Do you have to day trade to trade full time?

[shortlist]

0.5% per trade just isn't enough. For shorterm trading, you won't cover fees, and for longterm trading these trades just won't be worthwhile. Don't look to sell them just because they rose x%, you sell because you think the trade will more than likely not go up any further.

Thanks Mr J - I got a lot of feedback on the 0.5% plan and have reviewed my strategy accordingly. On another note - Newbie Questio No. 531: can you adjust a stop as your stock goes higher, or must you initiate a trailing stop upon initial purchase? Thanks in advance....

 

[Mr J]

Stop option may depend on your broker, but I move mine manually. I usually set the stops according to support and resistance, though I often don't actually let my trades get stopped out.

 

[shortlist]

Stop option may depend on your broker, but I move mine manually. I usually set the stops according to support and resistance, though I often don't actually let my trades get stopped out.

OK, thanks. So you are able to reset stops as your trade moves. Right - but you are also saying that you sell manually before the stop is reached?

 

[Mr J]

I place a stop at my logical point of exit, but I don't like the way the trade is behaving, I'll close the trade. It's just the difference between being discretionary or mechanical. Some people will rely on their stops to take the out, others will get out before their pre-defined exit.

 

[shortlist]

I place a stop at my logical point of exit, but I don't like the way the trade is behaving, I'll close the trade. It's just the difference between being discretionary or mechanical. Some people will rely on their stops to take the out, others will get out before their pre-defined exit.

Thanks Mr J. I have a lot to learn, clearly, but it's such an interesting subject. I'm tending to look at the whole thing like a puzzle right now, with money just as units that enable me to play the game and solve the puzzle.

Good job I'm still paper trading. Of last four "open positions" one got me a 7.5% profit, one got me a 10% loss (they cancelled each other out due to difference in position size) and the other two positions are still open.

 

[Mr J]

10% of the trade size, of the risk on the trade, or the account size? I judge trades by the return on the amount at risk. Going back to 0.5%, that might be fine if you're talking about the trade size, which may be $100k for an SPI contract while you may only be risking $250 on the trade.

I have a lot to learn

We all do, and I certainly do. Just consider anything I say as an opinion, as I've been doing this for 6 months and don't want to pass myself off as anything more than that.

 

[shortlist]

10% of the trade size, of the risk on the trade, or the account size? I judge trades by the return on the amount at risk. Going back to 0.5%, that might be fine if you're talking about the trade size, which may be $100k for an SPI contract while you may only be risking $250 on the trade.

The gains and losses I mentioned were percentages of the amount at risk - the sum actually in the trade, not the full capital base. Do you trade in a specific sector if you can or are you happy to go along with whatever looks good? I guess I'm trying to find out the value of developing a specialism.

 

[Sir Osisofliver]

The statement I made was a little too simple to represent my entire view. I was refering to the 'investors' who achieve ordinary returns and have poor risk management in place and get hit hard in crashes. If they're only achieving 10% a year, it's a pretty miserable return considering that half of that is inflation, so that they may suffer a 50% drop just to gain 5% per year.

I have no problems with longterm investing if it's far better than 10%, or that measures are taken to significantly reduce the fluctuations in capital. I admit that I'm biased against investing, and that shorter term trading makes me completely unable to appreciate 10% or 20% gains. A great trade can make that in a day, so it's not hard to see why I'm pretty dismissive. I see extreme longterm trading (i.e. investing) as a minimal activity/minimal return exercise. Like picking up a sport and just rocking up every couple of weekends.

Gosh darn it I had this massive post for you and I got logged out and I lost it. Oh well it looked a bit like this......

Mind if I challenge your perceptions a bit?

Scenario 1) $2000 cash (own money) Trading...

Let's say you are a great trader and achieve a consistent 30% per month return with no down months for a year. At the end of 12 months.....

Your portfolio is worth $35,848.21 a return of 1792% an after tax return of $25,090.25 (assuming you are a clever chap using a Company and trust structure to limit your MTR) bringing your return down to 1255% NOICE EH? Well done a nice return for all your hard work reading charts and analysing shares and telling the girlfriend, "Not tonight dear I'm trading on the Nasdaq".

Scenario 2) $2000 cash (own money) Investing...

Couple of assumptions needed here. Lets say I have $500,000 of borrowing capacity from my assets, I can borrow money at 8.25%, and I will get a 5% fully franked dividend yield across my portfolio, and I'm also a clever clogs who has capped his MTR at 30% with the use of a company and trust structure.

I borrow $260,000 and invest it in the market (I'll just replicate the index how does that sound?). At the end of the year, after tax, interest rebates, franking credits and other considerations, my exposure to a $260,000 portfolio has cost me $1,972 and I bought $28 worth of cheap scotch during the year as well to get me to a nice round $2,000.

So a 10% increase in the market means that my $2000 turned into a $26,000 increase in my net wealth. Or a return on my money of 1300%.

A 20% increase in the market means that my $2000 turned into a $52,000 increase in my net wealth or a 2600% return.

If you had initiated such a strategy on the 1st of June 2009 (not even using the bottom of the market here), the index has increased 22.36% and your return on own funds used would have been 2907%

I'm NOT taking into consideration using the growth in the portfolio to borrow additional money and re-invest further adding to my level of return.

Comments?

Cheers

Sir O

 

[skyQuake]

Agree in general Sir O, but risk of ruin is greatly amplified; The strategy would fare a lot worse when the market is tanking, case in point - Storm.
Not saying its all like storm but the concept is similar and prone to advisor abuse.

The $2000 daytrading example would at worst, lose you $2000. There is room for recovery as $2000 won't cripple you and you can easily raise another stake.

Also, I would sleep a lot better at night if 1/2 my house wasn't leveraged to the markets.

Cheers

Edit: Then again, brokerage will definitely cripple the $2000 acct unless you get some reallly big winners early on.

 

[Sir Osisofliver]

Agree in general Sir O, but risk of ruin is greatly amplified; The strategy would fare a lot worse when the market is tanking, case in point - Storm.
Not saying its all like storm but the concept is similar and prone to advisor abuse.

The $2000 daytrading example would at worst, lose you $2000. There is room for recovery as $2000 won't cripple you and you can easily raise another stake.

Also, I would sleep a lot better at night if 1/2 my house wasn't leveraged to the markets.

Cheers

Edit: Then again, brokerage will definitely cripple the $2000 acct unless you get some reallly big winners early on.

Skyquake.....

1) have a look at the borrowing capacity $500,000.00 as opposed to the amount actually borrowed $260,000. Is this a large enough of a buffer to help you sleep at night? Risk management is risk management. You could lose your job for a couple of years and still not use the buffer that you have in place. You protect the assets that you have with reserves in place FIRST. But frankly if you are not using half you house value to invest.....you can bet the bank is.

2) You'll note I made no mention of a margin lending facility whatsoever (even though I used a m/l interest level in my example)...so no margin calls no double debt strategy no negative equity scenario al la Storm.

3) Of COURSE you would not do this at the top of the market, you wait until the beginning of the market cycle for ANY geared strategy. Of course if you were using Margin lending for this strategy what would happen to the LVR when the portfolio increases in value? The LVR drops. Direct your dividends into paying your ML interest and within a year or two as dividends increase you will be positively geared. As we move back towards the top of the cycle....no ML facility.

4) What advisor? Do this yourself...then no abuse issue.

Cheers
Sir O

 

[shortlist]

Gosh darn it I had this massive post for you and I got logged out and I lost it. Oh well it looked a bit like this......

Mind if I challenge your perceptions a bit?

Scenario 1) $2000 cash (own money) Trading...

Let's say you are a great trader and achieve a consistent 30% per month return with no down months for a year. At the end of 12 months.....

Your portfolio is worth $35,848.21 a return of 1792% an after tax return of $25,090.25 (assuming you are a clever chap using a Company and trust structure to limit your MTR) bringing your return down to 1255% NOICE EH? Well done a nice return for all your hard work reading charts and analysing shares and telling the girlfriend, "Not tonight dear I'm trading on the Nasdaq".

Scenario 2) $2000 cash (own money) Investing...

Couple of assumptions needed here. Lets say I have $500,000 of borrowing capacity from my assets, I can borrow money at 8.25%, and I will get a 5% fully franked dividend yield across my portfolio, and I'm also a clever clogs who has capped his MTR at 30% with the use of a company and trust structure.

I borrow $260,000 and invest it in the market (I'll just replicate the index how does that sound?). At the end of the year, after tax, interest rebates, franking credits and other considerations, my exposure to a $260,000 portfolio has cost me $1,972 and I bought $28 worth of cheap scotch during the year as well to get me to a nice round $2,000.

So a 10% increase in the market means that my $2000 turned into a $26,000 increase in my net wealth. Or a return on my money of 1300%.

A 20% increase in the market means that my $2000 turned into a $52,000 increase in my net wealth or a 2600% return.

If you had initiated such a strategy on the 1st of June 2009 (not even using the bottom of the market here), the index has increased 22.36% and your return on own funds used would have been 2907%

I'm NOT taking into consideration using the growth in the portfolio to borrow additional money and re-invest further adding to my level of return.

Comments?

Cheers

Sir O

Interesting stuff. Right now I am undecided between preferred time frames and I can see the merits of both. My Newbie Question No. 642 is: how do you buy shares in an index? Do you buy a contract? I mean - how do you "own" part of an index? I understand how you own shares, and I (now) understand what a CFD is and how that works. But buying into indices??

Your help is appreciated!

 

[prawn_86]

Interesting stuff. Right now I am undecided between preferred time frames and I can see the merits of both. My Newbie Question No. 642 is: how do you buy shares in an index? Do you buy a contract? I mean - how do you "own" part of an index? I understand how you own shares, and I (now) understand what a CFD is and how that works. But buying into indices??

Your help is appreciated!

You buy shares in a company that replicates the index. ARG, AFI, STW etc. With their cash they buy the correct weightings of the index, so in theory their price movements should be very similar to the index itself

 

[shortlist]

Agree in general Sir O, but risk of ruin is greatly amplified; The strategy would fare a lot worse when the market is tanking, case in point - Storm.
Not saying its all like storm but the concept is similar and prone to advisor abuse.

The $2000 daytrading example would at worst, lose you $2000. There is room for recovery as $2000 won't cripple you and you can easily raise another stake.

Also, I would sleep a lot better at night if 1/2 my house wasn't leveraged to the markets.

Cheers

Edit: Then again, brokerage will definitely cripple the $2000 acct unless you get some reallly big winners early on.

Some good points here - I think the sleepling soundly at night thing is high up on any newbie's list for sure. This beginner would not consider using a house as security until a proved track record was established. And getting 30% back every month for a year seems an unreachable goal for this newbie - hey - I was considering myself successful if I could return 2% per trade!

I obviously don't think big enough.....

 

[shortlist]

You buy shares in a company that replicates the index. ARG, AFI, STW etc. With their cash they buy the correct weightings of the index, so in theory their price movements should be very similar to the index itself

Thanks again prawn! How do I determine who these companies are? Is there a Big Book of Companies that Replicate the Index somewhere or do you just get to know with experience. Apologies for the obvious ignorance.

 

[skyQuake]

Skyquake.....

1) have a look at the borrowing capacity $500,000.00 as opposed to the amount actually borrowed $260,000. Is this a large enough of a buffer to help you sleep at night? Risk management is risk management. You could lose your job for a couple of years and still not use the buffer that you have in place. You protect the assets that you have with reserves in place FIRST. But frankly if you are not using half you house value to invest.....you can bet the bank is.

2) You'll note I made no mention of a margin lending facility whatsoever (even though I used a m/l interest level in my example)...so no margin calls no double debt strategy no negative equity scenario al la Storm.

3) Of COURSE you would not do this at the top of the market, you wait until the beginning of the market cycle for ANY geared strategy. Of course if you were using Margin lending for this strategy what would happen to the LVR when the portfolio increases in value? The LVR drops. Direct your dividends into paying your ML interest and within a year or two as dividends increase you will be positively geared. As we move back towards the top of the cycle....no ML facility.

4) What advisor? Do this yourself...then no abuse issue.

Cheers
Sir O

Ok, thats fair, but a lof that that rests on market timing, getting the cycle right. Would you hypothetically use that strategy now? It could go 30% either way; Are we moving towards the top of the cycle or just started from the lows? Imo its still a bit too dependant on timing.
Cheers

 

[prawn_86]

Thanks again prawn! How do I determine who these companies are? Is there a Big Book of Companies that Replicate the Index somewhere or do you just get to know with experience. Apologies for the obvious ignorance.

They are called Listed Investment Companies (LICs) a search for that should give a few hits. The ones i have listed are some of the bigger ones, with STW being run as a trust structure (i think)

 

[Mr J]

Comments?

How about that second year, third year or fourth year? The trader will outperform the investor who borrowed 500k within a short space of time. Even in the first year, with 1/250th the capital, the trader manages to make roughly as much as the investor. I also have to question why someone with $500k borrowing power is starting with just $2k. If we bump that starting capital up to $10k, it's not even a contest, even if we improve the investing performance to 20%/pa.

So a 10% increase in the market means that my $2000 turned into a $26,000 increase in my net wealth. Or a return on my money of 1300%.

And a 10% drop in the market sees a similar loss, for a return of -1300%. It's simply an amplification of the result. If someone did this mid last year, at one point they would have been down a quarter of a million. I'd hate to be down 250k and have to live with 10-20%/pa to make up for it. There was a rally this year, but what if there was not?

If they can lose a quarter of a million, it just doesn't seem appropriate to judge performance on the original $2k. If you can lose $500k, that is your capital, and how performance should be judged.

I see the investment strategy as carrying far greater risk, especially for the typical investor, and that the trader will quickly outperform the investor while using far less capital. I'm not suggesting investing isn't worthwhile to some, but I do see it as completely inferior to trading, as it's simply trading but on a far, far slower timescale, and often done far less intelligently (e.g. buy and hold).

 

[Sir Osisofliver]

How about that second year, third year or fourth year? The trader will outperform the investor who borrowed 500k within a short space of time. Even in the first year, with 1/250th the capital, the trader manages to make roughly as much as the investor. I also have to question why someone with $500k borrowing power is starting with just $2k. If we bump that starting capital up to $10k, it's not even a contest, even if we improve the investing performance to 20%/pa.

Of course that is the power of compunding but the point you seem to be missing is that the trader is increasing his/her income for a great deal of hard work and effort (essentially as a full-time job) and the investor is increasing their net wealth with very little effort...and can trade at the same time if they wish. Time equals Money Mr J. By doing BOTH of these activities how much better off are you?

Roughly as much? how does 1255% = 2907%

And a 10% drop in the market sees a similar loss, for a return of -1300%. It's simply an amplification of the result. If someone did this mid last year, at one point they would have been down a quarter of a million. I'd hate to be down 250k and have to live with 10-20%/pa to make up for it. There was a rally this year, but what if there was not?

So the lesson here is..... Timing in investing is just as important as timing in trading. I didn't do this in Mid last year I started buying in November 08 and was almost finished in May 09. Your argument above doesn't hold water as I didn't invest at that time and haven't gone backwards.

If they can lose a quarter of a million, it just doesn't seem appropriate to judge performance on the original $2k. If you can lose $500k, that is your capital, and how performance should be judged.

How would the above portfolio have lost $250k? there was only a $260k investment. The market didn't drop back 90% when I wasn't watching did it?

The reason why it's appropriate is because I can very easily go to the bank and say I'd like to get a line of credit to invest in a long term share portfolio please. I can even, should I feel like it, go and get further borrowings through a margin lending facility (which I haven't used here in this example because further leverage usage blows the suggested performance level out to ridiculous levels).

I cannot go to the bank and say. I'd like to borrow $500,000 to do short term trading in the market please.... *shrug* maybe you can.

Trading you use your own money Investing in the manner I describe above, uses other peoples money. See the difference?

I see the investment strategy as carrying far greater risk, especially for the typical investor, and that the trader will quickly outperform the investor while using far less capital. I'm not suggesting investing isn't worthwhile to some, but I do see it as completely inferior to trading, as it's simply trading but on a far, far slower timescale, and often done far less intelligently (e.g. buy and hold).

What greater risk? Because more money is involved? More money = more risk management I don't see your point. BTW I think the "typical investor" has their head up their bum.

I'm not trying to make the argument that trading is better than investing or investing is better than trading. (that sounds way too much like my dad can beat up your dad for my liking). I simply wanted to challenge your notion that there is no value in investing.

Cheers

Sir O

 

[mazzatelli]

Trading you use your own money Investing in the manner I describe above, uses other peoples money. See the difference?

Isn't the crux of this back and forth the appropriate use of leverage rather than trading vs. investing?

 

[nulla nulla]

Isn't the crux of this back and forth the appropriate use of leverage rather than trading vs. investing?

If you are going to leverage, don't leverage more than 30% in your portfolio. That is 70% your own capital and 30% borrowings. If it is good enough for the Infrastructure funds and REIT's it should be good enough for you also.