TTPH Trade on Feb 27, 2018 09:34 from alext341: Tradervue User Stock Trades.

Well, I blew up my account! These have been some very disappointing few months, which I believe deserve some commentary. My strategy going into the market day-in and day-out was to find small-cap stocks between $1-10 that were gapping up at least 4% pre-market or to find stocks moving up intraday on high relative volume.

However, this strategy has not been working well for me. I know that I am executing it decently. After all, my gross trading metrics show that my equity curve has only increased, and that my average winners are higher than my average losers by about 1.54, which means my gross PL ratio is 1.54, which is actually good. My gross PL profit factor shows 1.21 and my accuracy is 42.4%, which I think is barely profitable:

I actually made a gross profit since I started trading, but my commissions were $5801.11, which caused a $2846.18 profit to become a $2954.93 loser! Plus ECN fees of $53.04, I've lost $3007.97, which doesn't include the monthly platform fees. Below are the Net PL equity curves and details:

What is the lesson here? The lesson is that my strategy is not sustainable for a small, undercapitalized margin account like mine that is forced to pay high commissions to an offshore brokerage firm that allows me to circumvent the pattern day trading rules. At a minimum of $4.95 per execution and $0.01 per share, trading with large share sizes put me down quite a bit.

Now, it is certainly possible to grow a small account scalping this way. That's how Ross Cameron did it, but my opinion is that he was relatively fortunate by opening his small account in January 2017 when we had stocks like DRYS and heavy upward momentum in the shipping sector. He also had years of skill behind him, which most beginner traders do not when they start out. Suretrader also had more favorable commission rates at that time, but have since increased them.

Take this for example. The average share size for day trading the small-cap strategy with a $500 dollar margin account is around 500-1,000 shares per trade on stocks costing between $3.00 and $6.00 with full 6:1 buying power, which means the trade will cost you at least $10-20 to place. That is, of course, if you can get a clean fill on the trade, and if the stock has not been manually margin-restricted of if it is under $3.00 because both of those are margin-restricted.

If you sell on the Ask, or if there is poor liquidity, you will probably get filled at different lot prices on more executions, which means you would probably pay a lot higher in commissions than you would otherwise.

But let's say that it costs you $10-20 just to place the trade. If you were scalping the trade, you'd most likely be looking for stocks that offer a risk-to-reward potential of 1:1. At the point-range small-caps typically trade, you are looking at a 10 cents to 10 cents risk-to-reward profile. With 500-1,000 shares, your 10 cent stop would cost you $50 to $100 if the stock went against you. If you add the $10-20 commissions, you're looking at $60 to $120 of potential loss, which means you have to make at least that much with 50% accuracy just to break-even. But you're taking profits at 10 cents, which means you will only make $50 to $100 per trade if the stock goes your way. That means you are actually trading with a risk-to-reward ratio of 1.2:1, which means you need to be right about roughly 53% just to break-even.

What does this mean? It means scalping at the standard 1:1 risk-to-reward ratio is unsustainable, even at 50% accuracy. You need to make 12 cents of profit per share at 50% accuracy just to break-even. Like I said, it is not impossible to grow a small account with this risk profile, but it is not very likely, especially for beginner traders.

My trading metrics show that I did the best when I traded this way, but that was only when we had the cryptocurrency hype between December 2017 and mid-January 2018.

At this point, I am looking at AverageJoeTrader's higher-float, higher-priced stock trading strategies. Ed has been able to grow small accounts, and I think that since his strategy trades stocks that deliver higher dollar reward potential, 1:2 or at least 1:1 dollar risk-to-reward, you can take fewer shares per trade and mitigate much of the high cost in commissions Suretrader charges.

Here's an example of what I mean. The highest price I have seen Ed trade is around $100. Let's say you fund your margin account with $5,000 at Suretrader, which is still relatively small, and trade 6 times the amount with full buying power, you can afford to take 300 shares of the stock. If you trade conservatively at a risk-to-reward profile of 1:1, basically a scalping strategy--though in reality, these stocks offer a much larger window of profit potential, like 2 to 5 times the potential loss--you risk losing $309.90 to make $300, which means you need to make 1.03 times the potential loss with 50% accuracy to break-even.

That's a 1.03:1 risk profile on 50% accuracy. Compare that with the 1.2:1 risk profile in the small-cap strategy! That's a much more sustainable strategy. In fact, these higher-priced stocks trade more cleanly, they're not margin-restricted by Suretrader, which makes balancing your risk much easier, and they typically trade with much larger reward potential than 1:1, which makes the strategy more forgiving if your accuracy is not on point. They are also higher-float (less than 500 million shares), which means they have a larger supply of stocks to trade, which makes them more liquid, with less potential for slippage--unless there's little volume or you're taking a large number of shares, but that can be managed.

On a similar winning 1:1 risk-to-reward trade on a small-cap trade, you would see commissions making up 20% of your gross gains on a 10 cent gain per share 1,000 share position. On one of Ed's winning plays, you would only see commissions making up 3.3% of your $300 win, 1 dollar gain per share on a 300 share position.

The strategy going forward is to learn Ed's strategy and to get a job to recoup my losses, so that I can resume trading a month from now, hopefully. Sometimes you have to lose a large amount to really learn from your mistakes. Until next time, Tradervue!