Day Trader versus Active Trader

What is the true difference between an active trader and a day trader? They both are usually in and out of a trade in a short period of time and tend to avoid the long term buy and hold strategy that conventional investors find so endearing. They also tend to follow the same guidelines, require discipline and can be very profitable.

In my opinion, the main difference between the two methods lies not in where they start, but where they finish. In my opinion, day traders almost strictly leave their desk for the day flat while active traders have tendency to play the overnight moves. The ability to have this useful technique in your bag of tricks really can come in helpful. In these turbulent times with political, social and economic unrest, it is not unusual for big moves to form on overnight positions. Most people will argue that no one can tell what is going to happen overnight in Europe or Asia but at the same time, no one really knows where the next tick is going to send any security. If someone is able to forecast the next movement like that, than they should have no problem making a great deal of money with whatever type of strategy they want to use. My main point of bringing up these overnight swings is that with the decrease in volatility and volume in today’s market place, it is getting harder for traders to target the profit swings that were so common just three years ago. Now markets do move intraday on news, numbers and all sorts of other conditions but they can easily be caught late or missed entirely. . With historically low volume and volatility, traders of all sorts need to be constantly looking for ways to seek new techniques to profit from. Active trading and the use of swing trades can capture that full overnight spread. If Europe elections fail and you are short in the US market, you are there and you can profit from it. This obviously can be risky especially with overnight margin requirements and uncertainty that is involved in making trade decisions but isn’t that the type of risk traders are looking for?

It is this type of risk that is going to move the market enough and thereby allowing us to capture some of the gains if we make the right decision.  During intraday market movements, day traders are limited to the general movements of the market and some occasional movement on news but it is very difficult to catch all of these or even catch them at all. The benefit of swinging trading for active traders can also be a disadvantage since they do not usually get their buying power released back to them to fully take advantage of these intraday trading opportunities. Having increased buying power intraday will of course allow you to have more substantial profits but it is true that you can’t have your cake and eat it too. There are advantages to both day trading and active trading that may benefit different traders with different strategies. Both methods greatly depend on market conditions and volatility. Even though they are very similar methods in trading, they do vary a great deal and those differences will certainly give us topics to argue over for years to come.

$AAPL, $GE, $TY, $C

Active Trading by Bots or Algos:

First I have to give a shout out to Cash Bauer over at At the Money.  The dude has had an awesome week.

Bots or Algos have started to take over the market place. Its like something out of the terminator movies. Machines are quicker, better, faster, smarter, and more efficient then people. So why wouldn’t that make better traders? Machines, bots, and algos, take emotion out of trading. They take human intuition, instinct, pride, ego, and emotion totally out of the game. They act, react, think and take action only on mathematical parameters or set conditions. Typically with if then statements and conditional logic. This has also been called high frequency trading. It is a very interesting topic and has gained huge market space over the last few years. Essentially if you create logic or a set of rules that is right the majority of the time you can remain profitable by simply letting your trading program run. This code that runs algos and high frequency outfits is extremely valuable. People have even been known to try and steal this code. If you get the right code you basically found a money tree. The algo trading system doesn’t think with emotion or heart. It’s a cold blooded killer and machine and only acts upon pre set conditions. The overall goal is to make money. But as we all know machines tend to malfunction every now and then. With usually a ton of money on the line you better hope your machine doesn’t fail you or you will be deep in negative territory wondering what went wrong. The other huge benefit that algos have is that they are usually located in data centers of exchanges. In the electronic world milli seconds definitely matter. The closer you are electronically to where trades actually occur the quicker you can get your trades in and the better off you will be. Time is everything and time is definitely money in this case. A lot of times these algos will send out tons and tons of orders which will never get filled. They are essentially making a fake market with all of these orders. Yes, they have the potential to get filled but they are so fast and much faster then the average human that they can pull adjust modify and even cancel orders before you can actually act on it to make a trade. You don’t know who these people are or who these algos are. They are very stealth and behind the scenes. During the flash crash it was said algos gone bad were what really caused it. When the scenario changes the algo rules still remain the same. This could cause it to go haywire and start making bad trades, which in turn could lead to substantial losses. This type of trading is for the extremely sophisticated investor. In my opinion I would like to see it removed as its unfair to the regular trader reading charts and who isn’t a machine.

Top Five Active Trading Mistakes

Speaking with some of my day trading buddy’s we compiled a list of the top 5 mistakes made while active trading.

Revenge Trading: if you make a bad trade don’t double up on the next one to try and make it back.  You will end up down 5 times as bad.

Don’t be Greedy: If you are in a trade and you are up take some profit off the table.  While you wait and hope you make more money you can see the stock pull back and you will start to give those profits back and maybe eventually end up in the red, where is exactly where you don’t want to be and you will be kicking yourself afterwards.

Stick to the plan: if everyone jumped off a bridge would you?  Just because everyone is trading that hot new IPO does that mean you should?  Don’t deviate from what makes you successful just because others do.  Not everyone can be a trader and most get eaten alive by not following a game plan.

Over extend: Did you take some losses and are trying to make them back?  Are you swinging for the fences instead of hitting a few singles?  Don’t load up on margin.  Trade with what you can afford to lose or emotion will take over.

Overnight: Remember Lehman brothers?  People held that position overnight and woke up on Monday broke.  News and company changes CAN and WILL occur on the weekend at times.  However, the market is closed then and you sit helplessly until Monday when at that point it’s too late.

Windows 8 Blows For Active Traders

Anyone who is a big fan of any non-api day trading strategy should be a little scared tonight. The tl;dr; of the situation is Microsoft in all their wisdom decided that building a one size fits all platform for tablets and standard PCs was the way to go.  And it probably is for the every day fluff stuff but for people who need full use of their screen for multiple applications and don’t plan on abandoning the mouse anytime soon, this is not your operating system.  After struggling with it all weekend, I found myself always in standard mode (but still missing the start button mode).

Look at how big task manager has grown

We need a special paragraph to talk about how much active day traders will hate the navigation coming from the right side of the screen.  This concept has been tried before with another group of super particular pissy people on ubuntu in a desktop IDE call Unity.  It was a major fail and it is impossible to enter any *nix forum now without someone bitching about how crappy the UI was.  Way to listen Microsoft.

I could not get my favorite day trading app running right out of the box which was a little disheartening but there is always tomorrow.

I do have to mention that on my i7 VM allocating 2gb of ram, this tablet os cruised right along.

I hate Windows 8.

Ok, maybe just sampling the water.

It was hard to try to play active trader today when all my top picks were going downhill so quick.  I need to find the right broker that can handle the day trader flow without their web interface freezing up.  But, I am totally gearing up to buy in the next few days and am getting free stock trading tips from @cashbauer.

Funny story,when I first started trading I would only sell $GE over and over.  I hit the pattern day trading limit and had a 7 day margin call to bring myself up to the required  $25,000 minimum balance for someone labeled a pattern day trader.  At the time, I was with a nameless .com broker who didn’t feel the need to tell me that they could probably get the margin call waived.

Look maw, I am going to be an active trader!

A quick rant:

I sit in my coding cave day after day watching you guys winning and losing big time in the markets and then still get your act together and have drinks at 4:30pm.  The thrill of the game make the grass so much greener.  I am stuck with the task of automating away half your jobs but still I want to join your team.  Why am I still sitting here at a screen…

And so began my mission to become an active trader, formerly know as day trader (I wish you could still make text blink in html).  With any challenge, I sat down pen and paper and created a pro and con list for risk.  If the items on your list are too generic you are only cheating yourself.

Positives of Active Trading as a Profession:

1. Large reward potential and chance to be in control of my own domain.

2. Personally feel I have a competitive advantage with data modeling and automation of error prone tasks.

3. Financially in a good position with passive income reducing much of my monthly commitments.

4. An indirect way to pursue my passion of developing cool apps, able to scrape the social world and return unseen nuggets of wisdom and meaning and form a “Hey dude- you going out” tweet.

5. I could be on the last episode of MTV Cribs

6. I have a unique technical background that could give me a competitive advantage when trading volumes are low.

Negatives of Day Trading as Profession:

1. It is an early person’s game.  To be honest, if it happens before 9am, it doesn’t really happen.

2. Losing all your money can happen quickly if you continue to double down on the wrong stock.  (I have a nice example of this for anyone who likes to hear bleeding stories.  It is the story of $JAG.  Such a sexy name for a flat out fail.  But now is not the time to talk about that romance.)

3. Cash requirements make it a pretty serious risk.

4. I could fail and you could buy my house for pennies on the dollar.

TL;DR;  I am doing it and you are welcome to watch.  I will try to post information as I learn along the way that could help other potential risk takers become profit makers.

As a side note – during this journey I am reading, “A Random Walk Down Wall Street”.  So far I would strongly recommend the book.