Day Trading Introduction

Day trading opportunities depend on the market’s volatility. 80% of the time, stock markets have low volatility (less than 25%) making it unprofitable to day trade. However, 20% of the time, market volatility increases above 25% which makes day trading profitable.

That is why, professional traders in hedge funds are 80% of the time portfolio managers (trading in time horizons of 1 to 3 months) and 20% of the daily traders where their trading horizon is lowered to 1-5 days.

The strategies and methods we employ in portfolio management also apply seamlessly to our day trading activities.

Why most Day traders lose money

1. Insufficient recognition of the broader possibilities at hand: General market conditions, including volatility, often give rise to short-term prospects.
2. Inadequate preparation: Absence of structured methodologies for decision-making in response to both general market circumstances and asset-specific factors.
3. Overly optimistic outlook: Frequently, the level of volatility in the overall market does not justify an exclusive 100% day trading strategy.
4. Engaging in day trading based on outdated information and technical indicators.

The importance of volatility

Over the past two decades, the VIX has maintained an average level of 15-20%, with a slight variation of around 35 basis points. This is the primary reason why 80% of the time, our role leans toward portfolio management.

When we assess portfolio risk:

• An increase in the VIX by 25% or more signifies a corresponding rise in portfolio risk by at least 25%.
• Conversely, a VIX decrease of 25% or more translates to a proportional reduction in portfolio risk.
• This explains why significant movements in the VIX often coincide with substantial market shifts, either upwards or downwards, as market participants adjust their risk exposure.
• Our aim is to preemptively reduce risk before these market participants do so. Typically, market participants are slower in their risk reduction efforts, presenting us with short-term trading opportunities. However, it’s essential to maintain sufficient cash or margin to capitalize on these opportunities. Hence, we prioritize transitioning early to stay ahead of the curve.
• In roughly 80% of instances, the annualized volatility of the S&P 500 index remains below 25%.

Hence, when the index volatility undergoes a transition and begins to ascend:

1. Decrease the position size by 50%.
2. Adopt a day trading strategy, actively seeking opportunities for directional trades within a 1-5 day time frame.

Conversely, when index volatility transitions into a declining phase:

1. Augment the portfolio position size by 100%.
2. Embrace a portfolio-centric approach, exploring prospects for profit over a medium-term span of 1-3 months. Deploy available cash into a diversified long-short portfolio.

Day trading opportunities

Volatility and hence opportunities are generally driven by two areas across asset classes:

1. Economics: occurs at macroeconomic level affects countries, currencies, commodities, bonds, stocks and sectors relative to each other within stock market
2. Asset specific: newsflow that occurs at macroeconomic (sector) level and unique level:
   • Currencies: macroeconomic & political only
   • Commodities: newsflow is broadly macroeconomic, demand and supply shocks
   • Bonds & rates: macroeconomic & political only
   • Stocks: macroeconomic affecting indices, macroeconomic affecting sectors, unique companies

Economics Day trading Catalysts

The following economics releases often cause spike in volatility and hence day trading opportunities:

• United States
  • Leading indicators: ISM, ISM NMI, UMCSI, authorized building permits, money supply (M2), yield curve (interest rate expectations) – the bond market will price in before the equity market moves expected
  • Coincident indicators: PPI, CPI, employment situation report (non-farm payrolls), jobless claims, industrial production, durable goods, FOMC meetings, personal income, factory orders
  • Lagging indicators: GDP, unemployment rate (NFP report), federal reserve beige group, retail sales
• Europe
  • Leading Indicators: Economic sentiment indicators
  • Coincident Indicators: industrial production, monthly inflation numbers (across all countries), ECB meetings, BOE meetings
  • Lagging indicators: GDP, unemployment (across all countries), retail sales (across all countries)
• China
  • Leading indicators: Manufacturing & Services Caixin PMI, Conference Board leading economic index (LEI)
  • Coincident indicators: industrial production, monthly inflation numbers, export orders (trade commodities)
  • Lagging indicators: GDP, unemployment, retail sales

Unless there are hugely surprises you shouldn’t be trading on coincident indicators and lagging indicators.

Indicator	Indication	Stocks	Commodities	Bonds	Dollar	Release Time
ISM Manufacturing	UP	UP	UP	DOWN	DOWN	1st Business day of month
ISM Non-Manufacturing	UP	UP	UP	DOWN	UP	First Thursday of month
UMCSI	UP	UP	UP	DOWN	DOWN	Preliminary 10th, full end of month
Building Permits	UP	UP	UP	DOWN	DOWN	20th of month
GDP	UP	UP	UP	DOWN	UP	Quaterly
Non-Farm Payrolls	UP	UP	UP	DOWN	UP	First Friday of Month
CPI	UP	UP	UP	DOWN	–	Mid-month
PPI	UP	UP	UP	DOWN	–	2nd or 3rd week of month
RETAIL SALES	UP	UP	UP	DOWN	–	15th
CAR SALES	UP	UP	UP	DOWN	UP	5 weeks after month end
EXISTING HOME SALES	UP	–	–	DOWN	–	25th of month
TRADE BALANCE	UP	UP	UP	–	UP	19th of month
DURABLE GOODS	UP	UP	UP	DOWN	–	20th of month
Europe ESI	UP	UP	UP	DOWN	DOWN	29th of month
China Official PMI	UP	UP	UP	DOWN	DOWN	First business day of month

Asset specific day trading catalysts

News flow that occurs at microeconomic (sector) level.

Currencies

Currencies are affected by macroeconomic & political developments.

Commodities

Commodities are affected by news flow is broadly macroeconomic (demand) or output (supply) dependent.

While the focus here is primarily on macro-level dynamics, it’s important to note that delving into micro-level news, particularly in the realm of commodities, can yield valuable opportunities. For instance, consider the impact of specific events like the Energy Information Administration’s (EIA) weekly release of oil inventory data on Wednesdays. When these reports deviate significantly from inventory build expectations, it can disrupt supply chains unexpectedly. This, in turn, affects various commodities, including food staples like grains and livestock such as cattle and hogs.

Microeconomic factors can come into play, causing volatility within these commodity markets. For instance, extreme weather conditions like heatwaves in the United States can lead to diminished corn, bean, and soy crops, thereby disrupting the supply chain. In such situations, astute traders can capitalize on these developments through day trading, seizing opportunities in commodities like corn, wheat, and soybeans, as demonstrated by many who profited from these market fluctuations.

Bonds & rates

Bonds & rates are affected by macroeconomic & political developments.

Stocks

Stocks are affected by macroeconomic conditions, macroeconomic conditions affecting specific sectors and stock specific developments.

Identify day trading opportunities

First understand your asset. Analyze the asset quantitatively by calculating:

• Average Price
• Average range (high to low)
• Average open to high
• Average open to low
• Average daily move (close to close) %

Check your expectations versus what has happened historically to adjust your stop-loss and expected targets.