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About Day Trading

Apr 30, 2012 at 3:07 pm in Day Trading by

Many of my posts in this community blog have been about my preferred position trading method of trading. That is, holding spread bet positions for as long as possible (but no longer) while hopefully the capital appreciation and dividend receipts outweigh the accumulating financing charges.

Position trading is not the only approach, and I have also talked previously about swing trading.

You might have already deduced it, but the one significant omission in my coverage has been day trading — which is the style of trading that most first-time spread bettors probably expect to be doing. I don’t do so much day trading these days unless one of my position trades inadvertently becomes a “day trade” by stopping out the same day, but (believe it or not) I was once named as a “day trader” in the Money section of the Sunday Times newspaper. I used to have a hyperlink to the online version of the article, but now it seems to lead nowhere and / or gets stuck passing through their web paywall.

Anyway, the first thing to say about day trading is that the idea is to notch up some profit (and ideally not a loss) on each and every trading day. Unlike longer term position trading where it can go against you for some time before eventually paying off “big time”, when day trading you get to say almost every day “Hey, I made £N today!”. Well, that’s the idea.

The reason you know exactly how much money you made or lost — which is for real, not merely “on paper” — is because in the purest form you close all of your positions at the end of each and every trading day. The advantages are that you are not exposed to potentially devastating overnight price gaps, and the fact that you don’t hold positions overnight means that you don’t accrue any slow-but-sure overnight rolling charges.

Whereas one of the seven pillars of position trading is diversification, the day trader can (and probably must) hold far fewer positions simultaneously. The day trader would more likely run a number of big trades in series rather than hold many small positions in parallel.

Day trading vs. Position Trading: A Trade-Off Example

The following chart for a recent embryonic position trade on Credit Agricole illustrates the trade-off between day trading and position trading:

Day trading vs. Position TradingHaving established a nominal £1-per-point position at a good low price of 3.51 on 24 April, by the end of the trading day my day trade would have banked a profit of about £15 (or £150 on a larger £10-per-point bet). This would have been real money “in the bank”, and (at the higher stake) not bad for a day’s work.

By holding the position into the second day, the “peak profit” would have been more than twice as high — if I had taken the initiative to close the trade at that level.

By continuing to hold the position into the third day I ran the risk of the price falling back (which it did) and possibly falling back below the amount that I would have surely banked on the day trade. I left myself at continued risk of a potential overnight price-gap at any time unless I had paid for a guaranteed stop order, and I would have suffered accumulating overnight rolling charges — albeit at a very manageable level in the current low-interest environment.

You may already have figured out from the chart what I ultimately chose to do: to hold on for the position trade but to raise my stop order when convenient to the level at which the original position trade would have closed, which, even more conveniently, coincided with a possible price support level.

In case you’re wondering, I can tell you that the trade did stop-out (just as I am writing this sentence) at a price of 3.65. So I banked the same profit on my potential position trade that I would have banked on the alternative day trade. On the £1-per-point basis, compared with the day trade I suffered £0.06 in financing costs and £3.51 for a guaranteed stop order that I had placed on my position trade.

The bottom line is that in this particular “trade-off”, the day trader would have banked 30% more profit than the position trader. But whereas the day trader’s profit was capped, the position trader’s profit could have gone so much higher.

Like I said: it’s a trade-off!

Tony Loton is a private trader, and author of the book “Stop Orders” published by Harriman House.

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