After having trading professionally for 16 years I still find the lack of understanding among friends and family as to how myself and other short term traders make a living humorous. Here are some of the comments I still hear on a regular basis from my parents and close friends “Market was flat today so I guess you didn’t make any money?” “Market was up 3% you must have really crushed it?” “Market was down over 2% did you lose a lot of money?”
Discretionary intraday traders make money based on intraday price movement. Period. Whether a stock closed up 1% or down 10% is in no way determative as to how much money a trader will make in a particular stock. All that matters is what happens in between.
Let’s exam the statistics and take a look at the chart for AYI from January 9th and see if we can assess the trading opportunities that were presented to the intraday trader.
| Ticker | Date | Open | High | low | close | Volume | Day Range |
| AYI | 9-Jan-12 | 54.98 | 57.81 | 52.25 | 54.94 | 1465400 | 5.56 |
The first thing that catches my attention is the stock’s intraday range (the difference between the high and the low during normal market hours of 9:30-4:00). Its range was over 5 points which represents about 10% of the stocks price. If we examine the distinct moves that occured in the stock the intraday there was even much greater opportunity than the 10% range suggests.
- The stock opens at 54.98 and then drops to 52.25 which is 2.73 points
- It then bounces from 52.25 to 57.81 which is 5.56 points
- It then drops from 57.81 to 55.10 which is 2.71 points
- It then bounces from 55.10 to 56.93 which is 1.83 points
- It then drops to from 56.93 to 54.06 which is 2.87 points
- It then drifts up from 54.06 to 55.06 which is one point before closing for the day
The total movement described above is 16.7 points which represents more than 30% of intraday movement. But a casual observer might say AYI opened at 54.98 and closed at 54.94 and that is only 4 cents of movement all day. How would a day trader possibly make any money on such a small move?
My response: the change from Open to Close is not a relevant metric for determining opportunity for a day trader. It is as meaningless as whether a basketball team loses by 1 point or 30. Either way the team has a single loss added to its record.
By the way, this type of intraday movement is fairly common for stocks that are In Play. But it is far less common for the market overall. That is why SMB focuses on trading Stocks In Play each day. They offer more intraday trading setups with better risk/reward ratios than trading the broader market. One of our trading tools the SMB Radar, has a column titled “Days Range” which ranks stocks such as AYI that have unusual intraday ranges compared to what we might see normally.
Obviously the money any individual trader makes will not only depend on the opportunity available but also his or her skill level and trading playbook. That is why SMB focuses on building fundamental trading skill during year one as well as helping our trainees build a playbook that makes sense to them.
Steven Spencer is the co-founder of SMB Capital and SMB Training and has traded professionally for over 15 years.
No relevant positions
3 Comments on “Measuring Opportunity Intraday”
Steve, I agree. I know the prevailing wisdom is swing trading is the way to big money and supposedly easier..I say “no way”. No trading is easy until you truly understand yourself and your skills as a trader. In swing trading execution skills may not rank as super important but your emotions will still be tested and execution required. As long as execution is required trading skill will play a part. Sure it seems easy to say I will swing trade so I can capture the overnight gaps but will you have on those positions at the proper time? Day trading may not be as easy as ” I bought the close sold the open for 2 points”, but it provides opportunity for profit everyday. Very rarely is there a day where I don’t either execute or miss a great opportunity for fabulous profit. Day trading may not ultimately suit every traders personality, but the training it gives is invaluable. I read of somewhat famous twitter traders sitting out weeks of action because it isn’t tailor made to their style (swing trading) and just can’t imagine that. I look at the World Series of Poker and all the 20 year old players that find their way to playing against the likes of Doyle Brunson and wonder if they only played a few hands a day would they be there? I doubt it, playing online in multiple games and seeing and playing tens of thousands of hands has allowed the learning curve and experience to be accelerated. What takes them months took Doyle years to play that many hands. Day trading allows the aspiring trader the chance to participate and learn with far less risk and many more opportunities to not only learn but profit. Once you gain the experience that day trading allows maybe you eventually lengthen out your time frames but that comes as a result of your skills being sharpened and honed in the market daily not sitting out waiting for a strongly trending gapping market.
Jeff Davis
jeff,
i couldn’t agree more. and by the way my friends who are swing and position traders were finding it almost impossible to make money from august through december. january has been a much friendlier market for swing trading as is usually the case when the market has a strong underlying bid.
steve
And a very low ATR on the SPX might I add