A not so funny thing happened on my way to more profitable trading. I used to be an investor holding stocks, mutual funds, bonds, ETFs and ETNs for at least a couple of years. That was a few years back. Today, I day trade mostly in common stocks without a specific holding time between long and short positions. This change happened gradually boosted by a gradual best practice that also evolved adapting to market conditions. Market volatility became a welcome friend rather than a source of anxiety. Day trading has opened doors for taking advantage of the peaks and valleys. Oh, yes, I believe in market timing as much as I do dislike the use of PE ratio as a trading guide. The bottom line is that current market and economic conditions favor immediate reactions and the realization that once rock solid institutions can no longer be trusted long term with one’s hard earned money.
I am retired. I have no time to wait out the market downturns and it has become critical that I invest wisely. Thus, I have evolved to day trading and happy to be there. My self-managed portfolios are mostly in stocks. Bonds, funds and other baskets have ceased to be as attractive as stocks as the latter offer a clearer picture of the near future price momentum. I developed a system that I am willing to share with others. I have been teaching my trading technique with my group in my community for about 2 ½ years now with encouraging results.
Fine, I became a day trader. Do I look at long term investment with disfavor? Not at all. The one thing about investment is that it is not a one size fits all venue. Probability still comes heavily in investing. So, I take advantage of today's more volatile market. On the other hand, one can almost be sure that grabbing a handful of stocks will result in most of these stocks doing okay and growing in the future. Thus, there is logic in long term investment approached in a relatively more traditional way than day trading. Learn the proper techniques to read the day to day market movement and you will be a successful day trader with potentially more profit than long term investors. Caution! Day trading requires more work than long term investing. If you are young enough to hold securities for years, long term investing may be more for you. Then again, why not have some long term holdings mixed in with short term ones?
My day trading technique has been the fruit of about 30 years of trading and making every conceivable mistake there is. Today, my trading system is based on a tripod with Fundamental, Technical and News. There is nothing new here. What is new is that I use only three Fundamentals for identifying what stocks to buy followed by three Technical charts to zero in on when to trade. News is valuable in fine tuning the decision. The intent is to use select metrics that within a system result in educating the trader on the factors that do matter in reducing risk especially in a volatile market. Most of the metrics are basic, participating in roles that support each other to show a clear market view of a common stock.
Let’s analyze Apple (AAPL)’s last full cycle starting on Aug. 19, 2011. Fundamentals were good with a 4 Morningstar rating, zero debt to equity ratio and positive free cash flow increasing from previous reporting year. My criteria for going long are Morningstar rating of 4 or 5, debt to equity ratio of 0.3 or less and positive free cash flow. AAPL Fundamentals were all favorable and merits going to the next step. At this point I look at the Technical indicators to see when to trade. I use the position of the price in the Bollinger Band, direction of the median and MACD profile. When the MACD lines are running very close to each other, I use the DMI for further guidance. Apple hit close to the bottom of the Bollinger Band and this is a signal for close watch. For those following this stock, this point offers the best point of entry, albeit with the risk that the price can still go south, because the median was still pointing downward but the MACD profile started showing an onset of upward momentum. The probability of the price further going down is lower than the probability of it going up from this level. Indeed, the next day confirmed an upward movement. The bullish trend continued and was finally reinforced on Aug. 26 when the MACD 12, 26 line crossed over to be above the EMA 9 line. All indicators including the PSAR supported the upward trend until Sept. 19 when it hit the top of the Bollinger Band signaling a close watch to go short. Indeed, a couple of days later, the price went south. This is a glimpse of how I day trade in favor of investing long term. Of course, I will update on current news at time of trade.
For long term, one need only look at the Fundamentals and News for company profile. It is still recommended to look at the Technicals for the right point of entry. The exit point will be significantly different between the short term day trader and the long term investor. The day trade will dump when the Technicals show that the upward current cycle is ending. The long term investor will not care as much and will ride many cycles.
Disclosure: I am currently long on AAPL.