With the influx of the US Stock market lately, you wake up in the morning never knowing if you’re losing money or making it. One thing is for sure and that is that the news seems to be split between good and bad and acts like everyone is walking on eggshells.
Because of this, I feel that volatility is ever present but there are ways to profit from it using day-trading techniques. Though you may not actually be trading hyperactively you still want to make money trading stocks, so let’s view some strategies and how to minimize trading expenses.
Identify cycles – An Individual stock example
When looking at ways to invest in this crazy market it’s best to look at the past and what everyone else is thinking. We will look into volatile things have been by taking a look at this chart of one of the most active stocks ever, Tesla (TSLA).
Real news or Over-reaction?
If you start to look into the times a stock dropped or spiked you will understand it’s because of Elon Musk and his radical ways of being outspoken. Most CEOs of companies quietly work and speak out every quarter or so providing earnings and a share holder’s meeting. However, Elon Musk is very vocal and active in social media. That at times wall street overreacts to his news. So what if we became a shareholder.
Let’s say for example you bought one share of Tesla stock on Jan 8th, 2018 at $336.41. As of Jan 4th, 2018 that same share would now be worth $317.69 or you would be down close to $20 so far. This would be for a long-term (greater than one year) holding scenario. However, during that same period, the stock rose to over $350 a share over 8 times, while it dropped below $300 around 8 times as well.
We can note that there were a few times the stock dropped closer to $250 and a time it got up to as high as $387. But those were much rarer than hitting between $300 and $350.
But if you were to have been trading this on a cycle you would have been able to profit from some of these highs and lows.
Most brokers will allow you to put into place a limit to buy or sell. Most transactions happen in the ‘market order’ which is the current price of the stock. But you can put in limits to buy when a stock drops to a certain price, or sell when it reaches a certain high.
For this example, we’ll put in our order limits to sell at $350 and to buy again at $300.
Cyclical Trends – Riding the Wave
Let’s just say you bought at $336.41 Jan 8th, 2018
The stock went up and hit our limit to sell at $350 on Jan 22. (Profit of $13.59)
Put in an order to buy again at $300 which does March 27 (realize now that we’re only using $300 of our $350)
We put in a sell order for $350 again and waited til June 13 (Profit $50)
Put in another order to buy at $300 and wait for it to purchase on July 24th
This time it’s a quick turn around to get to $350 on Aug 7th (we can thank Elon’s news of taking the company private) We take our $50 profit.
We place another order to buy at $300 and wait for it to purchase September 4th.
Stock drops lower but we wait it out until it reaches $350 again on Nov 8th (we take our $50 profit) and we currently are waiting for the price to drop again.
This gets us a profit of $13.59 + $50 + $50 + $50 = $163.59. Now compare this to the current 1-year buy and hold and we are down -$18.72. Which would you rather have after a year? Now we could tighten up the spread to buy it when it goes down and have it sell after $1 or something and you would take smaller profits more frequently in a more day trading approach. However, one thing we have to keep in mind that eats into the profits on most trading platforms is a trading commission.
Reducing Brokerage Fees
Luckily gone are the days when it used to cost $20 for each trade, but on average most companies (E-Trade, TD Ameritrade, most banks) charge a trading commission of around $5-$10. This is the amount they charge to complete each buy and sell transaction. If we add that into our scenario above we made 8 total trades (buy and sell), the total amount spent on commissions would be $40 ($5 * 8), which isn’t bad since we were making $50 on each cycle (Actually $40 since it would cost $10 to buy and sell).
Again this commission is per trade transaction, if we were buying 10 shares at a time we would only face one commission. So we would profit $490 ($50 * 10 shares – $10 trade commission). But if we were looking at a less expensive stock that was around $10, it wouldn’t make as much sense to buy 1 or even 10 shares of it knowing that 5-50% of the total transaction would become a commission.
What if we could just avoid that commission all together, let us trade a single share of a $5 stock for free and if it goes up to $6 let us sell it for free too and make a 20% gain and $1 profit instead of a $9 loss ($10 commission – $1 profit). So far I only know of 1 company that is daring enough to do just that and it’s Robinhood. See our Robinhood review.
Free Brokerage – Robinhood revolutionizing stock trading
When I was trying to buy and sell a few shares it would be hard if the stock price hadn’t increased much to be able to make much of a profit. Say I only wanted to buy a handful of shares of a $5 stock, maybe $25. If I add in a $5 commission to buy and another $5 commission to sell The stock would need to go up from $5 to $7. That’s a 40% increase just to break even! The value of the stock would need to be over $35. What if you could buy and sell for $0 each way?
As strange as it may sound Robinhood is doing just that, they are allowing the average investor to buy a single share (perhaps for $1) and then sell that same share with no commissions. Now imagine if you bought a $5 stock and it went up to $5.50, you could now consider selling and make a quick 10% profit. You no longer have to wait for a 40% gain to cover your expenses.
How can they afford to let members trade for free? From their website they earn money by offering members to pay a monthly commission and trade on margin (leveraging their money), also they can collect interest from customer’s cash balances (similar to a bank earning money on your deposit). Also, they get a discount by sending orders through a broker market who in turn pass the transaction request to the exchanges.
They have grown exponentially the past few years and are continuing to surprise the market, their next plans are to offer a 3% interest rate checking account, something that no one else comes close to accomplishing. They allow trades of stock as well as Crypto currency (BTC and Etherium as of this writing), also they can teach you to learn how to trade with Options and how when set up correctly they can profit when the stocks drop as well. For a limited time, they are offering a free stock to new members who start a new account from a referral. They can be your chance to start offer trading with no commissions and a free stock as well.
Making money trading stocks doesn’t have to be difficult, the hardest part is to eliminate the fees while reducing the emotional stress. By placing limits in your trade you don’t need to keep watching if your stock goes up or down, you can be comforted in knowing that it will trade when it reaches your limit that is set up. This cyclical trend show here is one of many other strategies but it can best be performed when you can take your profits (whether small or large) quickly and able to reinvest again.
Disclaimer: No member of MarcSRussell has any position in TSLA.