Tips for Profitable Short Term Equities Trading

By Alan Hill, Executive Chairman of State One Stockbroking Ltd & amscot Stockbroking.

The number of people making a living from active equities trading continues to grow. Whether it be professionals day trading for a broking firm (proprietary traders) or individuals trading for themselves at home, the rewards can be substantial. If you are new to day trading, here are a few tips to help you meet your trading aspirations.

1. When to Trade?

   The key element of successful trading is getting into a regular trading regime at a time that suits you, and when the appropriate market is operating. If you think you can fit a round trading window into a square time availability, then you are most likely heading to disaster. For example, if you're proposing to regularly trade for extended periods after a hard day's work then you will probably be disappointed with the outcome.

   To be a successful short term trader I believe that you need a period of at least 3 hours each trading day when you can totally apply yourself to the task, with no disruptions! For those trading at home, it's best if your trading period comfortably fits into your daily routine and that of your family. The best regime is to have 45-60 minutes pre-market open so that you are ready for the commencement of the day's trading. This means that you are fresh and can focus on the task at hand. If that's not possible then the next best alternative is the final 90-120 minutes up to the close.

   Remembering that a day trade position is effectively an option over the stock for the duration of the day, it is best if you can maximise the “life” of this option by starting at market opening and remaining at “work” for most or the entire day, so you are in a position to hold your positions for the duration of the day if your stocks start to race away.

   Another aspect of timing: It's important that you don't try to trade all day, every day. You need to take time off to rejuvenate. The best times to take a break are when market activity drops to its seasonal lows – typically this occurs just before Easter, in the first weeks of July and the week or two either side of Christmas.

   Getting started

2. Get the Best Equipment

   When the pressure is on, you do not want to be struggling with sub-power computers, operating systems or internet connections. Such distractions tend to make it impossible to function effectively.

   You should only use totally dynamic pricing data, and the best and most reliable market entry system available.

3. Know your Software and how to use it

   A successful trader will know exactly what their software is capable of and will practice until they are very fast with order entry, amendment and cancellation.

4. Stay Local

   Understanding market sentiment is a vital aspect of trading. It's hard enough knowing what is going on in your local market, without heading off to some exotic locale, especially one in a different time zone. ASX provides as transparent a market as any on offer, and the activity levels of the best trading shares (which are so important for day-traders), are generally high enough to enable profitable day-trading. As for those days when activity falls to very low levels, perhaps it's a good time to give yourself the day off.

5. Know & Stick by the Market Rules

   Before you become an active day-trader it is important that you fully understand the rules of the market in which you are trading. You certainly do not want ASIC to be all over you for erratic trading, so ensure that each and every order you place, no matter how small, complies with the market rules. ASX and ASIC use market scanning software to monitor all orders and trades entering the market.

   The most serious transgressions are the “touching up” of stock prices at market close, especially at the end of each month, quarter and year; multiple orders in close proximity to the current price, and erratic order entry and removal. Your broker shouldbe able to assist you with any questions you might have on market rules.

6. Start Small

   Day trading can be expensive if you trade “too-big” when you are still a novice. Until you get a reasonable win-loss ratio, don't be embarrassed to start with just a few hundred dollars per trade.

7. Spread your Risk

   Don't tie up all your available funds in day trading. At all times remember that short term trading is no more than an adjunct to your longer term investment strategies.

8. Avoid Leverage

   Leverage is often promoted as the solution to the sub-standard returns of traders' and investors'. In my view the use of debt massively complicates the trading process, increasing the pressure on you. In the extreme it greatly increases the risk of margin calls, but even in relatively modest quantities it limits the time frame within which you can comfortably operate.

   As a novice you don't need such distractions. Novices also need to understand that there is debt, in some cases huge amounts of debt, in products such as CFDs and warrants. Often the amount of contained debt in such instruments is not openly disclosed.

   Leverage is only useful once you really know what you are doing, and even then my advice is that, to minimise the attendant risk of claims on your other assets, you should limit debt to not more than 25 per cent of your total investible assets.

9. Don't let brokerage charges kill you

   Whether you are trading big or small, as a short term trader scalping relatively small profits, high brokerage charges can quickly erase your hard-earned gains. A key reason many traders opt for derivatives markets is that they are deterred by the higher brokerage on equities. If you can secure highly competitive equities brokerage rates, then you can avoid the higher risks of derivatives.

   For the very active on-line trader, amscot offers the Bulking of brokerage, which involves the aggregation of repeated trades in the one stock over the day into just one contract note. This results in extremely competitive brokerage rates. You should consider amscot's bulking rates once you find that you are repeatedly trading successfully in the one stock during the day.

10. Don't pay a fortune for “sophisticated” software

    I have spoken to novices who have spent half their investible funds on software packages which will supposedly help them pick all the winners. What a waste. You simply don't need to do this, as there are low cost packages available.

11. Get advice from a successful equities day-trader or a broker experienced in the space

    It's great to have back-up and ongoing advice from someone who knows the game.

    Some basic day-trading rules

12. Keep a close eye on the key market indicators

    Sharp moves in the futures and market indices should lead to instantaneous changes in a day trader's appetite for risk. This is especially relevant when the market opens strongly and looks set for a positive day, before a subtle and then accelerating change of momentum occurs after key support levels are breached.

13. Understand the ASX Matching Process

    The opening and closing phases of the market, when all ASX shares go through a matching process, are critical periods in determining whether a trader's day is successful or not. The same matching process occurs after a company releases information to the market during trading hours. The aspiring day trader needs to fully understand this process, including how the opening phases differ from the close.

14. Know the Market Time

    Getting shares in the opening match (or when shares are reinstated after announcements) can be a great contributor to your trading profits. If you are to time your order entry to the most benefit it is most important that you know the exact market time and when each share is coming out of a match.

15. Go where the Action

    is The most highly marketable and volatile shares are the best place to trade. Many novices suffer from chasing wider spreads and apparent lack of selling pressure in stocks that are just not moving. That approach is boring and, unless you really know your shares or are extraordinarily lucky, it won't make you rich.

16. Get and Quickly Digest the News Feed

    A lot of the market run comes from news flow during the day. Always be aware of all the day's announcements Try to extrapolate company news to other shares in the same field. When reviewing today's announcements, especially those late in the day, ask yourself, “How will this read in tomorrow's paper?”

17. Know Your Positions

    Successful day-traders will always know exactly which shares and how many they hold, the prices paid, and their remaining orders in the market.

18. Don't trade too many stocks

    When you are starting out, taking positions in up to four or five stocks at a time will be more than enough to keep you busy. Later you might try to increase this, but more than 7-8 is, in my view, at all times risky.

19. Don't leave your post

    Successful traders will be glued to their trading screen for as long as they have positions open. They are not making a snack, on the phone, or out for a cup of coffee.

20. Make the trend your friend

    If you're a long only trader, you need to focus on shares that are going up. The aim is to buy a share early and stay aboard while it's running (i.e., not selling too soon), spreading your selling into three or four lots to capture some profit while also retaining some upside. If you buy stocks that have fallen sharply, chasing a bounce in the price, do so with utmost care. You will often find they have been weak for a reason.

21. Think like a fish, not like a rock

    A successful day-trader will always move with the market trend, not try to stand against it. So if the market starts to reverse trend, you need to promptly go with it.

22. Be Careful about believing your “Theories”

    Remember that your theories about which way the market is headed are just that, theories. They can be right on the money or totally off-beam, or anywhere in between. Good traders will not be working strictly to their own theories about which way the market or a particular stock is heading. Rather, they will simply be seeking to profit from whatever direction being taken by the market and the particular shares they are trading.

23. Don't Trade Alone

    If you want to be a home-trader, it's a good idea to have one or two trader friends working with you. As a group you are better placed to observe market trends, identify hotspots and discuss their ramifications.

24. Befriend a Geologist

    If you're trading the Australian market, then knowledge of matters geological is crucial. Because the resources sector provides so many of our best trading stocks, it's great to build up your own knowledge on geology and the reporting by resource companies. It's good to have at least one competent geologist who can assist you with technical interpretations.

25. Find some Technical Indicators you can believe in

    Because technical analysis is a most useful facet of day-trading, it is a key area for skill building. Find some books on technical trading and understand how to use appropriate indicators of intra-day price movements, like moving averages, MACD or stochastics.

26. Don't hold overnight

    Although holding overnight can also be a most profitable strategy, profits can also be blown away by a bad night on Wall Street. As a general rule, a novice day-trader should avoid holding overnight unless the stock is backed by an especially strong chart or an announcement that the market has not yet factored in and which will attract good coverage in overnight news releases.

27. Avoid total loss

    Although you do not need to know a lot about every share you trade, you should be aware of, and avoid, those companies that carry a high risk of failure.

28. Careful below 1c

    Lowly priced stocks can offer massive percentage gains, but remember that they are often the most at risk of negative corporate developments – e.g. the company going into liquidation or administration, or a trading halt ahead of a share consolidation.

    Some fine tuning

29. Understand Averaging Up

    When you are holding a share that has just “broken-out” through a resistance level to the upside, it can be a most profitable strategy to quickly increase your position. This can also save you from the temptation to sell “on the break”, which is a common mistake.

30. Use contingent orders

    It is very useful to have the capacity to put in orders that will automatically trigger once a share is trading, bid or offered at a certain price. This can reduce the load on you when you have a number of trades in play. I would normally set up such orders to sell a portion of stock purchased to help lock in some profit. The IRESS system offers a ready-made system for placing various types of contingent orders.

31. Careful with stop-losses

    Most trading gurus advise you to always put stop-losses in place. I am wary about using them. If you are not careful they can lead to a steady string of moderate losses according to the level of stop loss you set. The hard part is to decide when to hold, when to cut, and when to increase your position. That's the challenge and the joy of day-trading.