Why vast amounts of retail traders lose money? Applying the day trading mode when volatility is low to make money

(Last Updated On: September 25, 2014)

Why vast amounts of retail traders lose money? Applying the day trading mode when volatility is low to make money

This is important why

Sorry for any typos as usual

80% of trading involves managing your portfolio using volatility. Sometimes when it is low and on a normal trading day (SD=1), the odds to make money in a day is hard. There is usually only 20% of the time throughout the year where you can make money via day trading which is factored in with volatility. When volatility increases, you transition into a short term trader but when it drop you need to transition back to portfolio manager. As a result, you become a slave to volatility. All techniques for portfolio managers can be applied to day trading. We sometimes need to look for volatility with ATR (average true range) analysis which enable you to set expectation when to apply stop losses. Many day traders fail at this.

Day trading time horizon will shorten to 1-3 days but principles stay the same. It is considered hard to make money at.

Why is Volatility Important

It is 15-20% on average but this is why you manage portfolio more. 80% of daily market moves are usually no more than 0.5%, When you factor total annual move of 35 bps with transaction costs, you could easily get wiped on any trading day if you rely only on day trading. Either way, you will not make money on the long run. The market tells you 80% of time you will not make money but 20%of time, you can make money via day trading. Volatility tells you when the markets will have trading opportunity. If VIX goes up 10%, your total portfolio global risk has gone up 10%. Portfolio managers are then forced into the markets but reducing risk if needed. If the VIX is too low for too long, you will get complacency in the market thinking it will stay low for a long time. If you see VIX move large, it means the market is moving big so market participants can de-risk. You need to de-risk before them but will result in short market opportunities in the market. You will need cash to take advantage to be ahead of the game.

Use VIX (annualized volatility) falls > 25% and VIX < 15 or 20, you will be portfolio managing.

If VIX jump > 25%, global risk has gone up the world is being less than portfolio managers which will be forced to de-risk.

You need to know when to transition between before the most portfolio managers do. If not, the pros will use your activities as liquidity to profit from. These are usually negative news events which goes against you.

If index volatility is going up, you may want to reduce positions by 50% (your reduce the risk this way). If index volatility is falling, you want to double positions in your portfolio.

You need to know what is driving the volatility risk. You need t have well diversified long short portfolio and maximize what the market is telling you. This is what makes you different from classic retail traders who fail.

Why vast amounts of day traders lose money?

1. No appreciation when market presents opportunities.

2. No systematic process to prepare for changing market conditions

3. They set unrealistic expectations when volatility is too low for always day trading

4. They trade on older news and technical analysis indicators only (follow line on a chart)

Retail traders are suckered into believing day trading and technical analysis because they want to hear they can make money from it. They are also told it is easy to do. The reality is most pro and profitable traders don’t think this way! There are numerous processes used to keep you in the game!

You need Discipline and Track Record

Use the Kelly Criterion processed regularly but only use long term positions not day trading short term positions. Keep the short term and portfolio management trading separate when working with Kelly Criterion. Do not mix!!

News flow

Economic news at a macro level can affect all levels.

Asset Specific can:

Currency affects political and macroeconomic

Commodity is demand macroeconomic or output of supply

Bonds and rates, are macroeconomic and political only.

Stocks are macroeconomic affecting indices, microeconomic affect sectors, and unique affect companies.

For US: Focus on leading indicators like ISM, Michigan Consumer Sentiment, Authorized Building Permits, Money Supply, and Yield Curve (Interest Rate Expectations). So day trade only on these if the market allows.

The coincident indicators apply confirmation with PPI, CPI, Employment Situation Report, Jobless Claims, Industrial Durable Goods, FOMC Meeting, Personal Income, and Factory Orders. Don’t day trade on these numbers are known before they come out so you don’t want to provide liquidity for the pro traders on the other side.

Do not trade on lagging indicators like GDP, Unemployment Rate, Retail Sales, or Federal Reserve Beige Book. Most are already baked into the current market. This is where day traders get sucked in to reading old news.

For Europe:

Leading include with weighting of:

Industrial confidence indicator: 40%

Services Confidence Indicator: 30

Consumer: 20

Retail Trade: 5

Construction: 5

Composite European Economic Sentiment Index will total 100% of above

Coincident: Industrial production, monthly inflation number (all country), ECB meeting, BOE meeting

Lagging: GDP, Unemployment, Retail Sales

For China:

Leading include:

China HSBC PMI, Official PBOC PMI, Export Order, ConferenceBoad Leading Indicator (LEI) which includes

Consumer Expectation Index: 9.35%

PMI Export Order 7.22%

PMI Supplier Deliveries Inverted 22.31%

Total Loans Issued by Financial Institutes 14.86%

Raw Material Supply Index; 44.48%

Total Floor Space Started: 1.8%

Coincident: Industrial Production, Monthly inflation

Lagging: GDP, Unemployment, and retail

**There are tables that have economic indicate when certain reports and what kind of impact there will be on stocks, commodities, bonds, currency, with even release dates.


Asset specific news flow

These create larger opportunities to day trade. These create wholesale opportunity. You need to deploy capital if you have on these big volatility swings.

For currency, you have macroeconomic (demand) and political only. You could get micro that affects one type of commodity where it could affect the supply chain of a certain market sector. You could use energy info US inventory each Weds, you could get big moves in the actual will impact the supply chain at a micro level. If news event, you could back day trade on oil supply chain market for usually a day. For food as grain or wheat, if micro event affect the supply chain you can make decent profit from the volatility generated there. e.g. heat wave affected corn supply to trade long as in a few months.

For commodity, it will demand and supply dependent.

For bond and rate, it will be macroeconomic and political only

Stocks are affected in indices, macroeconomic impacts sectors, and unique to company. Micro can affect the stocks the most especially the industry supply chain.

News flow can impact for a few hours but big moves come after a few hours when people process the headline in major news outlets. These are usually found in assets farther down the supply chain.

Looking at volatility

In asset specific, 5 areas impact it:

Company results

Profit warning->market will downgrade the expectation

Big rumour

Unique events


You need to know the asset you trade

ATR is a measurement of volatility


If you day trade, you need to:

Understand best practices when day trade

For any asset, use a year of end of day data of:

Understand variance of the ATR high low. Understand the average range (high to low), average open to high move, average open to low, and average daily move % (close to close) . You should be able to set expectation from this data and apply your stop loss accordingly.

For short term day trade opportunity:

Visually look at volatility of volatility (open to high) for upside. This will help at what point you should buy before the asset opens on the next day trading opportunity. For instance, if you know your open to high is 5 cents, but you get in above this 5 cent, the risk reward is not worth pursuing this trade opportunity.

For downside, visually look at open to low to get in at right short price with

You could apply the same to even measure performance against your index asset.

If you don’t follow these procedures, you are either paying the market or losing money in the long run. Only amateurs do this.





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