Second Life Day Trading Strategies

JohnLight Raymaker over at Second Life Millionare was been talking about his experiences trading on the Second Life. His haven’t been all that successful, but over the past month I’ve taken about L$ 300 and turned it into L$ 3000. He has asked if I have any tips on day trading on Second Life. I have a few which I am writing up here.

First, I should note a caveat. I did work for financial services firms in the past, but I was a technologist and not a trader. I’ve picked up ideas here and there which have influenced my trading in Second Life, but I can’t say how well my tips would apply in other markets.

One of the things that I did wrong in some of my early trading is I didn’t pay enough attention to the underlying fundamentals. I looked at companies that had high trading volumes and high bid ask spreads. I figured that if I put in a low bid, and got the shares, I would be able to sell them at a profit, even if the asking price came down. Generally, this worked well for me, but I did get burnt a couple times. The companies I got burnt on are BNT, DGD, AIG, TNW and SLTM.

BNT is perhaps the best example. It was trading around .53 as recently as 8/24. It is now trading around .21 (Note: I’ve used a running average of the last five trades to smooth out some effects of the bid ask spread.) There are two important things to note. First, the old Wall Street adage, “the trend is your friend”. The trend here has been that BNT is dropping about .02 every day. If you see this trend, expect the trend to stay the same and factor it into your decisions.

That said, be try to understand the fundamentals. In this case, Nicholas Portocarrero, head of Ginko Financial, which ran into difficulties last month, holds over 9 million shares of BNT. He’s been trying to unload this and it drives down the prices.

Related to that, I’ve generalized my rule right now to be very cautious of firms whose primary line of business was gambling or is investing. There are some good players, but you have to be very careful.

A second recommendation is to make relatively small bets. One trader recommended never trading more than L$ 100 at a time. If you do this, you will be able to keep making a nice small constant return. However, it does limit what you can do. There are only 16 stocks currently trading in the SlCapEx so that rule would keep you limited to L$ 1600 in SLCapEx. You could go up to around L$ 6,700 in the WSE, but this is assuming that all the companies have a wide enough spread and don’t have issues like BNT.

Instead, I prefer to focus on stocks that have a reasonable amount of volume. The way I define reasonable is that I will trade up to about 25% of the daily volume. Since the SlCapEx is averaging around a million shares a day, that gives me room to trade about 25,000 shares a day if the spreads and the fundamentals are right. Another thing to keep in mind is the size of the trades. A company that has one trade a day of 25,000 shares is much less interesting from a day trading perspective than one that has a trade every hour of 1000 shares.

Unfortunately, SLCapEx doesn’t provide information about the size of each trade. Using the webservices, I have a program that gathers and analyzes the data so I can get a sense of this, but it is a rough estimation.

The next tip I like to focus on is how you come up with your prices. On SlCapEx, the minimum increment is a penny, so it isn’t as big an issue there, but on the WSE, you can bid in very small fractions of a penny. If there is a wide bid ask spread and you come in with a bid or ask price that is just fractions off of the previous, you might get to be the best bid or offer, but you might not get people to actually hit your bid or lift your offer. Instead, it may well be worth it to put in a bid or offer that is more than just a penny better than the current best price. After all, having the best price in the market doesn’t do anything if no trade ever takes place. Instead, put in a price that moves the market a few pennies and may encourage others to buy and sell.

Related to that, be careful about getting into to bidding wars. The other day, I was offering a few hundred shares of one stock. Someone else came in and offered stock for a penny less. I had a large profit in the stock, so I figured I dropped my offering price two cents. He did the same, pretty quickly, effectively communicating that he was willing to keep battling for the lowest price. I drove the price down around .10 and then bought his shares. I then proceeded to sell both his shares and mine at a much higher price.

Then, there is the comment I made over at JohnLight’s blog that started the whole discussion. Don’t be afraid to cut your losses. In the BNT example, I had bought 650 shares at .31. When I saw where things were going, I ended up selling them at .28 and losing around 15 Linden Dollars. I could have held onto it I could have been down 65 Linden Dollars with little hope of seeing a profit. Personally, I don’t expect to see BNT hit .31 again anytime soon. So, while I’m down 15 Linden Dollars on the trade, I’m 50 Linden Dollars better than I could have been.

One final note: I’ve written various programs to better gather information from the markets. I can go into this in more detail at a later point if people are interested. The more information you have, the better.

I hope these thoughts are helpful. I believe that day traders bring valuable liquidity to the markets and that there is room for a lot more day trading on all the Second Life Exchanges. Hopefully the exchanges will make more information easier to access and the markets will grow from this.

If you have further thoughts or questions, please let me know.

Previous commentaries on Second Life Trading can be found in the Games section of my blog.

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