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Thesis vs. Price Action in Day Trading

Trading Blog


November 11, 2020

In January 2020, I was reconsidering several things that I thought I knew about day trading.

To start, I was slowly dabbing into going long.

From the beginning, I was sure that I was much better off being a short-biased seller. It came to me so much easier, and my best strategy to date was the gap down day. Despite winning most of my trades, several things bothered me deeply about shorting.

First, the fees were a huge factor that needed to be considered. Generally speaking, it costs money to borrow shares, and the cost typically varies between 1-5 cents per share. Sometimes, it can be as high as $0.25, and I have missed A-type setups simply because of the insane cost to borrow.

And of course, fees come out of your account no matter if your trade was successful or not. And the more you trade or the bigger your position is, the more you pay. Additionally, the classic 3:1R day trading strategy doesn’t factor in these fees, messing up the P&L chart and the overall gains. 

Price Action in day trading is more important than your thesis

At the same time, going long doesn’t cost you anything. So even though it’s not as natural for me to go long, I’m making progress. I normally practice new strategies with my real account (I’ve discussed the reason in an old blog post), and I risk a really small amount of $10. This way, my worst-case scenario of a lost long-biased trade costs me the same as the mere cost of borrowing at 5c/share on a short-biased trade.

Secondly, I’ve noticed that some of my habits were not working out too well. I’ve always struggled with sticking to the 1:3 risk-reward strategy. However, that applied to both shorting and longing. The bad habit that was messing up my short game was placing too much faith in warrants and news.

Don’t get me wrong: as a trader, you need to pay attention to the red flags and other markers that come along when you’re tracking and trading stocks. No matter if you’re trading in the OTC land or messing with the big caps, important news and events can be a catalyst that dramatically drives the stock price up or down. In one of my latest videos, I explain how it works on the $APVO example. Still, warrants and smaller news don’t always immediately affect all stocks. You have to follow the price action first and watch out for a confirmation of sorts instead of following your thesis blindly.

I used to treat warrants as a clear indicator that the stock price is about to go down and that I needed to short that ticker right away. This strategy has backfired many times, and I’ve been burnt enough to finally learn my lesson. Eventually, I had to accept that it was never a black and white situation. Rather, warrants and news are just more things to pay attention to.

For example, the stock would be definitively trading upwards and be strong, yet I’d short it because of a warrant. Now I realize that t’s not enough of an indicator. If the price is on the rise and I see a warrant pop up, now I wait for another signal to confirm my theory rather than enter the trade on the short side of things.

Again, including warrants and other signals into your decision-making process is not wrong. The thesis that a warrant may drive the stock price down still holds. However, basing your decision solely on warrants and their expected effect is not wise since many more factors are at play.

Now I pay far more attention to the price action and how the pattern unfolds. Day trading is more complicated than any “if-then” algorithm. At any given time, there are multiple variables that influence how the ticker moves, and every event has its consequences. But it doesn’t mean that the same event will trigger the same kind of impact or even the intensity of that consequence in a different situation.

You have to remember that you’re not trading against machines and programs; there are humans on the other side. Just like you, they may be emotional, undisciplined, or stubborn. As humans, we speculate, get distracted, get confused, and make mistakes. The point of learning patterns and strategies is to find the logic behind the way things work and understand the underlying reasons that push the market one way or another. But you’ll never find trades that are identical to each other; there are simply far too many variables at play. Moreover, there’s always an element of surprise and risk that we take as day traders.

To some, this may seem too insane and uncertain. To me, this is the beauty and the thrill of my job. Not only do you have to learn the rules and follow strategies that fit your unique personality type, but you also have to anticipate the volatility and unpredictability that you have no control over. Again, this is why automation and risk management are so important. If you feel like you don’t have enough knowledge in that area, I promise you that we’ll go into detail about it sometime soon. Subscribe to my newsletter so that you don’t miss my future posts!

So in January 2020, I acknowledged that some of my ideas about day trading were off. All things considering, that was a great time to realize that. Covid has already started affecting the market, but we were nowhere close to the March and April levels of market madness and volatility. Thankfully, I managed to learn my lesson at a relatively low cost.

I strongly believe that we are in charge of our own stories. We are not subjected to our reality. In fact, we are the ones creating it and writing our stories. Understanding that helps you change whatever you’re dissatisfied with. You have the power to learn whatever you need to learn in order to grow. You are in charge.

That’s why I’m still so keen on enjoying the process of day trading rather than simply evaluating the merit of my passion in terms of dollars gained or lost. 

Moreover, my business B The Story is about the story that one would be proud to tell. That’s why I’m never planning to sell courses about “the one day trading strategy you’ll ever need” or give rigid “one size fits all” advice. First, I don’t believe that day trading works that way. Second, the market is so much more fascinating than that, and learning the ins and outs and gaining your own priceless experience is of the biggest value in this business.

Learn how YOU trade and see what works for YOU. I’ve mentioned this before, and I’ll say it again and again. You can’t simply emulate someone else’s success. Instead, you have to find your own path, be it day trading or any other aspect of your life. We all have unique personalities, brains, conditioning, background, and psychological triggers. Study the greats and listen to what your mentors say, but always check if it works for you. Lean into your strengths and find your unique angle. There’s no silver bullet or magical piece of knowledge that will change your life once and for all. Working hard and being open to new experiences, however, will.

For me, doing the P&L challenge worked out really well. Just like in December, I didn’t look at my profit chart this January at all. It allowed me to focus on the process and not get stuck on the numbers. Moreover, I started dipping my toes into long buying. And of course, I started taking the information about warrants with a grain of salt.

How about you? Have you picked up any new knowledge that made you adjust your day trading strategies? Do share in the comments!


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