Welcome, folks, to the first ever episode of The Stock Market Millionaire. My name is Robert Roy and I am the CEO of WealthBuildersHQ.com. A little bit about me before we get into the episode, I started trading back in 1997 – that’s when I took my very first training workshop as a student, just like many of you are back in 1997. I was asked to teach the same strategies that I learned for the company that I learned them from in 1999. And, I’ve been training students ever since 1999, all the way through today. I trade most asset classes. In other words, I can trade stocks, options, futures, but my favorite are equity options – options on stocks. So, I also tend to trade multiple strategies, but my favorites are just directional trades – buying calls and puts – and then the covered strategies, the cashflow strategies, as you would. Covered calls, diagonals, credit spreads, things like that. I’m very active in those.
The diagonal, covered call, naked put type strategies, I love for my retirement account. As far as directional trades, I love directional trades – whether they are in a retirement account or a non-retirement account – they work extremely well. It’s a great opportunity with options to use directional trades to build wealth fairly quickly.
Enough about me. Let’s go ahead and get into our first episode, which is titled, “Day Trading: Good Or Bad?”
First off is, what is day trading? You know, when I first started in ’97, there were people out there that were called the S.O.E.S. Bandits – S O E S. And you can go look them up. They were Small Order Execution System. Basically, they took advantage of NASDAQ, small order execution system, and they were able to trade off of momentum.
So what were they looking for? They find a stock that’s moving up, it’s moving down, but it’s movement is really not based on a particular pattern; the movement is based on momentum. They may see that Microsoft (MSFT) was moving – it started to tick up, and people are jumping in trying to pick up, – at that time you traded in fractions – so an eighth, which was 12 and a half cents, is what you’re trying to pick up. $0.125. And, they would trade trying to pick up these small amounts, and it doesn’t seem like much, but if you’re trading a thousand, 2000 shows and you do it 30, 40, a hundred times a day, it adds up. SOES bandits have kind of gone by the wayside. Today’s day trading is a lot different. When you look at day trading it basically to me day trading in today’s market says, how do we go about and enter a trade today, exit a trade today, but do so by utilizing clear and concise entries and exits?
In other words, having a plan, a systematic approach to when I get into the trade, how I enter the trade, when I get into it, how I enter it, what system I’m using, what am I doing for managing that position, and how do I exit out of the trade? So, four key criteria in setting that trade up. It’s not as simple as just, Ooh, it’s moving, hit enter. There’s a lot of concerns with making sure you understand the instruments that you trade. So, if you are trading equity options, as I do, understanding how options work, how do things like volatility work, and how do things like open interest and bid-ask spread play into it. And, if we’re talking options, which we will in a future show – I’ve already got it set up – we will go through some of the components there and how I choose my options. For today, I just really want to focus on the day trading component by looking at the stocks.
So, day traders today have to be much more savvy than they were many years ago, and that’s because markets have gotten more savvy. Technology has gotten more savvy. I wish… I would give anything to go back to when I started in 1997, when the average person had no idea what was going on, and it took hours to find out – and I paid tons of money, but to get a system that fed it to me very quickly, and I would see this as fast as the broker would. Actually in many cases, faster. I’d pay all that money all over again to have the access quicker than everybody else. That doesn’t exist in today’s marketplace.
So, when we look at day trades, the first question you have to ask yourself is, are there any risks? And the answer is, without a doubt, yes. There are risks associated with day-trading. There are risks associated with any type of trading. So, Rob, what kind of risks can we run in there? Well, the very first thing is it’s trading. So you’ve got money at risk in that trade. You could lose all of your money. You just have to go into a trade understanding that. Now, is that the intent when we go in? Absolutely not. And as a day trader, it’s a lot harder for that to happen if you’re following a set of rules. And what do I mean there? Well, if you’re a trader buying a stock and you’re holding overnight, and that stock comes crashing down because there was a scandal and that company is filing bankruptcy, they’re going out of business, and the CEO stole all of the money, whatever – and that stock went from 100 to 20 overnight, that’s gone. You’re not getting that back. It’s not coming back anytime soon, if that news is real. That doesn’t happen if you’re day trading per se, and many traders as directional swing traders (you’re holding on longer) – many traders will or – investors we should say – will buy a stock and hold onto it long term. And even though it’s going down, they figured they’ve got time to make it up. And, that’s when that investment becomes a very long-term investment – when you’ve owned it for years and years, or you bought it at 20 and it’s now at three, and you’re hoping that it comes back. As a day trader, one of your risks is that markets tend to move a little quicker, so you’ve got to be more cautious there. But biggest risk: The bottom line is, it’s dollars and cents. There’s money at risk in this trade. You have to understand that going in. But, by setting a stop, saying, “we buy a stock at $10, and if it goes to nine…” (so we bought at 10 and we put a stop down at nine) “…and if it goes to $9, we’re out of the trade.” Right? That’s where so many people miss out on managing the risk in the trade.
Now, “does day trading fit in my personal risk profile?” is a question you have to ask. If you’re the type of trader that can’t sleep at night, when you’re holding a position overnight, then swing trading is probably not for you, whereas a day trader, that might be a better choice for you – to be able to be in and out the same day.
So, are there some positives and negatives to day trading? Absolutely. Let’s go through those.
So, what are the positives? The very first thing is you cash out at the end of every day, right?
So, you’re back to cash at the end of the trade. There’s no ifs, ands, or buts. There’s no holding it overnight, and this company announced good or bad news, and it moves in your direction, against you. (It’s always great when it moves in our direction, but we’re talking about, you know, the news could have a problem for you, right?) So that’s positive if you are a day trader that you don’t have the news effect coming out overnight. You also come up with increased margin. Margin is when the broker lends you more money to trade with. Intraday trading has an additional margin component than holding a trade overnight. Right. And those are regulated; it’s not like the broker has a lot of say in the fact – they don’t. The broker can only do what the broker is allowed to do based on the laws, the rules.
Those are your positives. When we look at the negatives, you basically miss out on the big runs. You could’ve gotten into a stock and I’ll use an example that’s very front and foremost right now, and that’s GameStop – GME. Go take a look at its chart if you haven’t seen where it went, $20 to a couple of hundred dollars in a very short period of time. Now that’s not the norm, but if you day traded GameStop and you bought it at 20 and you sold it at $20.25 cents at the end of the day, and you’re like, “YES , I’m up 25 cents a share!” And then tomorrow, you found out it was at $140 and the day after it was $280. And that it was at $410, You miss out on those big runs as a day trader right now.
There’s also the pattern day trading (PDT) rule. When you are day trading, that means you’re getting in and out of a trade within the same day. The PDT rule says you’re only allowed to do three – count them, one, two, three – intraday trades in a five – one, two, three, four, five – day period. What does that mean? If you get in and out of a trade today, that counts as one. If you do another one today, that counts as two. If you do another one that counts as three. If you don’t have greater than $25,000 in your account, you are not allowed to do more than three intraday trades in a five day period. “But it’s my money!” Okay, so how do we fix that? You can go to, what’s called a cash account and not have margin, but you miss out on some other benefits when it comes to margin.
So do some research and look at margin and you have to determine for you, is it better to have a cash account or a margin account? For me, I’m a big fan of the margin account. Cash account helps some with the pattern day trader rule, but it limits in some other areas as well. So just keep that in mind. Another negative is, the stocks might move too quickly for you. You may realize, “Holy mackerel, this is fast!” And it can be. And, depending on the stocks that you trade, you may find that some of the high flyers, the Amazons of the world are crazy when it comes to day trades. You just blink – watch – and all of a sudden the stock has moved $4, right? That movement may be too much for you. And if it is, that’s okay, that doesn’t mean day trading isn’t for you. Find the stocks that fit your risk profile. Find stocks that their movement you’re comfortable with. Make sure there’s enough move in the course of the day, right? You don’t want a stock that moves 25 cents a day. That’s not going to do much for you, right?
So bottom line is, is day trading right for you? Only, you can answer that. What I can do is help you understand some of the risks, some of the benefits. To me, I’m a tremendous fan of day trading. I trade what is called a two-prong system, which means my trading strategy, my system that I had developed has two different trade setups in it. One of them, the one we’re talking about today, is day trades. The second one are swing trades. And I think there’s a time and a place for both. I track every single company that I look at, and there are 20 stocks that I look at daily, and I fill out what I call a tracking sheet every day for those 20 stocks.And what I do there is I identify by that whether it will be a swing trade or a day trade based on numerous components – and we’ll talk about them in one of our episodes, comparing a day trade versus swing trade, which one is right today – And it’s not a matter of the market, condition alone, it’s the market condition, but it’s also the condition of what’s going on with that particular stock, the market, the economy, and a whole host of others.
So there you have it, folks, You stay focused on the quest to becoming a great trader, keep crushing it. And remember, you’re just one trade away. Take care and see you in our next episode.