Been pretty tied up with work and trying to land some presents before the Big Day gets here. (A Wii, A Wii, half of my kingdom for a Wii). But another thing is taking up all my limited computer time this weekend: a review of Friday morning’s activity.
With the chance to trade Friday (I didn’t work till noon), and with it being options expiry (nothing likely to move very far), I took the opportunity to try a little experiment I’ve been thinking about: trading one-minute bars.
There have been many times when I’ve seen a clear few-minute-long move beginning, and have wondered if my home-based equipment is sufficient for me to take advantage of such a move, and trade in and out in a matter of seconds without getting buried.
And then there’s the wondering about me. Everyone who’s traded at all can relate to the phenomenon of pulling your stop at the last moment, deciding to “wait just another minute or two and see what happens.” If you’re trading exceedingly large positions where a few-penny move can amount to what would otherwise be days’ worth of losses, you can’t afford to wait one SECOND after that stop is hit. And the only way to know for sure if you can resist the urge to pause is to test it with actual trading.
This experiment also called for me to do a new kind of scanning: searching for high-priced stocks that have the potential to move at least 10-40 cents in short swings, but which also trade so much volume that the spread is only a couple of pennies wide and so that one could get in or out at the market instantly, with as little slippage as possible.
You may be surprised at how short the resulting list is.
Anyway, I chose Apple. I love Apple. I mostly love to short Apple, but hey, I’ll go long if I gotta.
From experience, I knew I had to sit out the crazy first few minutes after the market opened. Let things settle out a little. So I jumped in at about 0950. I missed what would have been my biggest money-maker of the day by a few minutes, but this was my first time, testing the waters and all. I was expecting to pay some tuition for the education I was about to get.
In just over two hours, I made 32 trades. I stayed in anywhere from 15 seconds to about four or five minutes. I tried different lot sizes to see how the execution went, had 4 different charts of the same stock up, plus time and sales, and for a little while, Level II… which I promptly turned back off because it didn’t help at all and actually hindered me by taking my eyes off the chart.
I printed out my transactions and took them to work with me, and started studying them and scribbling and calculating there. When I got home last night, I pulled up the day’s chart and went back over it minute- by- minute, comparing what my trade confirmations showed with what the chart showed. That’s a long process, and I’m still not through with it. But I definitely learned some things and saw some patterns emerging.
Here are a few observations:
The fact that the stock market (NYSE and NASDAQ combined) account for approximately 105 billion dollars in trades a day suddenly doesn’t impress me any more. In fact, I’m a little underwhelmed by that figure now. I saw how one individual of modest means, and daytrading from their home, could easily account for 4-5 million dollars’ worth of trades in a 6-hr trading day, even with a very small account. Combined with the fact that there are so many professionals who trade accounts worth hundreds of millions of dollars, and probably easily each account for some billions of dollars’ worth of volume, that leads me to believe that the actual number of serious individual daytraders must be far lower than I ever imagined.
Ameritrade’s execution is generally excellent. Better than I expected, in fact. But when something happens, it can be very costly. My trades were executed, on average, about two to four seconds after I entered them. Probably about as fast as possible with data packets bouncing thousands of miles all over the internet. However, I had one instance where a market order just sat there for about 20 seconds without executing (while many many trades scrolled past), and when it finally did it was my biggest loss of the day. To do this regularly, one would need a setup that ensured extremely reliable and instantaneous execution on liquid stocks.
Trading like this could easily amount to over $1000 a day in commissions… a direct-access broker with the super-low commissions for high-volume users would be absolutely essential.
I verified that I can, in fact, pull the plug on a position instantly with nary a spell of “maybe I’ll just give it a few more seconds and see if it comes back.” That one’s a relief.
A rapid-order entry system, and practicing until you can enter a full order from scratch in about 4-5 seconds, is necessary. Ameritrade by default has the function of going to a “review screen” of each trade, in essence asking “are you sure?”… I’ve never had the need to turn this screen off before. Now I see why that option exists. What I’d actually need is about four complete, preformatted orders where I could just click on whichever one I wished to execute in that instant, with no typing and no verification. Just pick one (”buy 1000 AAPL market”) and click it.
Virtually every time, lots smaller than 1000 shares (even slightly smaller, like 800 shares) executed faster than 1000-share lots, and got broken up far less often.
The upshot? I averaged about a 2-4 penny loss on my losers (which pleased me greatly), and about a 15-20 cent gain on my winners. But the losers by definition are gonna far outnumber the winners, and in this case, I ended the experiment in the red, and went to the ICK! other job.
The promising part is that I missed trades a few minutes before I started, and a few minutes after I had to quit, which could have turned my entire day profitable. Also, there exists at least the potential that on more “normal” days (i.e. not expiry), the profitable swings may be wider before they start getting reeled in by the Big Guns.
The downside, and it’s major, is that this kind of trading ages me about a month for every hour I do it. I doubt crack cocaine has much on the adrenaline surge this kind of intensity creates, and that’s both stressful and exhausting. I have an extra dose of respect for the folks who make a living scalping.
I doubt very seriously whether I’ll pursue super- short- term trading any more than this. I’m actually leaning more towards getting away from intraday action and doing more longer-term swing trading, at least while I have another full-time job and three kids in school.
But I’ve always wanted to try it, and the experiment was a blast!
Baked salmon (with Tony Chachere's, of course) and Dr. Pepper
Second disc of Pulp Fiction Collector's Edition