Brief Summary
This YouTube video provides a comprehensive overview of day trading, distinguishing it from other trading styles and emphasizing the importance of risk management, discipline, and continuous education. It dispels common misconceptions about quick riches, highlights the competitive nature of the market, and offers practical strategies for both beginner and intermediate traders. The video also covers essential tools, account management, and the psychological aspects of trading, providing a step-by-step guide to becoming a successful day trader.
- Day trading is a serious profession, not a get-rich-quick scheme.
- Risk management and self-discipline are crucial for success.
- Continuous education and adaptation to market changes are essential.
Introduction
The book explains the fundamentals of day trading, differentiating it from other trading and investing styles. It describes important trading strategies used by traders daily. The book is concise and practical, designed to be read in full without losing the reader's attention. It aims to equip beginner traders with the knowledge of where and how to start, what to expect, and how to develop their own strategies. While reading the book alone won't guarantee profits, it emphasizes that profits come from practice, the right tools and software, and ongoing education. Intermediate traders can benefit from the overview of classic strategies.
Day Trading Misconceptions and Rules
Day trading is not a get-rich-quick scheme, and it's statistically proven that 90% of people who start day trading fail and lose their money. Day trading is difficult and competitive, requiring traders to outsmart others in the market. The money traders aim to win belongs to other traders who have no intention of giving it away. Emotional trading is a primary reason for failure, necessitating self-discipline and defensive money management. Successful traders must be significantly above average, discarding illusions and changing old habits to develop the discipline of a winner.
Day Trading as a Profession and Lifestyle
Day trading is a profession similar to medicine, law, and engineering, requiring the right tools, software, education, patience, and practice. Successful day traders can earn between $500 to $1,000 daily, equating to $120,000 to $240,000 annually. The attractiveness of day trading lies in its lifestyle, offering the flexibility to work from home, set your own hours, and spend time with family and friends. It's easy to set up and manage compared to other businesses, with quick cash flow management and the ability to start over easily.
Why Most People Fail in Day Trading
Most people fail in day trading because they don't treat it as a serious business, viewing it instead as a form of gambling. They trade for the thrill without committing to proper education or in-depth awareness, leading to eventual punishment by the market. The author shares a personal experience of early success followed by significant losses due to a mistaken notion that making money in the market was easy. New day traders must recognize they are competing with serious, well-equipped professionals and must be thoroughly prepared before the market opens.
Basic Tools for Day Trading
Day trading requires proper tools, software, and education to succeed. The basic tools include sufficient capital (at least $5,000 outside the USA and $25,000 if a US resident), high-speed internet, the best available broker, a fast order execution platform with hotkeys, a scanner for finding the right stocks, and a community of traders. Monthly expenses include internet, broker commissions, scanner costs, and trading platform fees.
How Day Trading Works
Day traders look for stocks that move predictably and trade them within a single day, never holding positions overnight. Holding stocks overnight is swing trading, a different business with different strategies and tools. Day traders always close their positions before the market closes. Swing traders look for stocks in solid companies, while day traders can trade any company, even those near bankruptcy, as they don't hold positions overnight.
Buying Long and Selling Short
Day traders buy stocks (go long) hoping the price will increase, or they can borrow shares from their broker and sell them (go short) if they expect the price to decrease. Short selling allows profit even when prices drop, as traders buy back the shares at a lower price. Short selling is risky because losses are potentially unlimited if the stock price rises. Short selling is legal as it provides market information and balances stock prices. Brokers allow short selling because it generates income by lending shares to short sellers, who pay interest for borrowing.
Retail vs. Institutional Traders
Individual traders are called retail traders, while Wall Street investment banks, mutual funds, and hedge funds are institutional traders. Institutional traders use sophisticated computer algorithms and high-frequency trading. Retail traders can compete by being patient and waiting for the best opportunities, avoiding overtrading. Retail day trading is compared to guerrilla warfare, where small combatants use hit-and-run tactics against a larger force. Retail traders profit from market volatility, seeking stocks with quick, predictable moves.
Finding Stocks with a Unique Catalyst
Retail traders need to find stocks with a fundamental catalyst, such as earnings reports, FDA approvals, mergers, or major contract wins. Reversal trades are best on stocks selling off due to bad news. It's important to differentiate between catalyst-based price action and general market trending. Retail traders should trade with other retail traders, focusing on stocks that are moving significantly due to a unique catalyst, not just following the overall market.
Determining Retail Focus and Daily Routine
To determine what retail traders are focused on, watch day trading stock scanners and stay connected with social media and trading communities like Stocktwits and Twitter. Joining a chat room can provide valuable insights. The author doesn't trade based on company fundamentals but uses futures to understand market direction. He focuses on equities day trading, avoiding penny stocks and trading real stocks with significant daily movement due to company news or events. A typical day involves pre-market scanning, news analysis, watch list creation, and trading during peak volume hours (9:30 AM to 11:30 AM New York time).
Trading Volume and Daily Goals
The market has the most trading volume and volatility between 9:30 AM and 11:30 AM New York time, making it the best time to trade. Midday trading is dominated by traders trying to regain losses, causing volatility. The author avoids pre-market trading due to low liquidity. He aims to reach his daily goal by 10:30 AM New York time and then eases up. It's important to walk away with profits rather than risk losing them.
Risk Management and Trading Psychology
Successful day trading requires sound psychology, logical trading strategies, and effective risk management. The inability to manage losses is the number one reason new traders fail. Traders must learn and implement risk management rules, having a line in the sand for when to exit a trade. It's essential to be a good loser, accepting losses and walking away. Every trade involves risk, which must be minimized with proper share size and stop loss.
Risk Management Rules and Share Sizing
Success in day trading comes from risk management, finding low-risk entries with a high potential reward. A good setup has a minimum win-loss ratio of 2:1. Traders should not take trades with profit-to-loss ratios less than 2:1. Risk management involves trading the right stock, determining the appropriate share size, and setting a stop loss. The maximum risk on any trade should be 2% of account equity.
Three-Step Risk Management and Trading Psychology
The three-step risk management process involves determining the maximum dollar risk (no more than 2% of the account), estimating the maximum risk per share (stop loss in dollars from entry), and dividing the maximum dollar risk by the maximum risk per share to find the maximum number of shares to trade. Trading requires quick decisions and discipline. Traders must ask if a trade fits their strategy, where the stop is, how much money is at risk, and what the reward potential is.
Trading Discipline and Self-Awareness
The key to winning is controlling oneself and practicing self-discipline. Traders must know what they will do, ask questions to ensure decisions fit their risk tolerance and strategy, and foster self-awareness. It's important to be focused, calm, and making good decisions, constantly reviewing performance. Skill and discipline are trading muscles that require exercise. Traders must be able to make quick decisions and follow trading rules.
Risk Management and the Two Percent Rule
A trader's only job is to manage risk, requiring excellent risk management skills. The maximum risk on any trade is 2% of account equity. If a logical stop would risk more than 2%, pass on the trade. Traders may risk less but never more.
Finding Alpha Predator Stocks
Retail trading only works on stocks with high relative volume, trading independently of their sector and the overall market, known as Alpha Predators. These stocks have a fundamental catalyst, such as earnings reports, FDA approvals, or mergers.
Stock Categories and Trading Strategies
Stocks are categorized into low float (under $10), medium float ($10-$100), and mega-cap stocks. Low float stocks are volatile and best suited for the bull flag momentum strategy. Medium float stocks work well with VWAP and support/resistance strategies. Mega-cap stocks are suitable for reversal and moving average strategies but require a fundamental catalyst.
Finding Trades and Using Scanners
Trades can be found through pre-market morning watch lists and real-time intraday scans. The author uses a scanner programmed to find stocks that gap up or down at least $1, have traded at least 50,000 shares pre-market, have an average daily volume over 1 million shares, have an average true range of over 50 cents, and have a fundamental catalyst. Real-time intraday scans are used for momentum and reversal strategies.
Planning Trades and Avoiding Overtrading
Once daily Alpha Predators are identified, look for individual setups and plan trades based on specific strategies. Focus on quality over quantity, waiting for the best setups. Day trading can be boring, and if it's not, you're likely overtrading. Experienced traders are like guerrilla soldiers, taking profit and getting out quickly. Profitable traders usually make only two or three trades each day.
Essential Tools for Day Trading
Essential tools for day trading include a broker, an order execution platform, and a stock scanner. The author uses Interactive Brokers (IB) for its tax-free accounts, low costs, and no minimum balance requirement for Canadians. Fast trade execution is key, requiring a platform with hotkeys like Das Trader. A trading community can provide valuable support and insights.
Brokerage and Margin
Brokers provide leverage, offering three to six times the buying power, known as margin. Margin can increase profits but also exposes traders to more risk. A margin call is a warning that losses are approaching the original account balance.
Trading Platform and Market Data
Fast trade execution is crucial, requiring a platform with hotkeys. The author uses Das Trader for its efficient execution and 24/7 support. Das Trader is not a broker but links to trading accounts for fast order execution.
Watch List and Scanner
A stock scanner is essential for finding good trades. The author uses Trade Ideas software for scanning the market. Joining a trading community can provide access to scanners and real-time information.
Community of Traders and Independent Thinking
Joining a community of traders can provide support, knowledge, and hints about the stock market. However, it's important to be an independent thinker and not blindly follow the pack.
Introduction to Candlesticks
Candlestick charts are visually appealing and easy to interpret, providing a clear picture of price action. Hollow candlesticks indicate buying pressure, while filled candlesticks indicate selling pressure. Traders can be divided into buyers, sellers, and the undecided. Candlestick charts reflect the fight between buyers and sellers.
Candlestick Patterns and Trading Rules
Candles with large bodies toward the upside are bullish, indicating buyers are in control. Bearish candles indicate sellers are in control. Understanding who is in control of the price is crucial for day trading. The author is skeptical of many chart patterns, considering them subjective and prone to wishful thinking.
Spinning Tops and Dojis
Spinning tops are candles with similarly sized high and low wicks, indicating indecision. Dojis are characterized by having either no body or a very small body, also indicating indecision. Dojis can signal possible reversals if they form in a trend. Confirmation candles and other forms of analysis should be used with indecision candles.
Most Important Day Trading Strategies
The chapter introduces strategies based on price action, technical indicators, and chart patterns. Day traders should focus on these elements, hunting for a fundamental catalyst. The best setups are the seven strategies explained in this chapter, requiring practice to master.
Trade Management and Scaling
Trade management involves order entry, exit, and risk management. The author typically buys 800 shares all at once, selling 400 shares at the first target, 200 shares at the next target, and keeping the last 200 shares until stopped out. Scaling into a trade involves buying at various points, but it's not recommended for beginners.
ABCD Pattern Strategy
The ABCD pattern is a basic and easy pattern to trade, starting with a strong upward move (A to B), followed by a pullback (B to C), and then another upward move (C to D). Traders wait for confirmation at point C before entering the trade. The stop loss is the loss of point C.
Bull Flag Momentum Strategy
The bull flag is a momentum strategy that works great on low float stocks. It resembles a flag on a pole, with large candles going up (pole) and small candles moving sideways (flag). Traders enter the trade during the consolidation period, as soon as the price breaks up. The stop loss is the breakdown of the consolidation period.
Top and Bottom Reversal Trading
Top and bottom reversals have a defined entry and exit point and a high profit-to-loss ratio. Reversal strategies involve waiting for a stock to become stretched out and then timing the reversal. Key elements include consecutive candles moving upward or downward, trading close to or outside of Bollinger Bands, an extreme RSI indicator, and the formation of indecision candles.
Bottom Reversal and Trading Extremes
Bottom reversals involve finding stocks that have sold off hard and are due for a bounce. The entry point is the first one-minute or five-minute candle to reach a new high. The stop is set at the lows. It's important to trade extremes, looking for an extreme RSI, a candle outside of the Bollinger Bands, and consecutive candles ending with an indecision candle.
Top Reversal and Trading Strategy Summary
Top reversals are similar to bottom reversals but on the short-selling side. The strategy involves setting up a scanner to find stocks with consecutive upward candles, waiting for confirmation of a reversal, and short-selling the stock when it makes a new five-minute low. The stop is the high of the previous candlestick.
Moving Average Trend Trading
Moving averages can be used as potential entry and exit points for day trading. Stocks may start an upside or downside trend, respecting their moving averages as support or resistance. Traders can benefit by riding the trend along the moving average. The author uses 9 and 20 EMA and 50 and 200 SMA.
VWAP Trading and Support/Resistance
Volume Weighted Average Price (VWAP) is an important technical indicator, taking into account the volumes of the stock being traded. VWAP is a good indicator of who is in control of the price action. The author typically shorts stocks when traders try but fail to break the VWAP. Horizontal support or resistance trading is the author's favorite style of trading.
Support and Resistance Trading Rules
The market remembers price levels, making horizontal support or resistance lines effective. Support is a price level where buying is strong enough to interrupt a downtrend, while resistance is a price level where selling is strong enough to interrupt an uptrend. The author provides hints for drawing support or resistance lines, including looking for indecision candles, half dollars and whole dollars, and recent data.
Trading Strategy and Process Importance
It's important to develop your own trading strategy, as it's personalized to each individual. The author emphasizes the importance of having a trading plan and sticking to it. Traders must trade a written strategy with historical data to verify its worth.
Trading Rules and Emotional Control
Indicators should only indicate, not dictate trading decisions. Profitable trading does not involve emotion. Education and practice provide perspective on what matters in trading. The key to success is knowing exact processes.
Morning Routine and Personal Discipline
The author emphasizes the importance of a consistent morning routine, including exercise, to prepare for trading. He has stopped drinking coffee and alcohol and eating animal-based food to improve performance. Winners think, feel, and act differently than losers, requiring a change in personality.
Step-by-Step Trading Process
The trading process involves a morning routine, developing a watch list, organizing a trade plan, initiating the trade according to plan, executing the trade according to plan, and journaling and reflection. The correct execution of all steps is crucial for a profitable trade.
Next Steps for Beginner Traders
Successful day trading is based on analyzing the balance of power between buyers and sellers, practicing excellent money and trade management, and having sufficient self-discipline. The next step is to get a proper education, never starting with real money. Sign up with a broker that provides simulated accounts with real-time market data.
Simulated Accounts and Strategy Development
Use a simulated account to develop a strategy, mastering one or two of the strategies discussed in the book. Keep the strategy simple and practice with the amounts of money that will be traded in real life. Move to a real account after at least three months of training with a simulated account, starting small with real money.
Continuous Education and Community Engagement
Continue education and reflect upon the trading strategy, never stopping learning about the stock market. Join a community of traders for support and knowledge. It's important to be an independent thinker and not blindly follow the pack.
