Trading for 1 day with more than you have?

Hi, I've got a small portfolio (3K+), and probably only about 4K in cash savings, and quartely bonus payments (2-5K), I use a leading online broker, I've been reading a lot about the markets in general, but have only 2 months experience so quite naive still (but keen as anything!).

Now, when it costs $20-$30 for a trade, and you have $1000 worth of stock, you can get a 10% gain, to $1100, which is great, sure, but selling from that position will cost $20-$30, leaving maybe $50 for the trouble...

Which is still a profit, but you need a 10% gain to achieve that. So instead I leave it and the gain withers away, to be lost the next day, or the next hour.

Sure - your going to say, the market is for the long-term, and yes I am in it for the long term but really, I'm just the sucker who has helped everyone else extract their profits...

Now getting to my point of this post, what if I bought $10,000 worth of stock, without the funds, hoping* that the stock rises, if it does - sell, if it goes below some sort of threshhold say 5% down ($500 loss), I also sell.

So I risk $500, but it could go up 5% and I gain $500. (+- trading fees)

Sure its risky, but days like today were pretty obvious most things were going up. Is this a legitimate way to conduct business? I've sort of read about long puts and naked puts but get lost in the lingo, and don't think this is the same thing.

Anyway, just wondering what everyones opinion is on this, good or bad!

I am a newbie to all of this too. Even though what you have thought of doing has entered my mind, it is extremely stupid. So all I'll say is DO NOT DO IT.

Take the advice I was given but too stubborn (stupid) to follow. Read and learn all you can, from books, forums like this, etc. Paper trade for 6 months, and take it serious like you were putting your own hard earnt $$$ into the market.

If you are looking to invest medium/long term, then stick to it. That was my original intent, and after suffering some pretty bad losses from just holding, I tried buying stocks I thought were over-sold hoping they'd go up quickly and I'd make a quick buck. I got smashed. Then when I sold in a company because I had suffered serious losses in, hoping to buy back in cheaper a bit later. Well the share price sky rocketed afterwards.

If you really want to day trade, do the short term thing, then you need a plan. Stick to it and paper trade, see how it works. Hopefully you dont make the same mistakes I have.

Best of luck.

shaunQ said:

Is this a legitimate way to conduct business?

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Hell no! Surely you can't be serious!

I'll start off with a warning. I did the same as you when i started out, discovered leverage, then got wiped out in 3 months. Countless others can share my experience...

You're looking for leverage. Boosting your potential gains and losses. You buy Call/Put options when you're betting in the market direction, CFD's are similar but you can lose more than your initial capital...

Craploads of people are losing money in this market... Think you can do better?
Also, today was by no means obvious... We opened up, but faded DOWN for the entire day. If you bought almost anything in the morning you would have lost money.

Not trying to discourage you from trading or investing, but consider leverage very carefully before you commit to it.

Also I note with a small capital balance its so much better to invest rather than trade. Brokerage alone will kill you even if you're a star trader.

Good luck

I understand you are just starting. I was in your boat 3 years ago...i was lucky to start in a up market which made pickings much easier than is currently available. In my opinion if i was in your shoes all over again i would consider

1. saving more capital and buying in slighlty larger lots.( obvious many people would have told u that; if not im sure you have thought about it.)
2.If u are in a relativly high tax bracket, consider a margin loan...however your stratgey should be focused on taking short term gains rather than holding for long periods..specially in this climate....this is one way to grow capital fast if you are witty.
3.consider above with a home loan if u have one of those...as for above and this one make ure You have enough muscle left in the bank if you are made to make a call...ie if u use a margin make sure ure leverge is atleast 25% below the max allowed...you wont be so suceptable to margin call...(I would seek pro advise on this before considering)
4. Although ure risk off loss is higher ;"U need to be in it to win it" as they say; look for stocks u can make fairly large rides on is my suggestion; dont be impatient i.e this 2 days rise in the market will not continue..it will consolidate lower...so pick ure entry point carfully...money is made when u buy not sell.
5. A list of what i have been playing around are
FMG, AMP, CNP, GTP, FLX, BHP, PDN, UGL, QGC, and the list goes on...the ones i have listed have greatest flucts latly ...hence the specific picks

Im not sure if wat i have said is going to help much...but i tried....do get some pro advice...i did it years ago helped a long way.
DYOR

Thanks Gav/AlterEgo, Its pretty amazing I have to say, from an "outsiders" perspective, I mean you hear it being like a casino, but in reality you can actually effectively bet on the outcome, and have the advantage of limited losses, with effectively unlimited gains (for the day), and can bet with say 10 times your worth.

I'm not praising it, I can see the dangers absolutely. I guess I wanted to know what is available to me if I see an opportunity.

I think I can buy in the morning, and sell in the afternoon the next day and they will offset each other. (the loss or profit payable I assume)?

skyQuake - Thanks, nah, I doubt I can do better and everytime I buy a stock I seem to find some bad news about the company.. but that said, I own a massive 79 BHP shares (bought $27-$29 - yes over 3! trades). On monday it was up to $30, Tues (today, dj booms prior) morning I assume $30, up to $33 about 10:30-11ish - I could have sold? - down it went to $31.

Now if I'd had leverage, I could have bought say 200 or 500 shares, and taken the $3, maybe $1500 profit.

Obviously its not that simple, and I now have great hindsight, but the principle and I guess oportunity exists.

On another point, surely this sort of distorts the market to a point, I buy say $25K worth of shares with money which doesn't exist, and sell it to someone that actually HAS money.. But hey, I'm not complaining.

Thanks Sanj, yes, larger lot sizes, learnt that um, 6th trade in. After I bought SUN, down 5%, sold, FMG (3.30) down sold, down, down, down, (yes - up to 4+ today). Only good buy was BHP but I stuffed around, was thinking I should "deversify", but obviously not to that extent...

Not really keen on the margin loan, although had considered a small one with minimal LVI. Yeah I know this run won't continue, its a long way to go before stability, and I'm not sure (to be nice) of America's prospects.

Although as I post, DJ up 366 so.... temptation.

ShaunQ, how can I be diplomatic about this... I can't, your plan is a disaster looking for somewhere to happen.

All is not lost, just don't do anything yet other than read, and paper trade a new plan that you need to develop.

The reason I am responding to your post is that I have recently headed off a similiar potential disaster with some friends who had a similiar great idea.
These are people who would drive around for 20 minutes looking for cheaper petrol but were willing to gamble with some of the profits of a real estate sale.

(I am trying to block out the fact that you are attempting to do it without actually having the covering funds)

I must clarify that I AM NOT QUALIFIED to provide any advice, I am just trying to help you, there are many people on this forum that I listen carefully to and learn from, you will recognise them quickly if you spend a bit of time on here.

One of the most basic concepts that will keep you MUST learn is risk/reward (or called R/R), ie. for every risk you take the reward must be greater.
You mention win $500 or lose $500 and your example was really a R/R of 1:1, it will not work, believe me, even a R/R of 2:1 is really pushing it.

Ideally you need to be looking at a potential reward of closer to 3:1 on every trade, ie. for a $500 risk you need to be assuming that you are going to make $1500.

Next area is the amount you are risking, 5% is way too high, you can easily have 10 losing trades in the current market especially if you are randomly picking trades.
I would say that a large percentage of this morning's trade entries at open were in the red at the end of the day and that is on a positive day.

I short term trade a CFD account and I use 2% of my account size to do my initial calculations.

I use software that does it all for me but you do not need any of that, just a basic calculator.

Every trade must have a predetermined stop loss point. The combination of entry point and stop loss point in conjunction with your $ risk determines how many shares you are going to buy.

I have adjusted my software to produce two charts of the same stock with a $10000 account size and a max risk of 2% ($200) per trade.
(no brokerage factor for simplicity)

The entry and target price is assumed to be same on each chart but the stop loss point is different on both.

Note that it is rare to actually use all of the $10000 due to the risk value of 2% ($200) in combination with the entry/stop loss points controlling the trade size.

I am not going to explain the text at each point on each chart, when you grasp the concept that will be clear to you. The particular stock name is irrelevant.

The examples are based on longer than one day trades (except if it hits the stop loss) but the basic principle is the same.

Then again you can ignore all of the above if you method works for you !

(click either to expand)

shaunQ said:

On another point, surely this sort of distorts the market to a point, I buy say $25K worth of shares with money which doesn't exist, and sell it to someone that actually HAS money.. But hey, I'm not complaining.

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What do you think will happen if you buy the shares and the stock goes into a trading halt before you have been able to sell them?

This has happened to some day traders....another factor to consider....then you will need to find the money by the time T+3 arrives.

Hi shaunQ,

Just a word of warning in regards to the round of euphoria that’s being played out in the media. This week may not be the end of the bear market, once the good news stories run out this could prove to be a trap, so if you can't afford to lose a few grand just sit back, you won't be able to predict the daily movements of the market although one could easily mislead ones self into believing so after a couple of successes.

Cutz.

Thanks Boggo, I appreciate all that info, it definitely helps my understanding.

lesm - ahh yes that would be bad, thanks I hadn't thought of that, surely BHP or another bluechip wouldn't, possibly, ever, ever do that though. (slight tounge-in-cheek).

And thanks Cutz, I've been watching for a while, and love the media hype like the crisis is over, which will hopefully lead to a little bit of a rally, after which, who knows.

shaunQ - if you haven't got the money to cover the trade you should not enter it. You also are exhibiting extreme naivety about how prices behave.

If you proceed with your plan the likely outcome is that you will eventually lose more money than you have and may face legal proceedings against you.


Firstly - any stock can go into a trading halt - it doesn't have to be for bad news - e.g. if for example RIO and BHP decided to merge, both would probably go into trading halt for a while so they could sort out the details and announce it in full to maintain an orderly market. If a stock goes into a trading halt you can't trade it - so you can't sell to cover your buy. A trading halt can happen at any time during any day. e.g. CBA went into trading halt to announce the bank west takeover if my memory serves correctly.

Secondly - if you watch intraday charts - most days that the DOW is up strongly result in a high open then a fade down from the open - so if you entered a trade at the ASX open after a big DOW up day a very likely outcome is you will have to exit the trade later in the day for a loss.

I'd strongly suggest paper trading some of these day trades you are considering watching intraday price activity.

In relation to options - they're a different thing altogether from what you are talking about. Exchange traded options are a different product to shares and there's a fair bit of reading to do before you can understand them enough to trade them effectively imo.

As suggested try it on paper and see how many times you go bust in a month.

Besides what others have said, if it were that easy then everyone would be doing it and everyone would be making a easy profit. That is clearly not the case and you can end up owing more than you initially invested if things turn against you.

shaunQ - there's lots of stuff above. Do a few searches on ASF and you'll see lots of threads/posts which say:

• don't be undercapitalised
• learn about position sizing
• have a system/trading plan and stick to it

You can find lots of people's experiences in doing what you're proposing - and it's pretty well all bad. As you noticed, fees chew up so much.

Good luck sorting things out.

If I could add to this interesting discussion that with option it is probably T+2 for settlement when you sell and T+1 when you buy.

That is why Commsec does not allow to trade in options unless you have a banking account with Commonwealth Bank .

This is what I learnt from Commsec dealer. Please correct my understanding as situation with E Trade or other platform it could be different

Cheers

I started out a couple of years ago with the philosophy "Only invest what you're willing to lose", for me that means a cap of $20k and no leverage. Last financial year I ended up about $10k in front (locked in profits, cut losses), this financial year I'm a fair bit behind and am hovering around $10k portfolio value.

If things turned for the worse and that $10k vanished I'd chalk it up to lessons learnt, if things improve and I get up to that $20k mark again I'll take profits again. I'm still holding true to that original philosophy, although my daily trading plan has changed a fair bit since I started. Yes I could have leveraged that $10k profit last year and made a ton, but I know this year I would be seriously struggling to pay my home loan and keep food on the table.

I'm still learning a lot, every single day.

m.

It's very cliche, but I changed my psychology from focusing how much I could make to how much I could lose.

Since my primary trading vehicle are options which has the potential for great leverage, when calculating scenarios like where I would be assigned, where more than one of my spreads tank, the amount of delta I was taking on, it woke me up to the risks and I reduced risk to a level I was comfortable with.

The trap though is not to get too negative about it.

I have found the statement that "retail traders are great at finding trades or picking stocks, but are terrible risk managers" very true from past experience.

shaunQ said:

surely BHP or another bluechip wouldn't, possibly, ever, ever do that though. (slight tounge-in-cheek).

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Shaun,

One thing i've learned is never say never. Who would have thought MQG would fall through resistance of $40.00? Well, it has, and will probably keep falling to low to mid $20s, or even further if MQG prove to be a lemon in this economic climate.

Who would have ever thought that BHP would fall below $30.00? Well, it has.