High-Velocity Trading In A Post-Bubble Market

The game has changed. While this is no surprise to anyone who has been actively involved in the markets over the last 18 months, it does warrant discussion and a strategy, as it relates to intraday trading. Traders now find themselves in the position of adjusting to the dynamics affecting the market currently, most noticeably, the erosion of stock prices. However, other factors are at work that make trading challenging, and at times, quite baffling. This lesson, however, needs to be prefaced with an ample dose of recent history.

When I first got involved with daytrading back in 1994, the markets were in the midst of embarking on yet another leg of the bull market. (The economy was coming out of the brief recession of the early '90s). At the time, mutual funds were the rage and the latest en vogue financial product, as espoused to us by every financial journalist and marketing guru within the industry. "Save for retirement" was the mantra, and Americans dutifully drained their once beloved FDIC bank accounts to latch on to the 10% Total Return Train. This reallocation of capital from savings accounts to portfolio managers only further strengthened the bull market with massive infusions of capital. Add to this all the 401(k) money, and in retrospect, you have a demand-driven bull market, as opposed to one driven by fundamentals.

Fast forward a few years. Suddenly, online direct-access trading was appearing on the horizon. This not only occurred at a time when technological advances made it possible to offer this to retail customers, but it also occurred when many portfolio managers were having a difficult time beating the S&P 500 on an annual basis (not that that is an easy task when you need to deploy large amounts of capital). Combine this with the early stages of Internet mania, and it was an easy decision for individuals who wanted to get in on the action via discount brokerage accounts vs. the now disdained common stock fund. Publications and financial news channels only added to the desire for individuals to get involved.

While the concept of individuals changing their savings and investing habits due to demographic changes is admirable and well intentioned, it set many up for a rude awakening when reality set back in, or as many call it, the reversion to the mean. Things in life go on for only so long before unforeseen events, or the "randomness" of the market catches everyone off guard. Suddenly, the song is over and there are no chairs.

With all the money that was being thrown at stocks during this time, it made the whole notion of intraday trading a whole lot easier.

First off, you had massive share purchases and sales by large institutions, which not only provided large intraday price swings, but also the volume to navigate in and out, with ease. In fact, many trades during this time were "shoot from the hip" trades, as opposed to trades that are stalked and executed with absolute precision, which is the way the game is again being played now.

Secondly, you had rampant speculation in tech stocks, further adding to the market being awash in liquidity.

The point being is that everyone in the world was trading stocks. Everyone was an expert. And by the returns some people put up, it was hard to dispute otherwise. However, the market has a nasty habit of testing one's resolve. The current period is one such time. Gone are the times of picking up half and whole points with a couple of mouse clicks, at least for now. Sure those trades still exist intraday, but they seem a bit more elusive then they were, say, just six months ago. Today, as daytraders, we are forced to dance in and out of the market, picking up small amounts each time.

I hear a few rumblings in my office about the futility of trading for 10 and 20 cents per trade. This is a sure sign of one's unwillingness to adapt. It also indicates that perhaps the traders intention for trading is for entertainment, rather than for income stream. I will trade for 10 and 20 cents all day, provided the setups are there. This approach will get me through the lean times and allow me to further refine my skills. Sure, I'll admit this is not the most exciting approach, but I am still here after many (outside my office) have either been wiped out or simply gave in when it came to down to brass tacks.

Add to the mix the introduction of decimalization, the seemingly overnight disappearance of billions of stock market capitalization, and unfortunately, an economy heading -- or already in -- recession, combined with a looming Middle East crisis. The result is truly epic. Those who adapt will surely survive; those who continue along without making some adjustments, will surely be tested and may not survive.

So how does one adapt? First off, you need to have already been playing the game under certain guidelines. Even during the height of the market frenzy in 2000, basic rules still applied. Today they are even more important. Let's review these rules:

1. Trade with the trend, as defined by the one-minute Moving Average. "Safe Catchers" and "Top Callers" put the odds even further out of reach.
2. Trades are commenced when the futures make a sharp move in the direction you were anticipating, and cease when the futures stop going in the direction you were anticipating. Are the S&P and Nasdaq futures moving enough intraday to justify trading? For the S&Ps, that range is a minimum of 3-5 points, and for the Nasdaq 10-15 points.
3. Less is more. Trade only high-probability setups, and focus on just one, maybe two stocks. It is very easy to have a few losing trades, get discouraged, and go looking for another stock to trade. This is counterproductive. Stocks have personalities. Take a few days to watch the price action. You will be surprised at how much it will reveal.

A phrase is starting to catch on in my office -- "It is what it is." What do I mean by this? If the setup is there and you have your trigger point...execute the trade like a machine. There is no time in this market for thinking or second-guessing. Given the fact that the institutions are participating less, you are trading predominantly with other traders, the specialist or market maker. The veteran trader will not flinch, will you? This rather simple idea/observation should allow one to successfully navigate the current market.

On the bright side, there is ample empirical evidence that bear markets on average last roughly 36 months. Assuming history repeats itself, the market may in fact become a bit more robust in the months to come. Additionally, the introduction of Single Stock Futures (SSFs), will certainly add some opportunity, as well as change the playing field for stocks. This means only one thing -- adaptation to a new way of conducting business which will result not only in inefficiencies early on which can be exploited, but also yet another angle to approach stock trading. There is little doubt that SSFs will offer tremendous potential for intraday traders.

So keep your powder dry, don't swing for the fence on each trade and constantly hone your skills. When the markets re-awaken, you will have become a far better trader. As the old adage says, "What does not kill you, will only make you stronger."

P.S. Keep your eyes peeled as TM and I roll out some innovative products and services in the months to come, with regard to SSFs.

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