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Stockscores.com Perspectives
For the week ending February 27, 2004
In this week's issue:
Do you aspire to be a professional stock trader? Does working from home buying and selling stocks appeal to you? A lot of time is spent describing how to buy and sell stocks effectively, but very little information is available on just getting started. Who do you set up a trading account with? What kind of computer hardware and software is necessary? How much time is required? Is it a smart thing to do? Here is an overview of how to start a stock trading business.
To begin, let me be very clear. Stock trading may seem simple, but it is not easy. Most people that day trade, lose money. The reason, I believe, is quite simple. There are no barriers to entry to stock trading. Opening a day trading account is a matter of filling out some paperwork and depositing some money. With a few hours of effort, you can get set up, and tell your friends that you are a day trader.
There are many books on the shelves of your local bookstore on active trading, and how to pick winning stocks. The book store also has books on how to fly airplanes, build houses and you may find one explaining how to do open heart surgery. To buy a book and consider yourself an expert on stock trading makes as much sense as performing a triple bypass on your friend with a good how to book as your guide.
Trading stocks is a great business, but recognize that to do it effectively requires time and education. Take time to learn, most of us work way too hard to earn our money, and throwing it at the market on a whim is bound to bring heartache. If 90% of day traders are losing money, the other 10% are making lots of it. And guess whose side experience is on.
There are many companies offering education, some are good, most are lousy. A simple rule is to not get an education from someone who does not have a track record of success trading the market itself. I don't believe a person can teach another to trade if they have not gone through the toils of actually making money in the stock market themselves.
Assuming you are comfortable with your knowledge of trading, the next step is selecting a brokerage house to facilitate your trades. There are four kinds of stock brokerages available. First, are the full service brokerages, which have advisors who will tell you what to buy and sell, and charge you for that service. The commissions are highest with these kinds of brokerages because you are paying for advice. For active trading, this is not a good choice. Nesbitt Burns in Canada and Merrill Lynch in the US are examples of these kinds of brokerages.
Next, you have discount brokerages that do not offer advice, but often offer a variety of tools for the trader to utilize for their stock research. These operations have much lower prices for execution of trades, but do not typically have order entry that is fast enough for the very active trader. Orders are typically placed electronically through a web site, or by the phone, and can take 10 second to a couple of minutes to be executed. Examples of these kinds of brokerages are TD Waterhouse or Charles Schwab.
The third group is the deep discount brokerages. These offer very little service, but have extremely low commission rates, some as low as $5 per trade. There is often, however, a hidden cost, as these brokerages try to make a profit from your order flow. If you are willing to purchase a stock for $10 a share, but the deep discounter can find those shares for $9.95 a share, they will keep the $0.05 difference. While it seems cheap, the inability to get the very best price can actually increase the price you pay. Examples of deep discount brokerages are E-Trade or Ameritrade.
The final group is the direct access brokerages. These are the kind of brokerages that I believe are the best choice for day or swing traders. Their commission fees are lower than all but the deep discount brokerages, but their order execution is direct to the marketplace, so there is no potential for price skimming. That means that you have the ability to get the very best price in the market, rather than have a middleman try to make something on the fulfillment of your order. More importantly, the order execution is extremely fast, often providing for confirmation of a fill on an order within a second of that order being placed. For short term trading, this is essential. Examples of these kind of brokerages include Trade Freedom in Canada, and MB Trading in the US.
If you intend to position trade, direct access is appropriate but not necessary. If you want a higher level of service, consider a discount brokerage that will offer more support than direct access. However, if you want low commissions, direct access is a better choice. If you are day or swing trading, speed of order execution is important, making direct access brokerages the best choice.
I am often asked about computer hardware and software requirements for trading. While trading may seem sophisticated, the equipment you use does not need to be. If you are trading, what is most important is a reliable and fast connection to the Internet. Nothing is more frustrating than losing your Internet connection in the midst of trading a fast moving stock.
The speed that you can move through the Internet is dependant on the speed of your connection, the processor on your computer, and the amount of memory your computer has. If you find that your computer is too slow when you are navigating the web, you will need to improve the slowest component of the three.
I use three computers and have seven monitors running in my office today. Is this necessary? No, but it does make life easier. I can trade as well on my laptop in a hotel room as I can in my office with all of the technology I have, but it is less work when you have multiple monitors to look at many different stock charts at once. Connecting multiple monitors to one computer is actually quite easy. Each monitor requires a video card. Most computers have the space to house two or three video cards, so most computers can run two or three monitors by installing two or three video cards. However, it is also possible to get video cards that have multiple heads on them, making it possible to connect two to four monitors to one video card. This means that you could have 8 or more monitors connected to one computer! The great thing about Windows is that it treats a configuration of multiple monitors as one big screen, allowing you to move your mouse across all monitors and move programs that you have opened across the space that the multiple monitors affords.
From the software side, there are three things necessary for stock trading. First, is the order entry software that allows you to place buy and sell orders. The direct access brokerages will each have their own order entry software which allows you to enter in the quantity of shares to buy or sell, the price, and the type of order. When considering a brokerage, see what types of orders are available. Your trading will be better if you can utilize stop loss, trailing stop and other sophisticated order types.
Next, you will need a real time charting program, so that you can see what is happening in the market, and pick your entry and exit points. There is a wide variety of systems available, at a wide variety of prices. Features and reliability determine the price of the system; consider companies like Real Tick, QCharts, ESignal or EGate for their charting packages.
Finally, you need a tool to help you find opportunities that you can capitalize on. With admitted bias, I recommend Stockscores.com for its ability to scan the market to identify opportunities.
How much time does active trading require? Swing trading will take one to two hours of your time each day, as you look for stock positions that you will hold for one to five days. Day trading is a full time job that requires your attention throughout the trading day. Many charting platforms will monitors stocks you are watching for criteria that you establish, so you can do other things while day trading, but when a trade is on, you will likely be pretty focused on what is going on.
A career as a successful stock trader is incredibly rewarding. Financially, it can be very lucrative but I think the rewards go beyond monetary gain. Trading stocks can also provide the freedom to spend more time with your family, to travel or do those things that require the time that many high paying careers do not allow. It takes effort and determination to become a good stock trader, but it is more than worth it.
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Stocks that breakout from low volatiity price patterns often go in to uptrends. Normally, I wait for the breakout to catch my attention, but another strategy is to follow stocks that have good potential to break out from a trading range, and watch them closely. By doing so, we may be able to get in to these stocks in the early stages of a trading range breakout.
This week I ran the Consolidating Bulls Market Scan which seeks out stocks that are trading in a range just below resistance. From the results of the Market Scan, I can create a watch list of stocks that have good potential to breakout soon. Here are some stocks to watch for that critical breakout signal that may occur in the weeks to come.Back To Top
1. AVA
Resitance at $18.50, watch for a break through that price level with abnormal volume.
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2. CDIS
Resitance at $25.50, watch for a break through that price level with abnormal volume.
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3. ELY
Resitance at $19, watch for a break through that price level with abnormal volume.
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4. IUSA
Resitance at $10.50, watch for a break through that price level with abnormal volume.
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5. T.S
Resitance at $7.50, watch for a break through that price level with abnormal volume.
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References
Get the Stockscore on any of over 20,000 North American stocks.
Background on the theories used by Stockscores.
Strategies that can help you find new opportunities.
Scan the market using extensive filter criteria.
Build a portfolio of stocks and view a slide show of their charts.
See which sectors are leading the market, and their components.
Disclaimer
This is not an investment advisory, and should not be used to make
investment decisions. Information in Stockscores Perspectives is often
opinionated and should be considered for information purposes only. No
stock exchange anywhere has approved or disapproved of the information
contained herein. There is no express or implied solicitation to buy or
sell securities. The writers and editors of Perspectives may have positions
in the stocks discussed above and may trade in the stocks mentioned. Don't
consider buying or selling any stock without conducting your own due diligence.
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