| How to Exit a Trade with Out Giving Away the Potenial by Chipping by Floyd Snyder Over the last few years thousands of ordinary people have been attracted to the profession of Day Trading by the once thought "unstoppable" bull market. Unfortunately not all are going to make a living at it. And in fact, the so-called experts suggest that nearly 80% will fail at this endeavor. Why? Because unlike other professions people have been mislead into thinking that just anyone can jump in with just a few dollars and a cheap computer and start reaping huge profits. Wrong!!!! Almost every daily newspaper, monthly magazine and TV newsroom has done some sort of feature touting the emergence of the new day trading phenomenon. But most of their research is limited to interviewing a few successful traders and very little time is spent on finding the ones that have literally lost fortunes. (Not to mention the fact that most journalist don't know the difference between the stock market and a farmers market.) The day trading craze has been around for some time now and dates back to the establishment of NASDAQ and the onset of ECNs (Electronic communications Networks) to place orders directly to the exchange. ECNs include ISLD, INCA, TNTO, BTRD, REDI AND ATTN. One method of day trading that surfaced early on is referred to as the SOES Bandit. It is the opinion of many that this gave birth to the term "chippy" and refers to the idea that a Day Trader can "chip" away (like a little birdie) at a stock price via SOES (Small Order Execution System) and make a great living by "chipping" off small profits. The theory being that a 1/8-point profit on 1000 shares is $125. Done ten times a day this equals $1250 profit per day. (Good luck!) In the early days of ECNs this might have been more effective then today and it was touted as a method to be used in certain circumstances. Unfortunately times have changed and many people are still trying to apply the method, not only as originally intended but to almost every stock they trade. In the early days the spreads between the bid and ask on most stocks were much wider and very few people were trying to make a buck at this game. Couple that with the inexperience of the Marker Makers, who were now working under an all-new system, it was much easier to practice this type execution at a profit. The idea was very simple. Find a stock with at least a 3/8 spread, and step in front of the best bid by 1/8 and immediately upon receiving confirmation of the purchase place the sell order in front of the bests ask by 1/8 and bingo, a 1/8 profit. Unfortunately many traders have bought into the idea that you can make a good living with the 1/8-profit times ten trades a day idea. And they are practicing the "chippy" method on every trade they make. Many traders are placing a sell order for 1/8 (sometimes a little higher or a little lower) on every stock they buy. Totally ignoring any possibility for the stocks real upside potential. In today's rapid paced Day Trading profession spreads are not near as wide, to many people are chasing the same 1/8 profit and the Market Makers have gotten wise to the game. Not only have they gotten wise but also in many cases they will drive the price down as soon as they suspect you are trying to chip them. Not many of us have pockets as deep as the Marker Makers. They can easily afford to do this. (And some are maniacal jerks and enjoy doing it!) If you spend any time in a live trading room you will witness this kind of trading going on. The Day Trading community, coupled with news or other events (and occasionally on it's own), can give a stock the momentum to run up in price by all of a sudden placing a large amount of buy orders. It also only stands to reason that the placing of a large number of sell orders can also kill the price. This phenomenon is talked about on page 100, in one of the best books on Day Trading I have run across, The Electronic Day Trader. Published by McGraw-Hill and written by two Day Traders, Marc Friedfertig and George West. Follow this link for this and other books on trading and investing. I have included an excerpt from the bottom of page 100 under the heading of: Don't Give Away the Potential in Your Trades When a stock you are long in, has reached a saturation point, do not leave your offers in for very long (few seconds at the most)-you are only making the stock look weaker. Do not offer the stocks at lower prices-you are only making the stock look weaker. If a market maker buys the stock from you at this level, he is not doing it for his health or just for laughs. He knows the stock is going higher. By making the stock look weaker you are only advertising to the entire trading community that the buying has subsided. You are forcing the stock down on yourself. Cancel your offer and wait. If the stock starts to go down, hit the bid (sell the stock)-or wait. That is what you were going to have to do anyway. If you do make a sale to a market maker, the stock is going higher and you could have gotten a better price. By offering stock in this manner, you are giving away the upside potential in your trade. If the stock starts to go down and you sell it, that is what you would have had to do anyway. If the stock restarts momentum on the upside, you are going to sell it at a higher price. Once again, this is one of the most important aspects of successful day trading. Simply stated, hold your sell orders till the stock starts trading at the price you want to sell at. If you and everyone else place the sell orders out in front, the price is not ever going to get there anyway! And then you have to start chipping away till you get out, often times driving the price down on your self. If the stock has the momentum to get to your sell price, chances are it will blow past your price and you sold too cheap. A final word on chipping. You should sit down with your accountant, banker or other business planning consultant and write out a "real" business plan on day trading. If you do this, you will quickly see that by the time you figure the commissions, occasional losses, fixed overhead expenses, your time and all other costs to being a professional Day Trader, you will see how important it is not to "chip" or "scalp" those stocks that have the potential to run. That's where the real money is!!!!!!! -End- |
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| Recommended Reading: Books in addition to those above |
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