicator for trading sideways and trending markets; unfortunately knowing which type of market you are in is the tricky bit.
Opening Range Breakout (ORB) is a particular price action that is taken to be an indicator to enter into a trade.

The Basics

The fundamental elements of an ORB trading strategy are best demonstrated by taking an equity market with typical trading hours of 08.00 -16.30. The high and low price levels of stock ABC are recorded over the opening five minutes (08.00 – 08.05) and in our example the high during those five minutes is 78.54 and the low price is 77.26. Any price action after 09.05 that takes the price over 78.54 is seen as an ORB breakout to the upside and is considered a signal to buy. The principle is applied in the same way to a breakout to the downside where a new lower price below 77.26 would be a signal to sell.Time horizon: Positions are typically held intra-day so are sold prior to market close; apply Price Action Rules.Stop losses: Buy trades would have stop-losses set at the low of the current day and sell trades would have stop losses set at the high of the day.Target price: 2:1 or 3:1 ratio to stop loss cost.

Supporting Signals

Catalysts: The occurrence of some kind of news event that is seen as a catalyst for the break out is seen to be supporting the signal to trade.Overnight Gap: The difference between the previous day’s closing price and the current days opening price should be considered. If stock ABC had a previous closing price of 76.74 and opened trading at 09.00 at a higher price (77.72) then the overnight Gap was ‘bullish’. In our example, a bullish overnight gap in ABC supports the ORB signal to buy. An ORB signal that is in the opposite direction to the Overnight Gap means you are being given mixed signals and would discourage entering into a trade.Volumes: The greater the trading volumes, the stronger the trading signal. Diagnostic tools supplied by broker platforms will offer the chance to monitor volumes. In the below example the breakout candle is to downside and is associated with a sizeable uptick in volume. The signal to sell is borne out by the price continuing to fall during the rest of the trading day.Source: IG Index 20181113

Variations

The example we chose is fairly simple and explains the fundamentals of the strategy but of course there are a range of factors to consider which will improve understanding and thereby hopefully improve profitability.Time intervals: Our example used 5 minute time intervals. Whilst this is a popular choice other trader use others such as 1, 15, or 30 minutes.Other events: Any diarized event that is likely to bring about increased trading volumes can be used as a base for trading ORB. Major reporting events such as the release of US Non-Farm Payroll data will generate spikes in trading volumes.

Summary

The theory behind OBR is that markets are busier at certain times of day and therefore price movements during those times are an indication of wide-held sentiment and therefore give an indication of future price direction.ORB trading strategies are widely known, are intuitive in nature, and to some extent self-fulfilling. If for example the price of a stock follows the required pattern to trigger an ORB trade on the upside, then the associated widespread buying will push the price upwards. Even if you are holding back on actively trading an ORB strategy it is worth understanding how they work thereby avoiding the risk of unknowingly betting against them.
Fading is a form of trading which aims to put on short-term positions and take profits after small price changes. It is similar to Scalping but looks to make profits from trading the price movements that are in the opposite direction to the general price movement.

How

Trading a Fading strategy involves buying and selling when price action temporarily reverses to go against the general market direction. Even if a particular instrument looks to be having an ‘up’ day, there will be opportunities to sell short and catch short-term price movements to the downside. The reverse would apply in a falling market where price is supported at various levels and for a short period when buyers outnumber sellers. It takes advantage of the fact that markets don’t tend to move in a straight line.Fading can be applied to news events that are stock specific (company announcements) or more general such as the release of economic data. Any significant market move that follows a news release might be seen as an over-reaction, particularly if price action triggers a large number of stop losses that traders had set at a certain level. Hitting stop losses can exacerbate the price move until it is considered to have over-shot. Trading a Fading strategy implies there is now an opportunity to make profits out of the process where price realigns itself to where fundamental analysis suggests it really should be.In the chart below the long-term trend is upwards, but there are still opportunities to make profits from short-term price action to the downside.IG Index 20181113

Risks

As with Scalping, the usual Risk Factors apply, especially Gapping Risk.Getting ‘stuck’ in a Fade Trade can be costly. Having a position that is against the general price direction means you might be in the unhappy position of trying to minimize losses rather than maximize gains. For that reason, the setting of stop losses at appropriate levels is particularly important.

Where

As with Scalping trades, You’ll want to use a Trading Platform that has reliable, high-speed connectivity to your own place of trading. You don’t want to suffer periods of being unable to connect to your broker to execute. It’s, therefore, sound advice to try Fading using a broker’s Demo account and monitor the reliability and speed of the connection.Fading is a Contrarian style of trading so practicing with a Demo account will also allow you to analyze if it is a good personal fit for you. Again, it might even be that one platform is better for you for Fading one instrument and another better for Fading something else, so research the pros and cons of the respective broker platforms.

What

Fading can be applied to any instrument or market with the right kind of trading volumes and price volatility. As you are taking a contrarian approach, it can be beneficial to trade an instrument that has some, but not too much price volatility as spikes in the general direction of traffic might hit your stop losses.It is also important to trade instruments that have tight bid/offer Spreads, so research how they compare across brokers that you can access.

Bulls and Bears

Upward and downward market moves tend to be different in nature. Upward markets are associated with more gradual price movement; it’s perceived that this is what they naturally do. Downward markets tend to be more dramatic and sell-offs can look like prices are falling off the edge of a cliff. The different type of market momentum means that Fading in Bullish and Bearish markets is quite a different experience. Particular risks are involved with Fading in a bearish market. Hence the adage warning it’s not a good idea to try and catch a falling knife.

Why

Fading is not for the risk-averse. It’s a contrarian trading strategy and is fast-paced. Despite the risks involved the distinctive approach does offer clear guidelines regarding risk management and it appeals to a lot of traders.
To be a profitable Day Trader you will need to have a clear trading strategy.Your strategy will detail the conditions required for putting on and closing out a trade and also the manner in which that trade execution is conducted. Getting the direction of the markets right is one thing, finessing your trade execution to maximize profits (or minimize losses) is another.

Preparation

Pre-trade is the time when some of the most difficult questions arise:
  • Has sufficient research and analysis been carried out to make your trading strategy a success?
  • Is the current market situation one that the strategy was designed to work in?
  • Are all or just some of the trigger signals indicating execution appropriate?
  • How successful has your trade execution been?
  • Have the risk factors associated with the strategy changed?
 The list of questions is extensive, and only a few vital questions are included above. Anyway, some of the most important questions will be personal to you. Try to understand your previous trading successes and failures and use them to frame a question to yourself about whether now would be a good time to trade.

Position size

Choose what size of position you would like to take. Then reduce it, then break it into smaller pieces and trade them in installments and ‘work your way into the trade.’ Running lower levels of exposure will lead you to a situation where you are managing a trade competently rather than being influenced by your emotions.

Instrument

Is a particular instrument the best for the strategy? If you’re feeling the markets are due a sell off a short position in an Equity Index CFD would give you exposure to that price move, but you may be willing to take on a single stock risk and go short on a particular company based on your detailed analysis of it?

Platform

Different broker platforms have different strengths and weaknesses. They range from the quality of pre-trade diagnostic tools through to terms and conditions of financing. Which platform is best for which trade? Broker Comparison tool.

VWAP (volume-weighted average price)

Understanding and using VWAP can help build positions and close out positions at better price levels. VWAP is the ratio of the value traded to the total amount that is traded over a particular period. It is a measure of the average price at which a stock is traded.If you are looking to enter into a long position throughout a day, then you’d be ‘buying the dips.’ The principles of VWAP may continue through the life of the trade with positions being adjusted to take advantage of short-term market moves. Positions may be increased or reduced to take profits or to manage risk levels.

Time Horizon

Know your product and the market hours that it trades and your investment time horizon. Equity CFDs can only be traded during that instrument’s market hours, and other products like Forex and Index CFDs will have wider spreads at certain times of the day.

Closing out trades

Stick with your strategy. If the trade is profitable, do allow stop losses to be adjusted in your favor to ensure some profits (or at least break even) are secured. Don’t move stop losses away from the market price. Don’t double down.

Post-trade analysis

Analyze your performance regarding trade execution. If you feel you are close to making optimal returns discipline yourself to manage the emotional aspects of leaving some money on the table.
To be a profitable Day Trader you will need to have a clear trading strategy.Your strategy will detail the conditions required for putting on and closing out a trade and also the manner in which that trade execution is conducted. Getting the direction of the markets right is one thing, finessing your trade execution to maximize profits (or minimize losses) is another.

Preparation

Pre-trade is the time when some of the most difficult questions arise:
  • Has sufficient research and analysis been carried out to make your trading strategy a success?
  • Is the current market situation one that the strategy was designed to work in?
  • Are all or just some of the trigger signals indicating execution appropriate?
  • How successful has your trade execution been?
  • Have the risk factors associated with the strategy changed?
 The list of questions is extensive, and only a few vital questions are included above. Anyway, some of the most important questions will be personal to you. Try to understand your previous trading successes and failures and use them to frame a question to yourself about whether now would be a good time to trade.

Position size

Choose what size of position you would like to take. Then reduce it, then break it into smaller pieces and trade them in installments and ‘work your way into the trade.’ Running lower levels of exposure will lead you to a situation where you are managing a trade competently rather than being influenced by your emotions.

Instrument

Is a particular instrument the best for the strategy? If you’re feeling the markets are due a sell off a short position in an Equity Index CFD would give you exposure to that price move, but you may be willing to take on a single stock risk and go short on a particular company based on your detailed analysis of it?

Platform

Different broker platforms have different strengths and weaknesses. They range from the quality of pre-trade diagnostic tools through to terms and conditions of financing. Which platform is best for which trade? Broker Comparison tool.

VWAP (volume-weighted average price)

Understanding and using VWAP can help build positions and close out positions at better price levels. VWAP is the ratio of the value traded to the total amount that is traded over a particular period. It is a measure of the average price at which a stock is traded.If you are looking to enter into a long position throughout a day, then you’d be ‘buying the dips.’ The principles of VWAP may continue through the life of the trade with positions being adjusted to take advantage of short-term market moves. Positions may be increased or reduced to take profits or to manage risk levels.

Time Horizon

Know your product and the market hours that it trades and your investment time horizon. Equity CFDs can only be traded during that instrument’s market hours, and other products like Forex and Index CFDs will have wider spreads at certain times of the day.

Closing out trades

Stick with your strategy. If the trade is profitable, do allow stop losses to be adjusted in your favor to ensure some profits (or at least break even) are secured. Don’t move stop losses away from the market price. Don’t double down.

Post-trade analysis

Analyze your performance regarding trade execution. If you feel you are close to making optimal returns discipline yourself to manage the emotional aspects of leaving some money on the table.