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Table of Contents
Introduction: What is Day Trading?
A Tale of Two Days: Ben & Jenna
Risk, Reward, Temperament and Time
Summary of Day Trading Features
Chapter 1: How to Get Started
Your Personal Day Trading Playbook
The Essential To-Do List
Optional or Follow-Up Activities
Chapter 2: Stock Market 101 and Day Trading Principles
How does the Stock Market Function
Making Your First Trade
Two Objectives to Keep in Mind
Chapter 3: Different Types of Stocks
Chapter 4: How to Read a Candlestick Chart
Chapter 5: Four Different Order Types
Chapter 6: Dos and Donts of Day Trading
Chapter 7: Some Techniques and Strategies
Chapter 8: How Much Can You Earn?
In this book Ill share with you how to develop the right mindset to go after your goals and achieve
the success youre striving for.
If you are reading this book you may have already heard about the exciting financial and personal
rewards of day trading. You are curious about the fascinating tales of great monetary rewards and are
excited by the prospect of working from home. But you may also be aware of the horror stories about
people losing huge sums and wonder whether the day trader lifestyle suits you.
What is day trading exactly?
In brief, day trading refers to transactions performed on financial securities within a time-restricted
period of one trading day on the market. Put most plainly, it is the buying and selling of securities,
which for the purposes of simplicity in the demonstration of this book, we will focus exclusively on
stocks (but know that there are a variety of trading options, currencies, and futures) limited only to the
course of one trading day so that no open positions are held overnight.
But, what are the implications of closing all positions by the end of the day? How does day trading
differ from long form trading? And what actually happens during the course of a day traders typical
day? These questions are explored in the following chapters with the purpose of providing a basic
introduction to the nuts and bolts of day trading so that the beginner trader may make informed choices
in their day trading ventures.
In this book you will learn specifically how to start and organize your daily trading activities, the
different types of stock available, how to read a candlestick chart, and place different orders. We
will conclude with a discussion on important dos and donts of day trading, as well as some
techniques and strategies to boost your day trading performance.
But first, it is not enough to simply absorb the very general idea of day trading, but to understand what
kind of person is attracted to day trading. While most people are attracted to the idea of this activity
because of its popularity, it is not for everyone. Are you someone who would enjoy it? Do you have
the temperament and attitude required to day trade? And most importantly, would you be successful at
day trading? To answer these questions for yourself, consider the personality profiles and snippet of
two days in the lives of two people, Ben and Jenna.
Ben is a mechanical engineer in his early 40s who has worked for several years at the same midsized firm. He owns a 4-bedroom home, in a prosperous neighborhood, and is 10 years into a 30-year
mortgage. He lives with his wife, who is a full time marketing manager, and they have two daughters
under the age of 8, and they all lead a fairly active lifestyle. Financially, they are doing well. Ben is
especially glad that his family does not feel the need to keep up with the Joneses by buying flashy
cars or too many questionable items that would end up in a landfill eventually. But neither does the
family scrimp on minor luxuries like Bens golf lessons or his wifes spa days, and their girls have
enough toys, clothes, and little extras that round out a comfortable childhood.
One day, Ben goes online and opens up his financial statements to check the status of his investments.
Fortunately, he sees a healthy, if pretty much predictable, set of figure on his companys 401(k) plan-both he and his wife contribute their maximums and take advantage of their employers match.
Despite the funds limited options for investment options, he doesnt mind, why make waves with a
stable ship? Years ago, Ben also signed on board with his fathers full-service broker who works
with him to purchase a middle-of-the-road mix of stocks geared toward a conservative portfolio. The
broker also advises the family on estate planning and the family taxes as well, and Ben slept well
knowing that someone he trusted stewarded his finances.
For a moment, as Ben scrolls through the bylines of the traditional companies in his statement, he
thinks briefly about upping his investment game. Just the other week, he was talking to his neighbor
about another exotic sounding financial instruments, and at the killing that people were making.
Maybe he should set up something? But at the end of the day, the very thought of constantly monitoring
the market, following the ups and downs of hundreds of volatile trades makes his stomach churn.
Further, as someone who liked to save his money, Ben did not like the idea of paying broker fees, and
the more you traded on the market, the higher your fees can be---and you arent even guaranteed to
have a successful trade! Why pay to gamble? No, Ben is a true-blue moderate investor, not a trader.
Now, lets take a look at Jennas day.
It is 9am, and Jenna is sitting in her 2-bedroom condo in Miami that she bought outright last year, she
is waiting for the stock market to begin trading at 9:30 Eastern Standard Time. She is wearing pajama
bottoms and a t-shirt, and her feet are bare as she sips from her favorite coffee mug. As her dog
scampers by she scratches his ears and enjoys the quiet moment before she has to fully focus her
attention. Jenna sighs thinking that she hasnt been on a planned vacation in quite a while, but
consoles herself knowing that at least at 4pm, when the market closes, she was free to take her dog for
a run in the fresh air rather than battle rush-hour traffic on the freeway.
Prior to day trading from her home office, Jenna led a pretty typical career trajectory that began with
her completing a bachelors degree in finance with a minor in accounting at a large state university.
She did well and interned first at a major Fortune 500 company and before scoring her first job at a
big 5 accounting firm. While slowly climbing the corporate ladder, Jenna spent her spare time
experimenting with different investment strategies for fun and profit. She found she not only had a
knack for, but genuinely enjoyed seeing how she could make money in creative ways. When she was
in college, she made a risk-free $1,000 when she took advantage of the low interest rate on
borrowing for a student loan and placed it in a CD that yielded a higher return rate. After paying back
the principle plus interest, Jenna pocketed the profit and knew she was comfortable with playing the
long game, but was she comfortable with greater uncertainty for an even greater profit?
The answer came pretty quickly when she decided to funnel the $25,000 of her own money into a
trading account---which is the minimum required by the financial industry in order for traders to
conduct transactions. This was indeed a scary proposition because Jenna knew she could have done
many different things with that $25,000. While she participated in the traditional and secure
investment portfolios offered by her employer, Jenna eventually reasoned that her youth meant she
could be more aggressive with her capital. Naturally, she kept to the general wisdom of saving 10%
of her income and setting aside 3 months of expenses, but she rejected the idea that she should
immediately earmark her savings toward a physical asset like a home right awaythat can wait, she
wanted to try other things first.
Eventually, within a short period of time, Jenna turned her initial investment into a six figure trading
account. Then, she did this again and again. But then she also lost this same amount, more than once.
With each set of gains and losses, Jenna kept her cool, never despairing when she lost big, but never
losing sight of perspective when she profited, keeping to her game plan and being consistent in her
focus each day. Mostly, she honed her skills, learned from her mistakes, and built her financial
repertoire, eventually achieving enough proficiency to transition out of her classic corporate gig into
full-time day trading. Whether it was a good day or bad, Jenna finds immense satisfaction in her
work.
So, what is it that distinguishes Jenna from Ben?
Beyond the specific details of their work lives, portfolios, and financial choices, there are several
personal characteristics that make the difference in their day-to-day routines. At heart, Jenna is a risk
taker while Ben likes to play it safe.
Someone like Jenna is willing to take on greater risk for a potentially greater reward. She is a trader,
which is in sharp contrast to Ben who prefers the more predictable ventures of a conservative
investor. The notions of risk and reward, as well as the personality characteristics of temperament
are central concepts for our discussion on day trading, lets take a closer look on how this pertains to
you.
These questions speak to the two most essential characteristics of successful day traders: steadfast
self-discipline and fierce independence. Both are significant traits for most individuals to possess in
order to be successful in many different jobs and contexts, but for day traders in particular, these are
non-negotiable personality traits.
Day traders who experience the greatest returns on their investment of not only their money, but of
time, and other opportunity costs (losing time away from a traditional career options) are able to
work with almost no support structure, and can consistently handle their work day from the mundane
(copier jams and buying coffee), to the more complex (health insurance, retirement) largely alone.
Your daily commute from your bedroom to your home office will reveal no coworkers, no daily chitchat from colleagues, no institutional corporate networking, evaluations, feedback, and mentoring.
And while, many people who work in a traditional office are more than happy to be done with long
meetings, annoying cubicle mates, pointless expense reports---they are also missing out on truly
valuable working experiences, social connections, and professional development.
It can be lonely existence working as a day trader.
Some traders describe the experience of day trading as gambling inside a vacuum. This is an apt
metaphor given the inherently risk- inclined, isolationist environment of day trading. Further, and this
may come as a surprise, there is less freedom to day trading than you may think. How is this
possible when, as a day trader, you can organize your days anyway you wish?
First, you are beholden to the schedule of the market from 9:30am to 4pm. While technically, you are
your own boss, ultimately, your job is to sit in front of a computer and generate profit for yourself.
Every minute counts. And in fact, day traders must be able to focus their attention for extended lengths
of time---bathroom breaks are quick, food is eaten at your work station, and you must have constant
access to stock quotes via the internet or your phone. The amount of slavish attention you are required
to lavish on your computer and monitors is similar to being an air traffic controller in terms of the
complete and total attention required.
At the end of the day, the week, and the month, your goal is to see that the balance of losses and gains
add up in your favor. There are no allotted vacation days.
And, unlike a regular job, where you can show up and perform poorly in some instances and still
receive a paycheck, there are no such contingencies in the day trading industry. In fact, you may even
perform well and make rational trading decisions, but the market does not favor you for that
particular day---no bonuses for trying.
The ultimate question then becomes, are you able to perform well, and happily under these
conditions?
Before you begin the process of committing your time and money to day trading, answer these
questions for yourself honestly and completely. The more completely and thoroughly you answer
these questions right now, the more prepared you will be during the inevitable ups and downs of
trading.
We will close out this chapter by summarizing the major concepts you should now understand about
day trading from the stories of Ben and Jenna, as well as generally.
More expensive commissions and fees: this should make sense since youll be doing
more trades, and youll be trading every day. Paying fees for each trade may take a large
chunk from your earningsthese range from 20-30% depending on the level of service
that is provided. It will be to your advantage to comparison shop, or to find firms that
may offer special discounts if you opened your trade account with them.
Earnings are compounded more quickly: here is some good news, day trading offers a
faster return on your earnings, which in turn, generate further earnings. If you are making
successful trade, you will see daily feedback in your account, and this can feel immensely
gratifying.
Personality and Temperament: are you able to sit and focus on a great variety of realtime, streaming data for hours at a time? Are you willing to forgo a traditional work-life
with corporate benefits and support? We have already covered the basic personal
qualities of self-discipline and independence required for a successful day trader.
Chances are, if you are reading this book, you likely have a personality that values
autonomy and enjoys the instant feedback (negative or positive) that fast-paced day
trading offers. You actually enjoy the idea of working hard because there is a chance that
the payoff will be enormously profitable.
Lifestyle and Quality of Life: depending on the type of lifestyle you would enjoy; day
trading can be either your worst nightmare or a dream come true. If you are the type of
person who counts on scheduled vacation days and predictable income streams, then
likely you will find day trading a tough fit---but if you enjoy the prospect of seeing your
portfolio potentially grow to new heights and are willing to budget for lean times, then
day trading is your best bet.
Before you make your first trade, you want to ensure the best chances for facilitating your success.
This includes creating a playbook from which you will refer to again and again each day as you trade.
In this chapter, you will learn to create a playbook and cultivate the habit of logging in the details of
why you executed that trade. This is not as much of a burden as it sounds---all the financial details are
already recorded in your trader account; you only need to jot down a daily record of your analysis.
Also, in this section, we will discuss the very basic steps and outline the basic terms of day trading
that will get you started. You will learn how to open a basic account, how much you should have in it,
and the importance of setting up your day trading station with the appropriate hardware and software.
Keep in mind that like exercises in the introductory chapter, you need to put in the time answering
questions posed and performing needed tasks. If you are diligent about setting up an efficient and
effective workstation, youll find that is half the victory.
What is a playbook and why would it be important for you? If youve ever played a sport, you know
that playbooks are an important tactical resource. It contains the techniques, strategies, and other
important notes to support a sports teams pursuit of victory. For a day trader working under the
constant, unknowable pressures of the market, it is easy to get confused in the confusion of a highly
volatile day. It is important to maintain perspective in the midst of daily financial turmoil.
In order to build your playbook, keep notes either on your laptop or small notebook so that you can
refer to the following questions quickly and easily:
1. Specify your profit goals and your loss limits by naming the threshold of gains you
would at least like to make, and the absolute highest amounts you are willing to lose
within a given timeline. For example: Within 6 months, I would like to make at least
__________, but cannot lose more than _________. At which point, specify what
your next steps would be. Some suggested follow-ups may be: spend 3 months
acquiring _____ more capital to replenish my trade account or relegate day trading
to monthly trading. If you happen to reach your threshold gains, you should also
specify your next steps. Examples of next steps include: reinvest into an additional
trade account or use profit to pay for analysis software.
The purpose of specificity is crucial for creating continuity in your day trading practice.
Without this forethought, you are more likely to make impulsive decisions whether you net
profits or suffer losses. For example, some new traders are so ecstatic from their first
successful trades that they quickly move this money into personal use when it may be
wiser to reinvest into their trade accounts. Similarly, a major loss early on may be so
discouraging that a new trader simply gives up before they gain the requisite insight that
would help them with future trades.
2. Each day is different, learn from daily success and mistakes by logging your
trades, which in turn, will give you the long-view of the market and your trading
practice. As part of your trading practice, it is important to create spreadsheets of
your progress based on earnings and loss reports from your trade accounts. The
additional features that you must log besides from net losses and gains is additional
narrative information of the trade---the company, your reasoning, analysis, how you
used research and information, whether or not you used software, etc.
Over time, these spreadsheets yield an overall picture of your trading progress. Day by
day, the market and your reactions to trading opportunities can meld into a chaotic blur
given the frantic pace of the market, if you do not log your trading narrative, you will
quickly forget what occurred and how you handled each transaction. A collection of your
analysis over a few days, over a week, a month, and eventually, a year, is an extremely
valuable resource for you to see not only the movement of the market, but sheds light on
your trading propensities and habits.
These two rules are easy to remember, but in practice, are difficult to perform. That is why you must
rely on your day traders essential character trait of self-discipline. Fold in the practice of your daily
log keeping and of writing reviews of your trading practice into the end of your workday; consider it
as natural as part of punching the clock for the end of day.
Making a habit of thoroughly logging not only your numbers (losses, gains, transactions---which
would be automatically calculated for you via your trading account) but of what you did and how you
made the trades will yield valuable dividends in the form of professional growth and greater
analytical skill.
will also cost you, and these per-transaction costs can vary widely
If you feel comfortable you may even open more than one account, but for the absolute beginner, one
may be more management. However, some day traders open several for a couple of reasons, one is to
create safety net in case (and this is rare) that one account could freeze or become heavily trafficked.
The more likely reason is that some account requires higher minimums for trading such that if your
account falls below this threshold amount, you are barred from trading further. Therefore, you may
have lost a considerable sum in one account, but have money in a different, still viable account.
Some traders have two or three preferred accounts entirely dependent on different applications
because all trader accounts offer different systems of varying degrees of readability---all this is
entirely dependent on the preferences of the trader.
However, many accounts you open (the fewer the better---but always take into account the possibility
of servers freezing up and costing you time), take the time to review the quality of your trading
accounts streaming chart displays. Most accounts will offer for free, or for a small fee, software to
view streaming chart data, take the time to assess and use the software to increase your comfort in
reading and manipulating chart views.
Set up a reliable computer, preferably with 2 monitors: A vital component of your work station is
a fast, powerful, and reliable computer. The importance of this set-up, along with a consistent highspeed connection cannot be overstated. Get the best you can afford. An executive chef does not
scrimp on high quality knives because these tools are an extension of his or her hands, they perform
the work of prepping food---cheap and dull knives will be a drag on efficiency. For a trader, during
the course of a typical day, where literally, every minute counts, a computer that freezes, lags behind,
or does not supply enough RAM or memory to quickly perform requests will lose you money.
The suggestion for two monitors will aid in creating focus and streamline your work. You will be
looking at charts, performing analysis, watching the financial news or reports, tracking returns,
placing trades and a performing a myriad of activities. Separating the work among different monitors
will enhance your experience.
Connect to a high speed internet connection: Again, this step cannot be emphasized enough.
Purchase the fastest data package available, do not scrimp. Was a day trader, your goal is to quickly
place and then close a trade within the same day, sometimes just minutes later. What would happen if
you placed a trade at 4:15pm during the midst of a lightning storm? Can you afford to risk the market
closing at 4:30pm when you still have an open trade? Streaming information as well as quality
hardware like your computer and monitors are vital for your success. And in fact, quality internet
connection is so important that you must create a redundancy, hence the next order of business:
Create a back-up internet connection: whether this is a mobile hot spot or some other connection,
be advised that the best data plans will pay for itself in time and money saved.
Purchase streaming stock quote software: arguably, you may be able to access, for free, streaming
stock quotes using financial news websites that constantly stream business updates and analysis. But
in the long run, installing software will streamline incoming real time quotes. Versatile software
offers a display of streaming stock quotes.
Why is it important to view streaming stock quotes? These quotes are a window into change
happening in real-time for orders of buying and selling. You will be able see where buyers and
sellers positioned on different exchanges and their offers to buy or sell specific amounts of stock. In
sum, it is a snapshot of supply and demand happening on the market in real-time---software will
streamline this view.
While there are free programs available, some of which reflect the enormous innovation in the
amount and quality of crowd sourced educational programs, you must be judicious in your
consumption of this material. There are several popular and well-established trading schools
to choose. This one is probably the most popular.
Online Trading Academy http://www.tradingacademy.com/
companies and a bevy of other commentators) sweet talk or bad mouth a particular stock. Watch
how those stocks move up or down accordingly. Who is responsible for this movement? Novice
traders who hang on every word of the latest gurus. Try to avoid the impulse to chase the herd,
instead, refer back to your playbook.
stock holders jostle for representation in their directives for the company. Class B holders
may be fewer in number than Class A, but their B holdings are issued with greater voting
leverage. Thus, A and B are at some point likely to reach an impasse during significant
junctures in the companys trajectory. Class C holders, despite their lack of voting rights, may
throw their weight behind A or B holders, or influence outcomes in other ways since their
payment structure is different.
Preferred stock refers to a category of stock that prioritizes dividend payment over voting rights. As
a preferred stock owner, you are paid first but have no voting power. In essence, you will be paid in
front of other holders, you will be paid your premium dividends despite uncertain economic times,
you will be paid even if the company goes bankrupt. But you have no say in the corporate direction.
The question of which stock type you should buy (for investment) boils down to where your priority
leads you toward---as a beginning day trader, however, it is best to go with Class A common stock
for now.
FIGURE 1: Basic
Candlesticks Gain and Loss
Youll notice several things. First, Stock A (with the green bar) shows an opening price offering at
$31, at the beginning of the trading day, and then closed at the end of day at its highest point, $35, for
a net gain of $4. This is pretty simple, but it is important to note that at $31 and $35, these are the
lowest and highest prices for Stock A---these make up the tops and bottoms of the closed box.
The red bar for Stock B indicates an inverse movement from Stock A. Stock B opened at the higher
value of $35, but by the end of the day, closed at $31---this stock lost $4 by the end of the day. Again,
the top and bottom of the closed rectangle show the highest value and the lowest value of the stock
respectively. You can quickly gauge the downward loss by the color of the bar, which is red--candlestick chart printed without color show a white or clear body to indicate that the closing price
was higher than the opening price while a black body rectangle (the candle stick) denotes a loss from
the start of the trading day to the closing.
What about the so-called wicks of the candlesticks? The wicks are called shadows and represent
more information about the pricing fluctuations that happened to that particular stock during the course
of the day. For example, Stock A may have closed up in that the price was net of +$4 on this day,
but what about the next day? Lets say that it opens the next morning at the price of $35 (the price it
closed at the previous day---a gain of $4 from its opening of $31 the previous day). But it dips up and
down---and at one point the price was actually lower than its opening $35 and eventually dips all the
way down to $32. But then it begins to climb slowly until it hits a pretty good $40---not too shabby.
But the big 40 did not last and the actual closing price was $37, a gain from its opening day value of
$35, but only $2 rather than the $5 it could have netted if it had closed at $40. The graphic looks like
this in Figure 2 below:
FIGURE 2:
or long downward shadows? Shadow length can enable you to draw some inferences as to how much
activity, or intensity that stock is eliciting. In conjunction with the movement---that is, is the stock
generally trending up (gaining value) or trending down (losing value) during the course of that day?
As for duration, you are looking at how long the patterns of rising and falling momentum, as well as
the lengths of the shadows, endures and trends.
In conclusion, the candlestick chart tells you how the stock is performing during that specific days
(and several days over time---however you wish to view the chart), the other analysis is the type you
perform at the front end where you must do for groundwork for investigating the company beforehand
to give you context to the stock performance day by day. If you are a traditional investor, you are
interested in the macro-view of the stock, so your view of candlesticks is day by day, over the course
of months. But a day trader is looking at the pattern of the days candlesticks as if he or she is
riding a wavesurfing along the shadows so that they can make immediate decisions. Think of it as
the difference between a surgeon vs. a general practitioner in family practice.
Your family physician has been seeing you for various health issues and annual checkups for years.
He looks at your overall health and sees an overall picture of your health. You first came to him with
normal blood pressure, vitals, and weight. Over some years you had higher cholesterol, gained some
weight, lost some weight, gained it back, but lowered your cholesterol, even as your blood pressure
rose---up and down, for different things and you also plateaued for some time. This is valuable
information. With the general picture, your GP can flip through your charts and peruse your
accumulated information to best direct you toward different suggestions for improving your health.
On the other hand, think of a surgeon in the midst of a complicated cardiothoracic surgical procedure
that she is performing on your grandfather. The surgeon is fully engaged and focused, she is hands
deep in the surgery and keeps an eagle eye and ear on the various machines monitoring your
grandfathers vitals. Every beeping pattern indicates the rate of respiration and electrical activity.
And the anesthesiologist who is monitoring the patients brain waves during the procedure is also
acutely attuned to spikes and falls. For both specialists, there is no casual flipping through of folders,
both are watching for and listening to immediate feedback.
Again, the GP is not unlike the traditional investor who looks at large patterns over longer periods of
time. They use candlestick charting along with line and bar graphs to achieve the most expansive
view available of patterns and trends for different companies and stock offerings.
But it is the day trader who relies most heavily on the unique formation and power of the candlestick
charting technique; it gives more immediately useful feedback. For all intents and purposes, in the
midst of a busy trading day, your focus is fixed entirely on the screens in front of you, monitoring
every shadows rise and fall, in essence, you are performing financial surgery.
To begin with, a market order is fairly straightforward in that it is a request by a trader to either buy
or sell a stock at the market price currently available. Someone wants to buy is paired with someone
who wants to sell a specific stock. This is the goal for everyone involved, so it behooves all
participants that a trade goes through. By allowing the market to name the price, the chances are
greater that the order is executed is high (a desirable state). However, you do not have any control
work on a better deal. In a similar manner that you place an order at your favorite restaurant,
once the kitchen gets the order, you cant unmake your meal---and it will cost you to order
something different if you change your mind.
DO:
1. Do keep going. Be persistent. Think of the last time you learned anything worthwhile,
necessary, or fun. Remember the first time you picked up a hockey stick, basketball, or
golf club? Remember the awkward way you handled your new equipment and how it
dropped out of your hands those first few times? And, anyone who has ever picked up a
musical instrument automatically cringes at the memory of that terrible wailing sound of
that super cool electric guitar you saved up so long to buy. You were pretty bad,
probably downright awful. But then, you kept going and got better---because you wanted
to get better, sometimes desperately so.
Can you imagine giving up after one frustrating driving lesson? Who doesnt remember the
bone-jarring stops and starts your first few times at the wheel? But more than likely, you were
hell-bent on learning. I know that I would have practiced parallel parking in the parking lot of
a grocery store all night long if it meant I got to pass my drivers test.
If you want to make day trading a profitable venture, push past the pain, you have to keep at it.
2. Do put in the time to learn---and there is ALWAYS a lot to learn. The basics of
trading are so simple that any person with enough money can buy all the equipment,
hardware, software, and open a trading account and buy their first stock within 24 hours.
But they can lose all their money in less than that time. Put in your time learning the
jargon, understanding the concepts (as suggested in chapter 1), and after you have
achieved some success---keep learning.
Why keep learning after you have the basics committed to memory? Think of what happens to
a medical student after graduation? After four years of training, do they officially have their
medical degrees? Sure. Can you call them, Dr. Of course. But would you want them as your
personal physician? Nope. That is why there is extensive residency trainings and postgraduate
training---what they learn in medical school is the basics of medical care and most
importantly, where to look for information.
After youve been trading for a while, you will develop a knowledge network of where to
receive additional training, how to learn better, faster, and apply these new concepts to your
own trading practice. Never stop learning.
3. Do your own homework. This is related to the first two dos of being persistent and
lifelong learning but NOT the same. Doing your homework means research on all aspects
related to your trading practice. The industry offers endless analysis on companies,
products, and financial eventsbut you must perform your own investigations.
Cable financial news and the internet burst at the seams with information, and in particular, a
certain breed of celebrity analyst has emerged. There is no need to name names, since there
are new glossy talking heads cropping up every week extolling their special brand of
financial punditry. Some of them are good, others are bad, and some are downright
disastrous---listen to them if you must, but follow their advice with caution. And even if you
find a commentator you like, following them blindly does you a disservice since you wont be
able to refine your own skills and self-knowledge to make your trading decisions
independently. If you simply subscribe to a newsletter and buy the featured ticker symbol of
the week, what happens if it tanks? Dont get me wrong, some guidance is great, especially if
you relate to a particular analysts trading style---but be sure you cut the apron strings fairly
soon.
Know your own traders mind and style, do your own homework.
As for the donts of day tradingthis list is just as important:
DONT:
1. Dont isolate yourself. As we have noted at the very beginning of the book, when
discussing the lifestyle of a day trader, it is very easy to become cut-off from the rest of
the world. How does this seclusion happen? First, you are most likely working from
home, and given the total focus required to perform analysis and execute trades
continuously, you would be working entirely alone all day.
This is why creating networking opportunities for yourself is so important. While you should
get plugged in early, keeping up with a professional network of other traders will provide
ongoing support throughout your career. Get a sense of what people are doing and how they
solve problems. You may pick up some useful tips, and more importantly, youll get a chance
to share what youve learned.
It may seem counterintuitive, but the more you reach out and teach others what you have
learned, the more you will gain in your own trading practice, Dont think of it as giving away
secrets---many things that works for some people will not work for others, anyway---but think
of it as contributing to the greater professional development of the industry.
Join networks, make friends, share your experiences.
2. Dont get greedy. Pace yourself. It is a remarkable turn of irony in the day trading
industry that the best antidote for facing the volatility and pandemonium of the market
requires that you remain controlled and orderly. As you become more consistent in
profitable trades, especially as you focus on high volume and modest movements, there
will be many times where you witness an incredible upshot for particular stocks in
specific industries and during special times---and you could have made a killing by
hopping on board that train. You should have made an exception to your daily practice
and habits and done something different. Making those kinds of exceptions can be a
slippery slope.
First you might break your own rules and inevitably, you will lose more than you wanted,
which in turn promotes the next turn in rule breaking until you find youve thrown your entire
playbook out the window. It will be more difficult to regain control, so dont lose it by being
overly greedy in the first place. Make your profit threshold and then hold steady.
Ready to join the madness above from the comfort of your own home? Now that you have learned
some of the basics of setting up for and getting started in day trading, it is helpful to augment your
daily trading protocol by including different plans and strategies to maximize your earning potential.
Remember the two major principles introduced in chapter 1 that you should keep in mind as you
venture into day trading? Lets review them once more:
3. Specify your goals as well as your limits and stick to them.
4. Each day is different, learn from daily success and mistakes.
This chapter expands on each of these principles by offering additional strategies which expand on
the principles in the following ways:
These additional strategies increase your knowledge base to increasingly
refine your trading goals and help you better define your loss limits.
As you apply different strategies on different days, to different buy and sell
orders, youll develop experience with their relative effectiveness.
Youll strengthen your skills for identifying which protocols work for you in a
variety of situations.
Technique 1: Know a handful of stocks well and trade them exclusively. This is a simplification
strategy of trading that minimizes your exposure to risk on the market by increasing your familiarity
with fewer stocks. Think of it this way, the day trading pace is frantic, with countless numbers of
stocks performing with all kinds of rhythms and patters. Keeping up with this chaos is difficult-unless you have pared it down to just a few stocks that you follow consistently and over time.
Pick a group of well-known but actively moving stocks, those that are brands and companies with
proven track records for generating profits in the long run. You may be thinking this isnt very
exciting, or that the stock patterns for these companies are rather static and known. But this isnt true,
even products that are Fortune 500 caliber yield diverse patterns over time---your job is to know
their stock performance intimately. By delving deeply into the nooks and crannies of that particular
products historical performance, youll be better equipped to trade them on the fly rather than chase
the latest, hottest stock. The wisdom of focusing on fewer, stronger stocks lends itself nicely for
beginners for utilizing the next technique:
Technique 2: Watch the herdand move the other way. As you have one eye on the financial
news shows (which resemble full-on circuses with celebrity financial ringleaders presiding over the
madness), you must maintain your composure and show restraint from participating in the inevitable
stock runs. A stock run refers to the frantic movement of a stock that is currently being discussed. A
hot stock being praised by a famous finance wizard will move the points upward rapidly (and
youll see this on your streaming bid displays). But resist the urge to follow the crowd and join the
stock chase.
Very likely this is an impulse decision you will regret by taking part. How is that? First of all, what
you are seeing touted on the news is likely OLD news by the time you see it screened. Trading day
begins at 9:30am but that doesnt mean that particular stock hasnt been talked about for hours leading
up to the opening of the market. Likely, in the first few minutes of that very morning, the stock has
already burned hot and the price has moved up and up. By the time the masses hear of it, the stock is
ready to deflate---and you can be caught up with newly bought stock that you are now frantically
ready to unload (i.e. amateur traders---those who are going to lose their entire trading accounts, more
experienced traders live for the newbies). Who really benefitted? Those who were already holding
the stock; they received unexpected earnings because they owned the stock---but everyone else is
behind.
Technique 3: Be a hybrid trader. After a certain amount of time, you may amass enough experience
with day trading to comfortably bow out when market conditions are less favorable and become what
is known as a swing trader. That is, you do not have trade daily, but can leave your trades overnight
for a few days or few weeks at a time. You monitor the market daily, so you see what is going on, but
you will dip back into day trading only when you judge there to be more favorable market conditions.
internet and individuals talented and willing to ride the frenetic waves of the day to day trading will
find that over time, the waves do even out and the market gains in value. And those are two key
words---over time.
So, be patient, be brave, and rest easy in the knowledge that you have embarked on this venture not
solely to make money. You have chosen to make money in a very specific manner that speaks to you,
that rings true with your risk-taking, self-disciplined, fiercely independent nature. And that is an
experience that cannot be given a price.
So, good luck, play hard, and make it a good day!
In this book Ill share with you how to develop the right mindset to go after your goals and achieve
the success youre striving for.