Prop Trading and Stock Selection

Discussion in 'Strategy Building' started by millerbw, Aug 25, 2005.

  1. millerbw


    How important is stock selection and idenifying value when developing a system to trade at a prop shop? I have just switched bias from futures to stocks and am brushing off the dust from Security Analysis and Intelligent Investor, but it seems a lot of the trading that is going on in intrad-day, scalping, short-term methodologies. It leads me to believe a more technical, risk management oriented approach is needed, but I still have questions about instrument selection.
  2. Profit


    If you're making consistent $$ in Futures I would suggest you stay with what works for you.

    Trading stock is a trick thing, they are more volatile and you have a much larger chance of getting wiggled, rattled and shaken out of a trade with stocks vs futures.

    Too many games are played by the specialist if you're day trading NYSE and by Market Makers if your trading on the NAS.

    My approach to the stock is position trading a small amount over a few stocks to limit risk from one of them going ape-shit or gapping down and cleaning me out. To go further you might position trade and hedge your plays with a few long and short plays.

    But if you're prop trading, then you're day trading and I suggest staying away from stocks unless you're allowed to carry positions over night and do as I suggested =)
  3. Volume and price movement. If your going for big moves, i would say volume and high stock price. If your going for ticks, volume and low price. IMO you just cant beat volume.
  4. millerbw


    I have worked in futures for the past 3 years, mainly in Ops and 1 year spent as a market maker,

    Swithcing to stocks because my I have had difficulty getting into prop trading positions within the futures arena.

    What do you think of O'neils book, How to make money in Stocks, I read it in the past and am going to revisit it. Seems to be a very sound system to identifying potential breakouts and short-term opportunities. I think if I were daytrading, I would definitely be developing my system around breakouts and momentum.

    Incorporated into this would be some sort of bet size algorithm and and mehanical risk management proponent.

    Any ideas?
  5. Regarding the first statement: breakouts and momentum systems get crushed in range-bound markets like the current one. The classic "Donchian" break-out system has been getting killed on an intraday basis especially.
    Even Keith Fitschen's presentation of "Developing Tradeable Systems" indicates COUNTER-TREND systems work best for intraday trading.

    Second statement: very sound, but unless you have an automated link which places your orders, best to consider a psychological management component as no trading after 3 losing trades in a row, X$ loss for the day, etc., etc.
  6. Profit


    I’ve read O’neils book and it’s a good book to start with, nothing wrong with reading it and getting back to basics. There is no hard and fast rule about how to choose the right vehicle to trade with and make money.

    What I like to do is have a few stocks that show how the market is reacting, or what sector the money is flowing in. When selecting these stocks make sure they come out of the basket used for the indices in NYSE and NAZ, depending on what market you’ll be trading in.

    Then what you want to do is compare the relative strength of your selected stock with the market indices. If I want to go long INTC, I would compare it’s relative strength with the Nas. and of SOX for semis. If it was AMD and I would compare it with the S&P500 since AMD trades on NYSE and INTC on the Naq.

    The other thing I like to look at is the Advance/Decline of each market to see how many issues are rising vs falling. Next on the list is the number of stocks making New Lows. If this number is declining, chances are the market is beginning to show some strength and the bears are running out of fuel and sellers(weak hands) are drying up (if the markets has been trending down).

    And yes you want to be trading stocks with high liquidity if you’re going to day/active trade them.

    I don’t have any books to recommend, but I suggest you look at swing trading, try to keep your TA as simple as possible and always back test your setup before jumping in. It’s a good idea to follow a few stocks and know them intimately, rather than running from stock to stock based on some news or event.

    I would say 90% of the battle that a lot of trader fail at and thus end up losing it that they don’t have the patience to sit on their hands and just wait for a opportunity to present itself, one with a good risk/reward ratio! Thus they over trade and give back their winning and then some to Mr. Market! If you can develop this last part of the game then you will be on your way to make profits.

    Start off slow with small positions, don’t be afraid to make a plunge long or short, once you get involved you’ll get the feedback from the market if your entry was right or not, or if you need to switch side and go the other way. This skill will not develop over night, and it’s better to develop these skills for a lifetime, rather than over leverage your position and lose sleep and burn through capital before you begin to get a feel for each trade and rely less and less on TA, that is the speculator in you is awakened and all the other stuff like p/e, TA, etc are just back drop to the tools you will uses to help you poke in the dark if you get what I mean =)

    Unfortunately for me when I strated out, I Ran, then Walked and now am crawling for Profits.

    Run from losses, walk towards Profits... I love all these Clichés, they have not made any soul any money in the market. The only true way is through experience and getting your face

    Happy Trading!
  7. millerbw


    great advice,

    I have been thinking all day about scalping and it seems to be a inherint ability that is only developed with experience.

    But I truly believe in what you said about being patient and waiting for proper setups and quality risk/reward trades.

    I also like what you said about letting the market telling you if you are wrong and actively assessing your entry, I know my strengths lie in risk management and do not feel cutting losers will ever be a problem for me,

    Taking profits and trading out of winners is another story, a skill I need to mechanize completely or develop,

    As far as pure scalping, my only experience is based on my time spent on the trading floor at the CBOT and from observations it seems to be a game thinking on your feet, entering a postion, taking a tick or two profit, taking a tick or two loss, and starting the process over. If thats the case, timing your entires is crucial. Im not sure how this differs trading stocks electronically, but I am under the impression that will be hard to compete with electronically automated market makers and trading systems.