Stocks generally trade in blocks of 100. Does this mean to avoid having more than
5% of your a/c in play you can only buy stocks below a certain level? eg
- a/c 5,000
- 5% trade limit 250
- max stock price 2.5
- You can buy stocks in blocks of less than 100, however xtn costs may be
- Is the bid-ask spread cleanly explained?
How long to achieve statistical significance with xtesting?
- Not covered
- = Action points
Use xtesting to calculate the win/loss probability
- see performance report from complete guide notes
Liquidity is the ability to buy or sell an asset in large quantity without affect-
ing the price levels.
- Volume is the total amount of a security that trades in a given time period. The
- greater the volume, the more buyers and sellers are interested in the security,
- and the easier it is to get in there and buy and sell without affecting the price.
- Another measure of liquidity is frequency, or how often a security trades.
- The more frequently a security trades, the more opportunities you’ll have to
- identify the short-term profit opportunities that make day trading possible.
- The volatility of a security is how much the price varies over a period of time.
- standard deviation
- The higher the standard deviation, the higher the volatility, the higher the
- volatility, the more a security’s price is going to fluctuate, and the more profit —
- and loss — opportunities there are for a day trader.
- Stocks generally trade in round
lots, which are orders of at least 100 shares. If you want to buy a stock worth
$40 per share, you need $4,000 in your account.
- No one will stop you from buying a smaller amount than the usual round lot
- in any given security, but you’ll probably pay a high commission and get
- worse execution for your order.
In backtesting, a trader specifies the strategy that he or she would use and
then runs it through a database of historic securities prices to see whether
the strategy would have made money. The test includes assumptions about
commissions, leverage, and position size.
Start with a hypothesis
Past performance is not indicative of future results. A strategy may test per-
fectly, but that doesn’t mean it will continue to work. Backtesting is an impor-
tant step to successful day trading, but it is only one step.
Paper trading does not take into a/c the effect of the placing your trade
It’s better to do good simulation for months than to lose thousands of real
- dollars in hours.
Profit & Loss statement (what time frame – daily, weekly?)
Fundamental analysis can actually hurt you in day trading, because you may
start making decisions for the wrong reasons.
A pivot point is the average of the high, low, and close price for the day. If the
next day’s price closes above the pivot point, that sets a new support level,
and if the next day’s price is below the pivot point, that sets a new resistance
moving average. It’s calculated by averaging the closing prices for a given
- whats your time period?
- A crossover occurs whenever the price crosses the moving
- average line. Usually, it’s a good idea to buy when the price crosses above the
- moving average line and to sell when the price crosses below it.
- To use convergence and divergence in analysis, the trader looks at moving
- averages from different time periods, such as 5 days, 10 days, and 20 days.
- When two or three of the moving average lines converge (come together),
- that means that the trend may be ending. That often makes it a good time to
- buy if the trend has been down — and a good time to sell if the trend has
- been up. If two or three of the moving average lines split up and diverge, that
- means that the trend is likely to continue. That means that it’s probably a
- good time to buy if the trend is up and sell if the trend is down.
- A moving average is a lagging indicator. It sums up trading activity in the last
- 5, 10, 30, or 60 days.
- Phases of a trend
- Accumulation: This is the first part of the trend, where traders get
- excited about a security and its prospects. They start new positions or
- add to existing ones.
- ߜ Main phase (also called continuation): Here, the trend moves along
- nicely, with no unusual price action. The highs get higher on an uptrend,
- and the lows get lower on a downtrend. A trader might make money, but
- not big money, following the trend here.
- ߜ Consolidation (also called congestion): This is a sideways market. The
- security stays within the trend, but without hitting higher highs or lower
- lows. It just stays within the trading range. A consolidation phase is
- good for scalpers, who make a large volume of trades in search of very
- small profits. It can be boring for everyone else.
- ߜ Retracement (also called correction or pullback): This is a secondary
- trend, a short-term pullback away from the main trend to the support
- level. Retracements create buying opportunities, but they can also kill
- day traders who are following the trend.
- ߜ Distribution: In the distribution phase, traders don’t think that the
- security can go up in price any more. Hence, they tend to sell in large
- ߜ Reversal: This is the point where the trend changes. It’s time to sell if
- you had been following an uptrend and buy if you had been following a
- downtrend. Many reversals follow classic patterns, which are discussed
- later in this chapter.
- If the rate of change on the trend is going up, then rising prices are likely to occur.
- To calculate momentum, take today’s closing price for a security, divide that
- by the closing price ten days ago, and then multiply by 100.
- > What are other momentum calculations?
- Momentum is a leading technical indicator. It tells you what is likely to
- happen in the future, not what has happened in the past.
- > Proof?
- A breakout occurs when a security price passes through and stays above —
- or below — the resistance or support line, which creates a new trend with
- new support and resistance levels.
- A one-time breakout may just be an anomaly, what technicians sometimes call a false breakout
- The exact amount of momentum that a security has can be measured with
- indicators known as momentum oscillators.
- A classic momentum oscillator
- starts with the moving average of closing prices for a past time period
- day’s moving average is plotted below the price line
- when positive, traders say that the security is overbought;
- when it is negative, they say that the security is oversold
A tick is an upward or downward price change
arbitrage comes from the French word for judgment
- suitable for automation because it requires fast work
- You sell as much
- of the high-priced asset in the high-priced market as you can, borrowing shares
- if you need to, and then you immediately turn around and buy the low-priced
- asset in the low-priced market.
- → dont do it: too complex!
- especially active in the commodity markets
- scalpers look to take advantage of changes in a security’s bid-ask spread.
- difference between the price that a broker will buy a security for from those
- who want to sell it (the bid) and the price that the broker will charge to
- purchase (ask)
- If the spread between the bid and the ask is wider than usual, then the
- ask is higher and the bid is lower than it should be. That’s because
- slightly more people want to buy than sell, so the brokers charge the
- buyers higher prices. The scalper uses this as a sign to sell.
- if the spread between the bid and the ask is narrower than usual, then
- the ask is lower and the bid is higher than it would normally be
- That happens if there are slightly more sellers than buyers, and the broker
- wants to find buyers to pick up the slack.
- The scalper would be in there buying and hoping that the selling pressure is short lived.
- You’ll need a low trade cost structure
- He also has to be sure that the price changes
- aren’t driven by real information, because that will make market prices too
- volatile to make scalping profitable. Scalping is “picking up nickels in front of
- a steamroller,” some traders say, because of the risk of focusing on small
- price changes when bigger changes are underway.