Madaz's 2016 Adjusted Trading Rules in These Current Market Conditions
I can only speak for myself, but I wholeheartedly believe
that these current market conditions (from about mid-February of this year to
the present) have been one of the most difficult I've experienced. There are many reasons but to sum things up
it's because the broad markets are still indecisive due to several uncertainties
with macros. With the markets not having
a clear obvious trend, traders will often be confused resulting in more crowded
charts and some people will be cautious about playing the market. As a result, we've seen volume and liquidity
take a hit. Even on days that look
promising and volume is great at the open, it diminishes rather quickly (see my
blog post prior to this one).
As a momentum scalper, I need volatility and liquidity in
order to trade effectively. I don't like
trade stocks that float on air or grind because I feel that they are too hard
to read and too risky to hold since you are exposing yourself to lots of risk
to things like random news, random dumps due to a rug pull, or a random
squeeze. These types of things vastly
minimize the edge a retail trader has.
A problem I've had recently was failing to completely adapt
to these current market conditions. As a
result I would have too much size when the volume dramatically drops off in a
relatively short period of time. This
results in adverse effects such as slippage and also ECN fees that get incurred
if I have no choice but to take liquidity to exit a position. So in order to prevent myself from getting
into this tough predicament, I've developed some simple (and more conservative
given these market conditions) rules that basically allow me to figure out
proper and optimal sizing to trade with at each given moment so that way if I
have to stop out, I won't have to deal with issues such as slippage.
- Large size (I.e. 10K shares on a <$10 stock) only allowed at the open. This is when the volume is the highest of the day so probably this is the only reasonable time you should consider going in big, since in the event that you're wrong, you can get out with a fill at the price you want easily.
- Reduce size to 1/4 (i.e. 2500 shares on a <$10 stock) by 9:45AM. Having studied various charts from recent trading activity, I've noticed that a lot of stocks experience volume drop offs of about 75% within 15 minutes. Logically this means you should reduce your size to 1/4 of what you would have done at the open in order to ensure you can get in and out easily.
- Reduce size to 1/10 (i.e. 1000 shares on a <$10 stock) by 10:00AM. Same reason as above, by 10:00AM, I notice that many stocks that are in play at the open drop off in volume by 90% so that means you should reduce your size to 1/10 of what you would have done at the open.
- Reduce size to 1/20 (i.e. 500 shares on a <$10 stock) if needed, for the rest of the day should there be very low volume, 1/10 max. If the volume drops off even more, then reducing size to protect any gains from the morning is a must. Of course, if there is no price action, you should not trade at all, but sizing too big late in the day and losing your morning profits because of that is very frustrating and this serves to prevent that from happening.
So of course there are going to be exceptions but these are
just general guidelines that help me prevent those really frustrating losses
where you're stuck holding too many shares of an illiquid stock and you have to
take liquidity to get out and have to take a much larger loss than expected due
to slippage. The tradeoff of course is
that I may miss out on some trades, but the bigger idea here is to practice
discipline as I feel the losses that I will prevent from not going in too big at the wrong
moments will outweigh any potential profits from missed plays during irregular
hours.
Believe
me, if you've been following me for awhile, you know that I love to go in with
large size and nail that big $5,000 win in 30 seconds, so it's painful for me
to have to take this much more conservative approach, but like I always say, "you must adapt to the market as the
market will not adapt to you".
Other rules I've been following include:
- Not trading at all between 11AM-2PM, and many times not even trading beyond 10AM. The volume drop-off during this period results in no edge for the retail trader and algos start to control the action. I've already beaten the dead horse regarding algos and manipulation on my blog on my youtube channel so I won't go over it again.
- Any random news play that shows up with massive volume as tempting as it is to go big because of the volaitility, stick to the sizing rules and play small anyways. Lost big on WR last week with that FOMO mindset even though I was nailing several of these news plays in a row prior to that, which goes to show you that all it takes is one bad miscue and you will pay the price, figuratively and literally. Play small and manage your risk and don't undo the work you did in the morning, or if you're already red, don't amplify your losses.
I thought this might be too specific to me to help others (I don't think everyone will necessarily take 10K share positions at the open) but some people have asked me about it so that's why I did the write-up. I hope it helps people to a certain extent or
at the very least gives people a better understand of why I do things the way I
do.
Cheers,
Madaz
