Part I - How Small Traders Overcome Inherent Disadvantages in Day Trading

Expert trader Linda Raschke discusses her pre-market preparations, technical and fundamental analysis, and important steps traders should take to prepare for each trading day.

Introduction
I received the following from Yogesh, a very good virtual trader on howthemarketworks.com. He was unable to post it as a response to my blog so he forwarded it to me. It is an excellent commentary so I am posting it in its entirety and I am responding in 'blue' to it paragraph by paragraph with resolutions to handle the disadvantages to small time traders. Here are his comments and my response: 

 

With Reference to Howthemarketworks.com Contests

I can't add to your blog. If you think it is fitting can you please include this in your blog that it may be beneficial to the participants of the contests on howthemarketworks.com? I love to share what I know with people, if it can be of any use to them. I would be more than happy if they benefit from my experience.

I would recommend that you all to read Mr. Mack’s blog at mainstreetusa1.blogspot.com . It is very informative. I will like to mention here that this competition is not like what actual trading is. This is a good way of learning different trading methods. There are certain glaring differences between actual trading and virtual trading, which I know about and would like to mention them here.

I agree.

The Contests are Very Different Because:
1. Order execution here is at market price, whereas in actual trading it is on ask/bid price, which may be more or less than 1 cent. So here you can cash-in on 1 cent, you can buy a stock at $8.81 and sell right away at $8.82. But you will have to make at least 3 cents to gain 1 cent, in actual trading.

Some readers may have difficulties understanding this point. In summary, when you trade live, commission ($5) is paid first. Then, the price of the stock you buy is at least 1 cent greater than the price you will get if you sell at the same time. So if you sell as soon as you buy you will loose the cost of round trip commission ($10) and 1 cent by the amount of shares traded (3,000 shares x .01 cents = $30). My goal also include to be able to predict that a stock that I am about to trade will increase or decrease in price by 3 cents or more. To date my predictions are nearly good.

2. There are no worries about buying/selling large a number of stocks here, whereas in actual trading, as soon as you put large stocks on sell/buy, the market will react and the price will change with your order. Your order may not be filled at your desired price. It may not be filled fully , for a long time because there may not be enough buyers or sellers at that time.

To resolve this issue, trade no more than 5% to 10% of the shares currently trading. Also, select only stocks that their current volume exceed 500,000 to 1,000,000 shares. If you still have difficulties, then trade stocks with even higher volume, may be 10 million or more.

3. Stop loss orders put up by small traders, like us, are immediately taken up by market makers and then it comes back to previous market price. Say the market price is 5.81 and you put a stop market order at 5.71, your order is immediately filled at 5.71 and then the price returns to 5.81. Then you feel cheated and fooled. I have experienced this more than 75% of times, before I stopped using stop orders in real trading. In this contest it is fairly dealt and gives you the feeling that it works.

In real trading as a day trader do not enter a stop loss into the trading software you are using. Instead, keep your stop loss in your mind, or draw a line on your chart where your stop loss would be. My stop loss is very simple, if I predict a stock to go up and after I make the trade it turns down, -1 cent, -2 cent; then I would exit the trade; and vice versa for shorting. If I am in this trade, as soon as there is any indication of a red bar appearing in conjunction with my other indicators; I would exit the trade.

4. You can put your short sale orders to use full available money here. But if you do so in actual trading, on a slightest loss you are reminded by the broker to put additional money, lest you’re a/c could be restricted.

This is an easy fix. Just do not use your entire balance to short trade in real trading. Some US brokers require $25,000 in order to day trade others even ask for $30,000, however there are offshore brokers such as SureTrader.com and AllianceTrader.com that only require a $2,000 deposit to open a margin account to be able to day trade.

Continue on Part - II...