Khalid – Day Trader

Day Trader

This article is part of our 'Guru' series - profiles of successful traders, with takeaways for the UK private investor.
You can find the rest of the series here.

Today’s post is a profile of Guru investor Khalid, who appears in Guy Thomas’s book Free Capital. His chapter is called Day Trader.

Khalid – Day Trader

As you will probably have guessed, Khalid is a day trader.

  • He is of Indian descent (his family are from Kashmir) and lives in Sheffield.
  • He was in his mid-40s when Guy interviewed him.

He previously worked in the family clothing and furniture businesses but became a full-time trader in the late 1990s.

Khalid uses three screens and a Bloomberg feed to trade.

He makes 30 to 40 trades in contracts for difference (CFDs) every day and almost all of his positions are closed within a few hours. He trades over £30m worth of shares every month.

Before CFDs and spread betting allowed private investors to use leverage for investment, Khalid used the old stock exchange account system – under which buys and sells within a fortnight were netted out against each other – to access financing.

  • CFDs are cheaper than spread bets, but they are not exempt from capital gains tax.
Strategies

Khalid’s trading only became profitable in 2002, when he focussed on two strategies:

  1. Trading broker upgrades and downgrades
  2. Using a small number of technical indicators.

Khalid’s strategy is to be the first buyer of an upgrade as soon as it is released, and then sell within a few hours into the demand generated as news of the upgrade is disseminated to other market players. Conversely, for a downgrade he wants to be the first seller.

According to Guy, Khalid knows which brokers and analysts to take notice of, and he also pays attention to general market conditions.

But not the details of the companies:

I don’t care much what a company does, and I usually know little about the fundamentals. I rely more on upgrades and downgrades, price charts and technical indicators.

Khalid’s main technical indicator is RSI, an oscillator, which he uses in a complicated way:

He may monitor an RSI of the ratio of the share price of two banks, say Barclays to HSBC; when the ratio moves to an extreme, he will go long the cheap stock and short the expensive stock.

Khalid uses RSI levels of 25 and 75 as indicators, rather than the more usual 30 and 70.

Khalid also uses some of the `TD’ proprietary indicators developed by Tom DeMark.

  • These are included with Bloomberg.

The TD indicators are based on the concept of price exhaustion; that is, they seek to identify turning points.

This is also the objective of RSI – Klahid is not a trend-follower.

Conclusions

You can probably tell from the brevity of this post that I didn’t get too much out of this chapter.

  • Day trading sounds too much like a “day job” to me.

I doubt that many people could make a living today from broker upgrades and RSI, let alone the 40% pa compounded for six years that Khalid claimed in the interview.

See also:  Taylor - The Autodidact - Free Capital

This is not a prejudice against TA in general.

  • I strongly believe that momentum / trend-following is a profitable strategy over the medium term (say 2 to 18 months).

But Khalid is not a trend-follower – he trades on surprises and mean reversion/turning points.

The research I’ve read suggests that day trading is too expensive for retail traders because stocks in particular are too volatile.

  • You would need to hold positions for several weeks to stand much chance of being profitable.

Certainly, the recent regulatory disclosures from spread betting companies suggest that upwards of 75% of clients are not profitable.

  • Like Khalid I use TA, but unlike Khalid, I plan to hold for weeks or months

And that’s unlikely to change.

  • Until next time.

Mike is the owner of 7 Circles, and a private investor living in London. He has been managing his own money for 39 years, with some success.

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Khalid – Day Trader

by Mike Rawson time to read: 2 min