Hobby: Day Trading?

[Sytes]

I have setup an account with Scottrade as they have streaming activity. Something Sharebuilder does not have. Sharebuilder, my buy/sell order may take up to 20 minutes to officially place. Little odds and ends learned. Thanks for the posts and PM's.

Don't forget to lop off 30% or so from you short term gains to cover taxes...

Gotta love the IRS and the ability to understand... A reason CPA's are soooo valued!

I want to learn how much 'gain' over my 'loss' it takes to fall into X tax. $1,000? $10,000? Are there exceptions for handling stock under an 8 hr time frame? Does each transaction uy & sell need to be recorded for tax purpose? ah - taxes suck!

The following is what I have learned on the tax aspect. Before diving in, I want to fully account for all costs to identify my break even point. Damn IRS! Nothing close to the KISS rule! Anyhow, this is what I have found.

FLAT TAX would hold so much more return for gov't accounting and KISS thus s-canning a large majority of these confusing laws and the staff necessary to initiate and enforce these wild tax laws. Meh, wasted words though good to spout about occasionally. haha!

Short-term gains and losses. Capital gain or loss on the sale or trade of investment property held 1 year or less is a short-term capital gain or loss. You report it in Part I of Form 8949.
You combine your share of short-term capital gain or loss from partnerships, S corporations, and fiduciaries, and any short-term capital loss carryover, with your other short-term capital gains and losses to figure your net short-term capital gain or loss on line 7 of Schedule D (Form 1040).

http://www.irs.gov/publications/p550/ch04.html#en_US_2012_publink100010688


Then I came across this...

In a little-noticed provision of the American Taxpayer Relief Act of 2012 (the Act), Congress extended the effective tax rate of 0% on the sale of qualified small business stock (also known as Section 1202 Stock) for a second time.

http://www.morganlewis.com/index.cf...cationID/64ae3b9a-97f2-4c6d-8cda-8a94de485812

If I have to pay for services to understand how taxes may or may not effect my hobby-ish day, week, month trading - it will simply add to losses before even starting. Better safe than sorry though, I suppose...

 

[MtnWest]

If you want to buy and sell intraday often you need to account for your funds settling in what's known as "T+3" (trade+three days). So you'll need to trade a small portion of your account to always have funds available.

To get around T+3 you need a margin account though you'll be limited to no more than 3 round trips in a 5 day period.

To get around that you'll need a margin account with no less than a $25k balance. The SEC set that minimum after all the mom and pops wanted to trade and lost during the .com days. They believe if you have $25k to trade you're sophisticated enough to participate. Same idea as being worth 1 million to invest in hedge funds.

That's the reason for the $25-$50k to open a trading platform account that is direct access and not online access.

I left my job in 2006 to become a trader. I traded actively since 1997 before making the decision. I wouldn't do it all over again knowing what I know now. It's just a regular job with some pluses and minuses like anything else.

If you do trade individual stocks please do not become biased thinking there is such thing as a good company. The only "good" company is the one you make money on. All you're looking for is price movement and liquidity, ticker symbol doesn't matter.

Paper trade for a while but it's like reading a romance novel compared to having relations with a woman. Not the same. When you have skin in the game is when fear and greed come in and mastering your emotions is the hardest part to being consistently profitable.

Good luck! Remember cut your losers short and let your winners run by letting your first sale be your worst sale...

 

[RobG]

Gotta love the IRS and the ability to understand... A reason CPA's are soooo valued!

I want to learn how much 'gain' over my 'loss' it takes to fall into X tax. $1,000? $10,000? Are there exceptions for handling stock under an 8 hr time frame? Does each transaction uy & sell need to be recorded for tax purpose? ah - taxes suck!

I hear there is a CPA that hangs around here...

Yes, you have to keep track of every transaction but Scottrade should do that for you... not sure if you can upload the information into a tax program like Turbo Tax or if you still have to enter it manually.

Not sure about really short term holdings but basically if you hold stocks/mutual funds for less than a year you get taxed on gains at your marginal income rate. If held more than a year the rate is less (10% if your income is less than <depends>) and 15% even if you are Warren Buffett. 0% is a temporary thing for long term capital gains and also has income limitations. Stock dividends are taxed similarly.

If you open up an IRA with Scottrade or elsewhere you can trade without these negative tax implications, but then you shouldn't touch the money until you're 59 1/2.

I think most people WILL make money day trading but the question is whether or not they would have made more with a simple buy/hold strategy. I'd suggest setting aside a portion of your money and buy a broad based "index" ETF like VTI and reinvest the dividends. Every once in a while check to see how much that fund has grown compared to your day trading account when adjusted for taxes. Academics who have studied this have concluded that even professionals will probably do worse day trading, and it is a matter of luck since all the professional traders will bid the price up to the point where nobody can tell if it is still a good buy.

 

[MtnWest]

RobG has a great point about index funds and divy's. I too recommend most people to buy gradually over time instead of trying to time the market. Under 50% of paid fund managers can beat their benchmark (SP500, etc) over the long haul. Unless a person is better than a paid manager put your money in houses that cash flow, long term funds and elk tags.

As an investor worry about prices being too high or low, but to traders it doesn't matter. There is no such thing as priced too high or low. It's just a ticker symbol with a number attached. It sounds shallow but all you care about is making money. It should be boring, not exciting. Think base hits, not home runs. Grind out 20%+ annually and it will take care of itself over time.

Though I wish people luck trading, it is not a matter of being lucky. Unless people's only business plan is to buy a stock and hope to make money, then they need luck. There is only managing risk, it is not gambling like some believe. There are no set odds like casino games.

No one would think about becoming a doctor or engineer without the time required. It takes years and years just like attending college or serving an apprenticeship. Sometimes longer to be a trader because if one started in the last 4 years all they know is a bull market that has made over 100% or this current quarter that has money managers tripping over themselves not to show any cash on the books by tomorrow for fear of losing their job.

If you are curious about taxes you'll want to know about wash sales right out of the gate. Only way around wash sales as an individual is having trader tax status.

Scottrade and all other brokers will export a tax file that will load automatically in TurboTax with wash sales already accounted for. If anyone quits their job or retires and wants to make the IRS election of being a trader for the following year, hit me up and I'll walk you through the requirements, making the election and filing. It's convoluted to put it mildly.

 

[WV Hunter]

No one would think about becoming a doctor or engineer without the time required. It takes years and years just like attending college or serving an apprenticeship. Sometimes longer to be a trader because if one started in the last 4 years all they know is a bull market that has made over 100% or this current quarter that has money managers tripping over themselves not to show any cash on the books by tomorrow for fear of losing their job.

Any good books or online information you could recommend? I have time here at work to learn and practice. Right now I am invested in stocks and mutual funds. I spent a year chasing options (buying/selling/spreads) and ended up breaking even for the most part, luckily. I use schwab street smart software and make about 25 trades a year at this time.

 

[RobG]

If you are curious about taxes you'll want to know about wash sales right out of the gate. Only way around wash sales as an individual is having trader tax status.

I know nothing of trader status. Would a person with this status be able to write off a wash sale? (i.e. sell a stock at a loss for the tax write-off but buy it back before 30 days). Wouldn't the loss just be offset by any realized gain when it comes time to do the taxes?

 

[MtnWest]

Any good books or online information you could recommend?

Sure. I liked Trading for a living by Alexander Elder and Ordinary people, Extraordinary profits by David Nassar. The good books won't be about picking the next winner or promising anything, more towards managing yourself and managing risk. Stock Traders Almanac is handy too just to get a feel for seasonal patterns, etc.

Sounds like you've got some good experience so you probably understand the psychology of trading is the largest portion of the trades outcome. I know it is for me anyway.

It is such a humbling experience to lose hard earned money and to admit your wrong to cut losses before a trade becomes an investment. I am wrong almost as often as not. Sometimes more but if your gains are larger than your losses you can make money. I hit the wall so hard once I had a come to Jesus meeting with myself that I was either going to adjust or go broke trying to achieve my goal. We all know the definition of insanity and I was in a pattern of doing the same thing over and over expecting a different result.

Would a person with this status be able to write off a wash sale?

Yes. No wash sale rules and the ability to write off more than $3k in losses amongst other things. No wash sale is important to me because I generally trade the same thing over and over. The reason to have to send a letter to the IRS electing trader tax status the year before eligibility is so people don't lose $30k and say oh crud I think I'll try to write this off. They won't give trader status though if you have a real job 99% of the time though.

 

[MtnWest]

This thread is about Sytes and anyone else interested in securities so please do not think I'm going off on a trip or something. I make way less than most on here I'm sure and I'm not special I'm going to mark up a chart and do a brief explanation of what I do to give some ideas. I know when I started I had so many questions.

If it helps just one person by giving them ideas to make some cash on the side for a new set of bino's (Swaro's or Fisher Price) or drives them away because it's not for them I'll be happy. I truly want everyone to succeed with everything they do in life.

Give me a few minutes I have to separate my 3 and 13yr old as the oldest is on spring break and throwing a wrench in the little mans plans.

 

[WV Hunter]

Awesome. If you want, Please start a new thread because I'm sure that will lead to a 100 more questions.

 

[Sytes]

Great info! Appreciate everyones time! New thread or this... whatever works. Maybe a new thread on trading in general? ThNks again.

 

[MtnWest]

First off I do not recommend trading or give investment advice. I do not know or care where the market is headed. Anyone that tells you they know where the market is going is lying. I can only guess along with everyone else. Ok, with that out of the way...

There are many different ways to invest and trade. No one way is better than another, it's whatever works for that person. You want to find a niche, something that gives you an edge. That can mean certain markets, securities, time frames such as swing trading (days or weeks in time frame) or scalping (being 100% cash every night, maybe automated trading), etc.

Paper trade then start small when experimenting. Keep detailed notes of performance, why you did it, what worked and what didn't. Excel spreadsheets are your friend. Trading over different market conditions will confirm if you found an edge and what it's limitations are. If the market is trending, volatile, up or down it will have an impact on your approach and you must adjust your style to the tape. That may be sitting out or using a different style during that time. Example may be you only trade on the long side so you sit out anytime the 20dma (day moving avg) is < the 50dma. Or you buy dividend paying securities when they go ex-dividend. Whatever it is there are thousands of ways of skinning this cat.

If one is fairly computer savvy they can backtest formulas using a software such as AmiBroker. Create various parameters and backtest them over all market conditions. Very simple example would be a formula telling it to go long XYZ symbol whenever the 20dma crossed above the 50 with $10k then selling when it crossed back below and it will tell you how many trades, your gains/losses, etc during the time period you tested. You can even do automated trading with such programs.

As I mention AmiBroker, I forgot to mention Active Trader magazine in my previous post. I had a subscription for years and it is great. Covers everything from trading techniques, platforms, backtesting formulas, tax, you name it.

Simple, complex, how much time you have, money you want to allocate and what you are willing to lose are all factors in deciding where to start. Tomorrow I'll go over an approach of mine and some rules that work for me.

 

[WV Hunter]

Great stuff

 

[pointingdogsrule]

How about I tell you what stock I am going to buy and you short that stock the day before I buy and you will make a killing

good luck to all
the dog

 

[MtnWest]

How about I tell you what stock I am going to buy and you short that stock the day before I buy and you will make a killing

I know the feeling. More times than I can count I've wished the same thing for myself. Funny how at times it feels as if whatever we bought waited until we got in to turn.

Disclaimer: This is not investment advice, I do not recommend trading or trying to time the markets. It's to give Sytes and anyone else just one idea of how to approach the markets and not feel like their money is a ball bouncing around on the roulette wheel.

So I did a simple mock trade to post as an example. I've concealed the identity of the security because you can replace the ticker symbol or adjust the time frame and it's all the same. All I want to do is make money, not hope that what I bought turns into the next Google.

A few rules I use to start- I do not follow financial news, I use defined risk (before I buy I know where my exits are), I avoid FOMC meetings and unemployment reports unless I have gains with tight stops and I do not trade individual stocks. There are many others but the point is to have a plan of what works for you and adhere to it. Discipline is the name of the game.

In this case it's a swing trade where we have spent minimal time watching XYZ and marked it's chart for trendlines, support and resistance daily. No wizbang indicators or heavy thinking here. This took just 5 minutes a day because until it meets our req's we find one that does or go do something else. We have patiently waited and bought XYZ here because of the following.

1. It was in a confirmed trend. 20dma>50>200 which are the blue, green and red lines.
2. It had pulled back to two levels of support (many times it's just the trendline). Both the rising trend line and a previous higher low.

Before we bought we figured where we will exit because we always trade with a plan. We figured these #'s out by...

1. We have an idea it should get to the previous high if it continues to rise, after all it is making higher highs and lows right? (we learned we get cut catching a falling knife). After that we have no idea. So we set our first sell order there since we know we will never pick the high.
2. Since we could make from 75 to 84 or about 12% we chose to set our stop loss at 4% or a 3:1 reward/risk ratio. We did this becuse we know from our detailed logs/spreedsheet we keep that we only get say 60% correct.

We were fortunate the trend continued and our sell for profit order was triggered. We were not there watching or sweating bullets because we had this planned out before to take "x" amount loss or profit. We did however raise our stop loss to our entry when we were up more than 4% to make it a free spin.

After our sell order was triggered we raised our stop because we don't want to give everything back but we do want to let it run. Hence cut your losers short and let your winners run. XYZ went much higher but stayed above our first sell like many times it does (resistance becomes support, vice versa). The quarter was coming to an end which means things can change, XYZ was stuck in a trading range so we sold the second half in the middle of that range and picked up an additional 4%.

There was no cherry picking this data like selling the $90 top or thinking we went long where circled on the chart when the moving avg's crossed to the upside and held it for a 60% gain. A few times a month we traded by our rules and without swinging for the fences we had ourselves a good year. Plus we slept sound at night knowing we did not have possibly unlimited losses by riding something down hoping for it to come back. We didn't pull our hair out listening to Cramer because we didn't care about all that stuff about picking the next Google we only cared about making money.

This was not intended to make it sound easy, it is not. Only to take some of the randomness out of the market for people who are interested by showing what one of a million approaches may be. It is not to say look at me or whatever. Hunttalk is a cool place with cool peeps so I thought it may be some help.

I'm going to just watch this thread and listen to other peoples ideas now. Calvin's approach seems to be identical to my Dad's and it works for him too. I can't do what he does and the same for him (my Dad) but it doesn't matter because there is no right or wrong way.

Here is our trade-

Marked chart
View attachment 35308

Log of that trade
View attachment 35309

 

[Sytes]

Appreciate your time, MtnWest! Fantastic insight into the labyrinth of trading.
Hah! If you continue, you may need to insert your 'disclaimer' as your forum set signature
I am really enjoying everyones info shared here! Even the 'minority' opinion(s).

I looked into AmiBroker @ http://www.amibroker.com/ looks very practical and surprisingly understandable - to a degree. Would be interested in opinions on the standard version and the professional edition. I like the ability to chart and backtest though just getting my toes wet understanding the backtesting aspect. I am curious about the 'scanning' portion - I'll learn up on that.

I am learning at the hobby level I need to identify a price per share fitting the amount I have available to fund. In a prior example with 1k$ for 20$ shares, it seems my intent to test with a "safe stock" left me shy of beaking even due to the qty of shares I was working with. Seems common sense though all is part of the learning.

Great info again MtnWest - I almost don't want to reply simply to keep your post visible for others vs getting clouded within a thread... though that is the nature of forum threads. Thus far, it is chaulk full of great bits of info!

 

[WV Hunter]

Again, great stuff MtnWest. I am not familiar with a lot of the jargon but I've started reading a lot of the investapedia pages. It's been a few years since I took an options trading workshop so I have forgot plenty. Who has the best paper trading platform?

 

[Calvin]

Whew, that's too complicated of a chart for this fisherman. haha

Buy low, sell high. That's as complicated as I get. (grin)

Keep an eye on things you know about. A guy could have made a killing on Cabelas if he was paying attention 5 years ago. Something like 10x your money as it has a strech were it was trading at 6, as some expert hated it. Now it's at 60. I'm liking what I'm seeing with Garmin right now. Dropping like a rock, a nice big dividend, and everybody hates it. I hope it's around 25 come the end of the summer.. I'll be buying and holding. They'll turn things around. A little cell phone carrier up here in Alaska.. Alaska Communications. hanging in the 1.60's. Not that bad of a company.. I use em, and all my pards are starting to use them as they are cheaper than ATT. If I see 1.50, I won't be able to resist buying up a chunk of that company. I might need to hold for a few years, but it'll pay.

 

[MtnWest]

I am learning at the hobby level I need to identify a price per share fitting the amount I have available to fund. In a prior example with 1k$ for 20$ shares

It may help to think in percentages of what the security may do. Buying less of something at 20 compared to 10 may seem counterintuitive but if they both have 5% potential it's the same.

Who has the best paper trading platform?

Not sure, I know some accounts have a checkbox to enable virtual trading. A notepad, spreadsheet or printing a chart with penciled levels then again as the trade progresses is a great visual tool. Using yahoo finance or googles portfolio tracker can work too. Key to paper trading is being honest. For me it is easy to say in hindsight what I would have done when in reality I wouldn't have.

Calvin- I know that chart looks complicated but in essence is buying low and selling high as it continues a trend. I take a few minutes and draw pretty pink lines every morning but don't watch or read business news. If I don't have levels pre defined I am worthless and usually get shaken out for a bad loss right before it turns, I think I have a.d.d.

My dad has bought and sold the same stuff over the years between two levels and loves to collect a dividend as he waits. Sounds similar to your approach. He is all about fundamentals and digs into eps, net asset values, etc. He also watches interest rates like the 10yr bond.

I am genuinely interested in how you decide to exit. Do you take a loss if you see fundamentals decline or have a feel for when things get exuberant and take profit? Also what are your typical time frames? A few months or a year or so? Mine is generally days and weeks as I'm terrible at longer terms but better than 50/50 about the next 5% or so.

#1 question I get when someone asks what I do is where is the market headed. I reply with I don't know. They look at me like.... Wha?

 

[Calvin]

I am genuinely interested in how you decide to exit. Do you take a loss if you see fundamentals decline or have a feel for when things get exuberant and take profit? Also what are your typical time frames? A few months or a year or so? Mine is generally days and weeks as I'm terrible at longer terms but better than 50/50 about the next 5% or so.

That's the million dollar question. I exit when I get that feeling that I should exit. I've been wrong a bunch of times and got out way too early, but that' the way it goes. If I get nervous, I stick a limit sell on what I have. I've broken even more times than I'd like to admit. Days, months, years... It's all depends.

If a guy wanted to just make some small gains, just to get their feet wet, intel will give you that. Buy it when it dips below 21. Sell it when it hits 21.50 or higher. Buy 500-1000 shares at a time, and you'll be putting some cash in your pocket on the safe side. Get stuck with it for an extended period of time, you get over 4%. You get a bit over $100 quarterly in dividends for every 500 shares you own. Not the biggest gains, but it'll pay for some hunting gear. You obviously can go much "bigger" than those small gains, but those carry higher risks.

I'm trending towards buying commercial fishing permits and halibut ifq right now. I'll still buy stocks, but I'm very bullish on fish.

 

[Corax]

I belong to an outfit called "American Institute of Individual Investors", which provides a lot of educational material on investing. IMO they are the best deal I have seen on learning the ropes of investing. They cover a wide variety of types and strategies, and once you are a member (about $35 per year) you can search their archives.

Good luck.

http://www.aaii.com/