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How I Day Trade the SPY

Many people think day trading is gambling: you might win for awhile, but eventually you will blow up your account. I agree—yet I day trade the SPY almost every day. Day trading is part of my overflow method and multiple strategy approach to managing my portfolio. I day trade very little capital, and I direct the profits into my less risky accounts.

So why bother if day trading is gambling? Simply put, I can increase my odds of a successful return using money management techniques. I fully expect to some day lose all of the money in my day trading account—the goal is to multiply the capital I started with many times over before that happens. This strategy works because I day trade with a tiny percentage of my entire investment portfolio, and the amount I am willing to risk remains constant—meaning that I do not attempt to compound my returns; profits are removed from the account right away.

Already this year I have doubled the money in my day trading account (not bad considering that we are only 8 weeks into the year). And because this profit has been redirected, even if I made only losing trades from now on I would have nothing to lose because I am, so to speak, playing with the house’s money. This is what I mean by money management: acknowledging that at any time you could blow up your account and protecting your base by resisting the temptation to compound.

Don’t Compound, Got It. But How Do You Trade?

Though day trading is gambling, you can leverage technical indicators and your own expertise to enter and exit trades with higher success rates. Here’s my formula for setting up daily trades:

  • I only trade the SPY, which I have monitored for so long that my gut often predicts how it will move. No joke. When you’re hyperfocused, investing with your gut can be effective.

  • I use weekly options to add leverage and reduce the capital required. I always trade at the money call or put that’s going to expire at the end of the week. This option normally has a delta around .50, which means that if the SPY moves a $1.00 the option will increase (or decrease) in value by $0.50—a 50% return if the option you are buying costs $1.00.

  • I buy only calls and puts—no fancy spreads.

  • I try to be in a trade for 40 minutes max. Sure, sometimes a trade lasts a few hours, but I always close the trade at the end of the day no matter what.

  • I like to enter my trades around 1:00 pm EST when more often than not trading is flat; the news from the morning has already been traded on, and many traders are taking a lunch break. By 1:30 or 2:00 the SPY is moving and shaking again.

  • I enter a trade knowing whether the SPY is bullish or bearish on that day, and I never buck the trend: if the SPY is pushing up I trade calls; if the SPY is going down I trade puts.

  • If the market seems flat—the RSI and MACD indicators are not hitting extremes throughout the day—I just stay out.

  • I make only one trade per day. If I am trading more than that most likely I am either cocky and think I can make more money or I am trying to fix a loss trade—both are bad ideas.

  • I never risk more than 30% of my trading account’s capital in any one trade. Yes, this percentage is high, but I am only risking money I’m willing to lose. That said, the SPY is stable so in reality the risk is more like 15%.

  • If the conditions are right I scale into a trade up to 4 times the dollar-cost average. I only scale down, never up—meaning I buy more as the price drops, and when I close the trade I sell everything (I do not scale out).

  • I time my entry by waiting for the RSI to cross 70 or 30 and then wait for the MACD lines to cross and proceed in the other direction. I also make sure the MACD histogram bars clearly resemble rolling hills, an indicator that the SPY is not flat. At this point I enter, and if the SPY continues to drop I buy more on the way down.

  • After entering a trade I always set a closing trade price, typically 20% higher than the option purchase price. Doing so protects me in the case of an upward spike in the market and frees me from being glued to the computer screen.

  • I do not set stop losses. The SPY is not crazy volatile and almost always I have some money left if a trade goes against me. Plus, I never risk more than I can handle losing. Stop losses are bad because sometimes the market really has to fall before it can pick back up. I have been down 50% only to be up 20% 10 minutes later.

  • I rely on my gut to time my exit (one of the reasons I have not automated this trading style). I always set out aiming for a 20% return, but if the market is not accelerating I will lower my goal until it corresponds to the reality of what the market is yielding. If a trade goes against me I simply wait for an uptick and use that opportunity to close the losing trade. Almost every day some buyer comes in and pushes the SPY up or down faster than normal in one big trade, but if not I sell at 3:59 and go all cash.

I have set these rules for myself over many years of day trading. To get a sense of how they play out in the real world, let’s walk through a trade I made on February 23, 2015.


(*Note. The times in the graph are PST.)

  1. From the start of the day the market was bullish—notice how the chart is pushing up rather than down—so I was looking to trade calls.

  2. At 12:35 EST the RSI crossed the 30 line—meaning the SPY was most likely going to start moving up again. I didn’t make a move yet, but turned my attention to the MACD.

  3. About 15 minutes later the MACD lines crossed, confirming that the SPY was ready to move up. Notice that the MACD histogram bars clearly resemble rolling hills.

  4. At 1:00 EST I entered a trade by buying SPY Feb 27 2015 210 Calls for $1.19. I benefitted from a big seller coming in right before I entered the trade, pushing the SPY down. If this event had happened later I might have scaled in and purchased more calls, but on this day one open and one closing trade did the trick.

  5. I set a limit order to sell all the options at a price of $1.43 (a 20% gain).

  6. At 1:30 EST I lowered my limit order to $1.37 (a 15% gain) because the market was bouncing around too much for me to be confident.

  7. At 1:40 EST a big buyer came in and pushed the SPY up in price. My limit order hit, the trade was closed for a 15% gain.

Most winning days play out just like this example. Though I don’t count on big buyers or sellers moving the SPY and helping me enter or exit a trade at better prices, it happens frequently and it sure is nice when it does.

Don’t Just Be a Day Trader

I just painted you a pretty rosy picture of how you can generate outsized returns day trading. The thing is, every day is different and a few bad days will certainly wipe out your account. But if you adhere to the overflow method you can use day trading profits to juice the returns of a less risky trading strategy. Day trading is also a good way to stay engaged with the market every day and sharpen your trading skills. Such experience and knowledge make you to a better credit spread trader or buy-and-hold investor. And, of course, day trading is a fun rush.

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