Dearest readers, have you ever heard of VTI (Vanguard Total Stock Market ETF)? On $10,000 invested over 10 years, the fee for this ETF that covers the US Total Market index is less than $80! So, a cheap way to invest in the entire US stock market. Whether this is your cup of tea or not, many people are opening self-directed RRSP accounts here in Canada and using low cost index ETF's to cheaply invest in a highly diversified way with less fees, more flexibility and more control than through a managed RRSP with mutual funds. This, more or less, is new for most people out there and I know of many people who have opened self-directed RRSP accounts alongside their standard RRSP accounts they have had for years, and have now stopped contributing to the old account and started putting money into the self-directed one. While this may be a widespread approach in the future, I have seen that retail short term trading (day and swing variety) powered by the crypto market as well as the stock market keeps growing at a lightning fast pace and I feel that everyone getting addicted to profit possibilities coming from volatility and momentum will not get discouraged even by the next market crash. Trading volatility and momentum is finding its own footing, growing up and expanding, but it still has a long way to go in terms of forming its own paradigm, values, rules and understandings separate from investing. It is kind of like the early days of USA when it still resembled Britain a lot, whereas today the two countries are quite different in many ways. During the months I spent learning about trading, I have come up with a few ideas- some alone, some by consulting friends and online sources, that may help those who are ready, just as I am, to finally understand trading as something completely different from investing and try to figure out what that something is.
The first and most important thing seems to be that the gains people brag about online these days, especially in the crypto space, cannot possibly last for many years to come so retail traders should not have skewed expectations of what they will get out of trading. As such, not quitting your day job in order to trade full-time, especially when your account size is small, is actually the right way to go. Think about it. If you think you will have many years of the kinds of returns people get now, and you put all of your money or large chunks of it into a one or a handful of stocks or cryptos, you are gambling and I am sure that in your state or province there is a help line for that ;) I deeply dislike treating trading like gambling so that is the bias I am coming from. Oh, and if you treat it like gambling and you make it a full-time job, you may call yourself a trader but you are a full-time gambler, which I do not think most of us out there can ever imagine being. So, let us not become that. Start with enough money, start part-time, allocate money correctly across your trades and the odds will be in your favour a lot more.
The second thing that seems to be very important is to respect any strategy you choose, whether you are day trading or swing trading. When it comes to this point, what I see and hear is that people select a set of criteria including one or more indicators that they apply to charts of stocks or cryptos they choose, and then they always follow their Buy criteria but rarely have the discipline to follow the Sell criteria of their strategy. It is human nature, I think, but I also believe that we are not animals, as unlike most animals we can strive to rise above our nature. So, when your Sell criteria says get out, your nature wants you to hold on either because you are losing money (and you hope your stock will recover) or because you are making lots of money (and you want to let your stock go for a home run). In both cases, you could get a sell signal based on your criteria, and then choose to ignore it even though you spent so much time learning about elements of your strategy, testing it and perfecting it. What business, then, would you have to not sell when it tells you to sell?
The third thing that seems a little controversial but based on everything I have seen and heard makes all the sense in the world is that, in day trading, screeners beat backtesting. For those who do not know, backtesting is a process you can do manually or automatically where you take a strategy such as a combination of indicators and then you run it on a stock of your choice for a period of time at your preferred time frame (e.g. 15 min) and see the number of trades your strategy results in, and what percentage of those trades ends up profitable. People do this because they look for a strategy that gives a high win percentage. The problem, however, is that you are doing this potentially on one stock at a time, during a period of time where it may have been on an upswing. This can make your strategy seem better than it is. Or, you pick a stock that was going sideways or trending down and this can make your strategy look like crap. Well, as it just so happens, this backtesting approach is certainly bad for day trading. This, dearest readers, is apparently not the way you do things. If you understand that day trading succeeds upon picking high volatility stocks or momentum stocks (or both), and then applying your strategy to them, you need to do two things. One thing is to figure out which sectors are hot right now; the other thing is to use a stock screener to identify which stocks in these hot sectors are going up on which day. Most of the time, you can only see that on a given day, so this approach is best for those who devote a lot of their time to trading on a daily basis. So, instead of sticking with a list of stocks you like or stocks you think are hot, you keep aware of the sectors that are hot right now and you use stock screeners every single day. Now, what criteria you put in your stock screener is up to you and that could be a separate topic as well. What matters in the end is that you understand that it is pointless to backtest a single stock on all days, including those days when it did not trend up, had little volatility or almost no momentum. Bottom line, instead of looking for a strategy that would work on your list of stocks, every single day you identify stocks that behave well with your strategy, significantly increasing your chance of making money. Why does this seem to work? Simple. When a stock has momentum, it means there are some big news related to it, someone is pumping it, or there is a totally different reason why a large investor is buying into it. When this happens, it does not matter what is going on with the market- the stock does what it does separate from the market, which means it can go up a lot when the market is flat or even going down. So, the consistent performance of momentum stocks is your best bet to stay in the trading game long term and find profit and success. If someone has a better idea (but it has to be based in trading, not investing), please at least drop a few hints for the rest of us. ;) Oh, and one more thing here. If you are wondering whether you really know what sectors are hot right now (or you are defaulting to the tech sector and saying duh), use a market screener for the market you like (I am a TSX and TSX-V girl) and watch for the top daily percentage gainers in, for example, $2-$20 range. For some people out there, the screener is the only way to know the real hot sectors as media outlets are behind due to incompetence, and pundits are behind by design.
There you have it, dearest readers- some ideas I have formed based on my observations from the sidelines. What has your experience been like trading in 2021? Or, if you prefer not to share, do you know anyone who has actually traded their way to significant success and plans to continue doing it for a long time?