Ranking the various financial instruments for difficulty in forecasting moves and trading the swings, stocks are the easiest, because they are the least efficient. The most efficient and liquid market is the FX market, and IMO, it is the hardest to predict. FX and futures seem more appealing, because there are only a few currencies/indexes/commodities needed to keep track of, there is a lot of volume and they are popular among traders. It is a lot "sexier" to trade ES or the euro compared to some no-name small cap stock that's trading 20 times normal volume because of some press release. In the stock universe, there are thousands of potential candidates to trade, and it seems like more work, and it is more work to search and filter out stocks to trade, but once they are filtered out, the moves are more predictable because there is a ton of retail money in stocks, especially popular small cap stocks where big money doesn't bother to swim in and the little fish are left to themselves to be eaten by bigger fish, i.e., sucessful retail traders. These markets are less efficient. Sharks, the sucessful fund managers and institutions don't even bother with most of these small cap plays that attract the daytraders due to the illiquidity. In the futures and FX universe, there is no such inefficiency, but there is one thing that big traders and institutions need, and that is liquidity, which is only available here, along with a few big cap stocks which usually just follow the market anyway. With options, the bid ask spread is a big bogie to overcome and options usually only exist for the bigger more liquid stocks anyway. Yet I see small time traders here trying to trade ES and the euro or yen and I have no idea why they even bother, because those are much more difficult markets to game than the daytrader flavor of the day small caps which trade on NASDAQ or AMEX which they can trade easily due to their small size. I'm sure most of my advice will fall on deaf ears by most small time traders who continue banging their head against the wall trying to make a few points per day on ES or some pips on the currency markets while having no edge using huge leverage to make up for the lack of volatility in those markets. My most valuable advice to these traders is simple: TRADE SMALL CAP STOCKS.
I agree 100%. But to be honest, I don't care what other people do or if they lose money. I'd rather they not crowd stocks anyways. Most think they'll be flipping 1000 lots of the ES one day.
Look for stocks that are trading unusual volume, big price gains or losses and whittle it down to a few that have had moves that seem unsustainable, or moves that seem to have a lot of momentum. Most decent streaming quotes software will have a list of the biggest movers, unusual volume filters, etc. Even delayed data available on Yahoo during the day will alert you to which stocks are on the move for that day. Its not hard work, but you've got to be willing to dig and see why stocks are moving, read press releases, look at what is being written on the message boards, dig into the company a bit to see if its legit or not, and also gain experience trading the runners and the dumpers and the news driven plays to see how they normally trade. It also depends on the kind of market you are in, bear markets are of course bad environments to trade speculative stocks, and bull markets are great environments to trade these plays. Unfortunately, we are in a bear market but there are "green shoots" in speculation without a doubt. I hate to say it, but what Tim Sykes is doing is what I would be doing trading a small account. He is a little bit crude in his approach but the general idea and concepts he holds when trading small caps and penny stocks is correct.
I don't really see how stocks on a big move up or down on heavy volume is any easier to trade? The volatility works both ways, the whipsaws are going to be bigger also. If a stock is up 15%, it can easily go to being up 18% and just as easily go down to being up 12%. So how is this any different than trading the ES except for your gains AND LOSSES will be bigger?
I disagree 100%. Your second to last sentence says it: Why not just trade the ES and Forex, but cut down on leverage? Small caps might be less efficient, but that doesn't mean that they are easier to time. They tend to be less liquid making the moves choppy and very hard to time. Also they are much more easily manipulated due to the their low liquidity and are prone to default risk. I would not recommend trading the ES or currencies with 1) high leverage (I use les than 1:1!) or 2) day-trading them. ES might be more efficient but over time it is clear when the trend will reverse and momentum wanes. You just have to be patient enough to wait for the right signals. But yes, if you use high leverage in those markets you wil not make it over time.
In my experience, the manipulation actually makes it easier to play these stocks, if they manipulate it too high, you short and wait, if they manipulate it too low, you buy and wait. If you are willing to be flexible and go both long and short, and also be willing to hold on to these stocks for more than just 1 day. And the default risk? We're not talking about junk bonds here, these stocks will trade whether they go bankrupt or not, in fact, I've seen stocks actually rally huge in the pink sheets market after a chapter 11 announcement! You can say the moves in ES are cleaner and you can follow such and such signals. But you are playing with a bunch of other bigger players doing the exact same thing and probably doing it better than you are. And don't forget bots which are the leech of the futures market eating away at the profits of traders bit by bit.
There is a huge difference between a stock that is being traded emotionally with big moves and a futures market that is being traded rationally with small moves. The more emotional and volatile the trading action, the easier it is to game. That is from my experience. And if the volatility is too high for your blood, you can always lower trading size. But if a stock's volatility is too low, there are limits to increasing trading size.
But this doesn't tell me how irrational the move could get. I've seen small cap stocks go up 100%, what if you went short at up 50%? You'd be stopped out obviously. Your advice doesn't explain the fact that you'll get stopped out just as much as trading an efficient market.
If you are trading volatile small caps using stops, you either set them really wide or not use them and trade smaller to make up for the added risk. Personally, I think stops are for pussies or for those too lazy to keep track of the price action. And I don't mean that you should never cut losers. But if you have the discipline and experience, you can tell when a trade doesn't feel right or isn't acting the way it should and you get out of the position. No stop needed. I didn't say it was easy. Just easier. And during bull markets, a lot easier than trading index futures.