Background

I have been interested in markets and trading for many years. I briefly attempted to daytrade internet stocks for about a week in 1999 during the Dotcom frenzy, lost some money trying to jump on momentum bandwagons from IRC chatroom picks, and went back to my day job as a software developer.

More recently, I decided to give trading another try. This time I decided to eschew chatrooms, etc. and make my own picks. I tried daytrading stocks again, made a few shekels, lost more, and stopped again while trying to figure out what wasn't working. Eventually I figured out:

1) Daytrading stocks is HARD! Every stock has its own float, news cycle, earnings releases, price, shares outstanding, volatility, and liquidity. To daytrade stocks successfully you are trading against other participants many of whom do nothing but trade that issue and maybe a couple of others EVERY MARKET DAY for the past 2, 5 or even 10+ years. Unless you specialize on only one or a few stocks, and follow them religiously, you are badly outmatched here. The typical stock daytrader hears a "recommendation", enters a ticker in his software, looks at the chart, and enters a trade. Most of the time he has never looked at this stock before, and may not even have heard of the company. . .

2) Daytrading stocks is HARD! Stocks are really volatile moment-to-moment and liquidity varies greatly, particularly when there is news extant driving price swings (which is when you would want to trade them). It makes using stops exceedingly difficult, but if you don't use stops you are jumping from a plane without a parachute. I found that I was often absolutely RIGHT about where a stock was going, but that I would get stopped out just before the stock started moving decisively in favor of my trade.

3) Daytrading stocks is HARD! Stock prices take much of their momentum from the overall market. So in order to make money daytrading stocks, you have to keep track of the stock you are trading as well as the broader market. Lots of variables such as -- how closely does this issue track the market, how is this stock's sector trading, etc.

4) Trading the broader market levels the playing field. There is one big market for everyone (the S&P 500), and all traders can watch it all trading day, every trading day. So you get to know how the market moves, how it rallies, how it breaks down, range-bound days, and days when the bulls or the bears get taken "offsides" and a tradable momentum movement happens. . .

5) Trading the broader market is LIQUID trading. SPY, the S&P 500 ETF, is by far the most actively traded issue every day in the market. ES (emini) Futures Trading is even bigger! Massive volume means minimal slippage and issue volatility versus the underlying market. While sometimes the market itself is extremely volatile, it will always be less volatile than the stocks that daytraders are chasing up and down. . .

6) Trading the broader market means you don't have to figure out the floats, trading volume, liquidity, of hundreds or thousands of different issues on the fly. . .

7) Trading the broader market means total control over position sizing. You can trade plain vanilla SPY in increments of a hundred bucks or so, step up to SDS or SSO for 2x leverage, use margin (and 4x daytrading margin) if you like, or control futures contracts or purchase options for even more leverage. But remember! Only use leverage when you are in a winning setup, and never use it to gamble on a noise trade.

8) After a lot of investigation and evaluation, I decided that trading ES (emini S&P500) futures contracts made the most sense for me. Low commission costs, almost 24hrs x 6 days per week trading to allow safe overnight position holding, favorable tax treatment, no restriction on $25,000 daytrading minimums, and maximum liquidity in the market led me to this choice. For other people, trading SPY or SDS / SSO or their options might be a better option.

9) After a lot of experimentation and evaluation, I found that daily momentum trading works best for me. That is, I buy and sell (or sell and then buy) on the same day, and my trades are based on identifying "trend days" when either bulls or bears have the momentum. I do not trade on "range days". I usually establish a "core position", long on bullish trend days, and short on bearish trend days, and usually "trade around" the position, increasing the position in countertrend moves, and decreasing it when the trend gets overbought/oversold.

10) Once you "have an edge" (ie: can identify patterns that present a good risk/reward profile), the key to success at trading is emotional intelligence. Success at trading absolutely requires the ability to overcome your natural human tendencies to allow greed and fear to dictate your buying and selling decisions, instead of the patterns and "edges" that reveal themselves in the market.