Manic Daytrading Times

Historically, on a spectrum of liquidity vs price efficiency, it would be something like this, from most liquid and efficient to least efficient.  

Forex  >> Bonds >> Commodities >> Equity Indexes >> Large cap stocks >> Small cap stocks

That spectrum is still valid now, but the gap between the large cap stocks and the small cap/micro cap stocks has gotten much wider.  It is the Robin Hood daytrader effect.

Like many traders, I started off investing in stocks which became daytrading in stocks.  And eventually, some of those stock traders become futures traders.  The main reasons one would go from stock trading to futures trading is to be able to trade with higher leverage, trade short term with large size, and to be able to trade overnight when the stock market is closed.

But there is a tradeoff from going from stocks to futures.  Futures markets are more efficient, and the edges are much smaller than stocks, especially small cap day trader dominated stocks.  During stock market bubbles, the liquidity in the small cap daytrader space goes way up while the price efficiency goes way down, which makes it much more worthwhile to trade.  This is one of those times.

We are in a stock market bubble.  Unlike past bubbles, it is happening in a time when the economy is really weak.  It defies comprehension, but maybe an 11 year bull market finally has seared a lasting memory into the brains of some investors, most who happen to be millenials, making them believe that the stock market only goes up.  It has encouraged them to buy stocks and call options with reckless abandon. 

It reminds me of the bubble in 1999-2000, when a lot of fresh faces came on to the trading scene amid the lure of fast, easy money.  Daytrading firms were popping up everywhere, and newbies were dreaming of riches as they bought and sold some of the junkiest and overvalued stocks out there.  A good book which describes that era is Scam Dogs and Momo Mamas.  It was quite a time to be daytrading stocks, with so many wild and irrational price moves.  Although we are not at that scale, and unlikely to ever get to that epic level, the speculation is quite overboard. 

Another period that this reminds me of is the poker boom from 2003, which lasted about 10 years.  In the early stages of the boom, you had a lot of new poker players who had no idea what they were doing and were losing money quickly to the professionals at the table, both online and brick and mortar.  The games were wild, and easy to win, if you had a basic understanding of poker and probability.  But as the years progressed, the flow of new poker players slowed and the ratio of fish to sharks got lower, making the tables tougher to win.

We are in a similar situation now with daytrading.  Google searches for daytrading are at an all time high.   A lot of newbies have entered the stock market and have no idea what they are doing.  This is resulting in irrational and excessive moves in speculative stocks every day.  We have bankrupt stocks like HTZ and CHNR going up 500%, with most of the buyers coming from brokers like Robinhood, populated with traders who are new and clueless.  They get their trading ideas from chat rooms, Twitter, message boards, etc.

On Robinhood, they started with the beaten up blue chip household names, like Ford and GE, migrating to the airlines and cruise stocks.  Now, they are going further out on the risk curve, focusing a lot of their activity in speculative small caps or outright pump and dumps based on "themes", the black stocks (UONE, UONEK, CARV, BYFC),  the coronavirus stocks (SRNE, XSPA, NVAX, VXRT, too many others to list), home entertainment stocks (GNUS, CIDM), riot stocks (VISL, DGLY), electric vehicle stocks (IDEX, NIO, NKLA), etc.

In the past, you would rarely have a stock go up over 100% in a day, much less 200%.  Nowadays, 100-200+% daily moves up in stocks are commonplace.  500% moves up in a month.  These are internet bubble 1999-2000 type of moves.  And its not just 1 or 2 stocks doing this.  Its multiple tickers going crazy each morning on either chat room pumps or hyped up press releases.

Pretty soon at this rate, you will run out of new small cap stocks to pump up since so many have already been pumped and dumped.  So what's been happening is stocks that have been pumped and dumped a few weeks earlier get re-pumped again, and the daytraders, who all think they can get out for a profit before the dump happens again end up spiking the stock, but usually the second or third pump doesn't last for long, with all the bagholders left from the previous pump and dump looking to get out.

These crazy irrational markets don't last for long.  Eventually, the flow of newbies slows down and the ones that have been in the market for a few months either have been gobbled up by sharks or wisen up and change strategies and stop chasing garbage pump and dumps and bankrupt stocks.  It is stock market Darwinism, the fish don't last for long in a shark infested sea.

The winning strategy in this type of stock market is to do the opposite of the Robinhood traders.  But you have to let the Robinhood traders go overboard and push prices to levels where the pendulum has swung too far, and take the other side, by shorting.  Remember, rookies only go long.  The pros go long and short.  This is where experience and intuition helps with timing entries.  The exits are less important, and can be less time sensitive.  The truly great prices to short don't last for long, so timing the entries is the most important factor in profitability.   The hardest part these days is actually getting the shares to borrow to short, as most of these stocks are hard to borrow. 

Recently, my focus has shifted from futures to stocks because the stock market is teeming with opportunity.  Still trading futures, but now more of my energy is going towards stocks.  When the fish are plentiful is the time to spend all day fishing.  These are once in a decade type of markets in stocks, and they usually only last for a few months. 

Trading is not about making a steady income throughout the year.   It never has been about that.  It is about making as much money as possible when the opportunities are plentiful, and losing as little as possible when its not.

Here is from a past blog post:

In general, it is better to focus on trading individual stocks in a bull market and trading the indices/futures in a bear market.  Some may disagree, but it is a good habit to look for new markets to trade, to find pricing inefficiencies and patterns in places that are less familiar.  That way, if you can find edges in more markets, it gives you more opportunities, which is helpful in slow markets like this.

This reminds me of a past post, where slow times reinforce the need to make as much as possible during active times:   Feast or Famine

It in times like these where I am reminded of the importance of making hay when the sun shines.  You absolutely have to kill it and be greedy when the opportunities are there because once they are gone, it will be hard to make anything when markets turn bad/dull/unpredictable.  A good post on Elite Trader made in August 2007 (a GREAT trading market) that still sticks in my memory:

jdeeZERO05: can't ask for more volatility than this. I crushed my profit target already, i'm going to the bar. this fucking rules.

RM: Quitting early after a big gain is the second worst trait a trader can have. No offense, but you'll never be rich.

jdeezero05: have fun giving back your profits, not my game.
...
to me it makes sense to learn to crawl before you even attempt to fly. 20 YM points a day is my goal. When I've hit that I'm done. If i got a hundred on the week I've been done. 15 point stop, if I get down 40 points on the day i'm done. 120 points down for the week, i'm done for the week. Haven't had that happen yet with this style management yet though. 5k account, 1 car. This morning though, I rode the trend, tried to jog for the first time. Could be done for the week if I want. The remainder of this week has no emotion at all. Market is going to have to entice me with the highest probability setups I can get to risk what I made today, all the pressure is off now on the week.

To me this is exactly why most traders fail. Good look getting "to the moon" when you can't even crawl without falling on your face. Not saying thats your situation, but giving me that advice is just shit advice, no disrespect.

RM: A surefire recipe for permanent piker status if I ever saw one.

For some reason I'm in the mood to do you a favor and take the time to explain what you're doing here:

My job is to collect strands of beads off the streets of New Orleans. I need to collect 500 strands every year to make a living, so I figure I just need to collect 10 strands every week.

The past few months have been tough- I've had to work pretty hard to collect my 10 strands/week. However, this week is Mardi Gras, so there are currently beads all over the place for the taking. The streets are flowing with a massive bounty- beads are literally everywhere! I've already managed to collect my 10 strands within the first five minutes of Mardi Gras week. This is great! I've already made my weekly quota, so naturally I'll now be taking off the rest of the week. Beads crunch under my shoes during my walk home, but I don't bother to pick them up. Why should I bother? After all, I already have my weekly quota in hand, so the pressure is off. Time to hit the bar!  

Don't be that guy who makes his $1,000 in an epic trading market, takes the rest of the day off, instead of making $10,000 by trading the whole day.  That same guy will try to squeeze $1,000 out of a brutal, dead market, and end up having a losing day, when he shouldn't even be trying to make anything and should just be taking the day off.