DAY TRADING GUIDANCE
In this Teaching Document, you will find the DollarBillionaire ™ Guidance Notes on Day Trading.
“Day Trading” is written by Barron Hall. Revised and Updated Saturday 03 August 2019.
Table Of Contents: [toc]
What is “Day Trading”
Often carried out by individual investors, “Day Trading” is the practice of purchasing and selling the same trade-able item, like shares, forex, or bitcoin, in the course of a single day. What differentiates Day Trading from other forms of trading is the intent of going into and out of the market on the same day, limiting exposure to the market to a maximum of 24 hours, generally less. A pure Day Trader always ends his days with cash only and no carried forward positions. Should he need to carry forward his position over a couple of days, he totally can. However, this is no longer a “Day Trading Strategy”. Some people call this carry over to a number of days a “Swing Trade”. This is not true. Swing Trading is a defined strategy in itself and involves more than just holding for more than one day. This is most commonly practiced in the share market or in the foreign exchange markets. Day trading requires a fair amount of skill and the traders are often well educated high IQ individuals. By its very nature, Day Trading relies more on Technical Analysis and Charting than on Fundamental Analysis and long term trends.
Getting Started with Day Trading
1 – Get educated.
Technical Indicators. Moving Averages. Exponential Moving Averages. Volumes. Support and Resistance. Trendline. Chart Patterns. Candle Stick Patterns. MACD. RSI. Fibonacci Retracements. Read Books: for example:
1 – The New Trading for a Living: (Wiley Trading) 1st Edition
2 – Market Wizards: Interviews with Top Traders
Jack D. Schwager (Author), Bruce Kovner (Author), Richard Dennis (Author), Paul Tudor Jones (Author), Michael Steinhardt (Author), Ed Seykota (Author)
3 – Trading in the Zone: Master the Market with Confidence, Discipline, and a Winning Attitude
Mark Douglas (Author), Kaleo Griffith (Narrator), Penguin Audio (Publisher)
2 – Open a Paper Trading Account and Practice
Here you trade real markets with fake money. Use the platform provided by TD Ameritrade, called Thinkorswim. When paper trading use the same account balance as you would use in real life. If you have $2000 then start paper trading at $2000. Practice for 30 to 90 days. Bluff it is real money and really feel all of the emotions.
3 – Create a Trading Plan – a Trading Strategy
The plan should include Risk Management, Position Sizing, Entry and Exit Points for each play. For example Exit point $5.44 Entry Point $4.12 Stop Loss $3.55. Test the Trading Plan on your Paper Trading Account. Polish and practice it until it wins most of the time.
4 – Fund your Trading Account
Start with say $3000 in your account. Start trades with $500, $1000 to $2000. The aim now is to educate yourself with real money. You are not trying to get rich at this point. You are trying to not lose money. The main difference now between real money trading and paper trading is emotions. Trading is 80% emotion control and 20% technical indicators and skillsets. Trade like this for another 60 to 90 days and once comfortable, start adding to your Trading Account. Never place money that you need to live off into your trading account. Do not think about getting rich or making money for at least 6 months. Just concentrate on learning and not blowing up your account.
This is a form of trading strategy that normally lasts longer than one day and concentrates on the cyclical movements seen in price charts. The idea is to concentrate on one cycle, or “swing” of the price movements and to profit out of that cycle alone, thereafter exiting. A Day Trader who extends his trades longer than one day is thus not a swing trader. He is simply a Day Trader who has had to extend his trade longer than one day for whatever reason.
A Pattern Day Trader
An investor can be classified as a Pattern Day Trader by having one of the two following characteristics: (1) He or she trades four or more times during a five-day span, provided the number of day trades is more than 6% of the customer’s total trading activity for that same five-day period, or (2) The firm where the investor is making transactions, or opening up a new account, reasonably considers him or her a day trader. Once an investor is considered a day trader, the brokerage must classify him or her as such, and the investor is then subject to increased equity requirements. Mainly, the brokerage must require minimum equity of $25,000 at the beginning of the customer’s trading day.
Who can Day Trade
This form of investing is pretty much available to anyone who has access to the internet.
The Day Trading Setup
A great Day Trading setup would include fast internet, a dedicated trading desk (not a formal Trading Desk but a personal space where Day Trading is conducted), large amounts of capital, great analytical software, multiple news feeds, and a fast-reacting broker.
The Personal Day Trading Desk
The Day Trader needs a quiet, dedicated place to work from so that he can concentrate on the task and be efficient in his work.
The Day Traders News Feed
This might include the Dow Jones Newswire, CNBC, The Wall Street Journal, Reuters and MarketWatch. As mentioned before, Day Traders might pay less attention to newsfeeds and more attention to technical analysis and charting.
Good charting software includes automatic pattern recognition, direct broker integration, and backtesting based on historic data.
Capital is needed to Start Day Trading
This is one thing that you cannot do without. Without capital, you are no longer in the game. Do not take crazy risks and blow up your account. Not much capital is required to start Day Trading. A day trader could begin trading with as little as $1000. Even though one can start Day Trading with $1000, it is hard to make much money out of Day Trades without a substantially larger capital base. Build your capital account up to $50 000 and then draw it down to $40 000. Place your draw-out elsewhere, like in property investments. Continue building to $50 000 and dropping it to $40 000 with draw-outs. Normally a Day Trader would only trade with capital that he can afford to lose. This is so to protect the Day Trader from complete financial ruin. Attempt to avoid using the margins offered to you.
Brokers charge commissions for handling trades. The Day Trader needs to make enough profit to cover his commissions. To minimize commissions it might be an idea to put all your money one just one stock.
This restricts the Day Trader to the use of the capital that he has placed in the trading account.
A Margin Account is essentially a loan from a broker to the Day Trader. This enables the Day Trader to effectively borrow money with which to trade. This is riskier both from the Day Trader’s point of view and from the viewpoint of the broker.
Skills Required to Day Trade Successfully
The Day Trader must be a high-performance individual. The learning curve is quite steep. A well-defined strategy is needed to operate successfully as a Day Trader. The ability to perform Technical Analysis and the skill of reading charts is required. The Day Trader needs to understand Candlestick Patterns, Arbitrage, Graphical Analysis, and Trend Lines. Even though the process is based upon the reading of charts, an understanding of the marketplace and current events helps to minimize risks involved. A good understanding of market fundamentals helps.
The Process of Day Trading.
The investor selects a share (for example) based on his Technical Analysis and the Trends that he perceives in the charts that he is studying. He chooses Entry and Exit Points based on the price. One of the keys to being a successful Day Trader is the ability to properly determine the Entry and Exit Points. Physical Stop Loss points, or Mental Stop Loss points, must be set to limit potential losses. These Stop Loss Points are also needed to ensure that the Day Trader preserves his capital so that he can continue trading. The Day Trader is doing his best to make a profit from price movements that occur within the same day. Given that the price often does not move much within one day, it is difficult to make large profits without a large capital base, or without using leverage. Leverage increases the risk. Any profits made from the Day Trading must also cover the commissions payable to the broker. Most Day Traders do not make money, with as little as ten percent of Day Traders actually making a profit.
Emotions, Self Discipline, and Day Trading
Emotions, or rather, the control of emotions, is important for success as a Day Trader. The Day Trader should act based on well-defined strategies and not on emotions. The best Day Trading Strategy is only as good as its disciplined implementation. The saying goes: “Plan the Trade and Trade the Plan.”
Risks involved in Day Trading
Day Trading can involve a high amount of leverage. Only 10 percent of Day Traders actually make profits. This means that 90 percent of Day Traders are making losses. To be one of the 10 percent that actually makes profits requires a Day Trader who is a high-performance individual with specially developed skills. Dollarbillionaire™ mentoring creates High-Performance Individuals who excel at creating wealth.
Attitude towards Risk
Each trade has a Trade Price
Think of the difference between the Purchase Price (PP) and the Stop Loss Price (SLP) as the price that you are prepared to pay to enter the trade.
Assume that you buy a stock at PP, the Purchase Price. Assume that you set a Stop Loss Price as well, called the SLP.
So, for every 1 share, you can loose up to PP-SLP, the Maximum Loss Per share, the MLPS. MLPS = PP – SLP.
Maximum Loss Per Share = Purchase Price – Stop Loss Price. Note, this is for one share, not for the whole play.
Maximum Loss Per Play (MLPP) = Maximum Loss Per Share (MLPS) x Number of Shares (NOS) in the play.
MLPP = MLPS x NOS which must be less than or equal to the CRA, the Capital Risk Amount.
So to correct your emotional thinking, decide that you are happy to pay MLPP for the right to make that particular play. Then it is seen by your emotions as a purchase, and not as a risk.
Watching the trade play out, focus on the process and not the price
One the trade has been set up according to your pre-defined Trading Strategy, do not watch the prices moving with an eye towards checking if it is going to be profitable or not. If you do watch the price graphs play out, then analyze what happens to study the pattern analysis further. Check if your understanding of this pattern is correct, or does it need modification. Do not make changes after one trade. After watching many trades play out, then you might need to modify your Trading Strategy and Pattern understanding.
Think of yourself as “The House” running a Casino. Do not look at individual wins or losses in isolation.
You know that the clients can win, and they can win big too. However, you also know that if enough clients come in and play then over time, given the laws of probability, the House always wins. Think of yourself as The House. Think of the market as the casino that you own. Think of the numerous trades that you will enter into as all the plays between the house and the clients. To get this analogy to be correct, you need to have sound Pattern Analysis, a collection of solid Tested Profitable Patterns and a sound Trading Strategy with appropriate Risk Management. With all this in place, you accept the losses because overall you know that you will win.
Never over-invest in any one trade
Never overinvest emotionally in any one trade. Never over-invest financially in any one trade.
Day Trading Long, or Long Selling
Shorting, or Short Selling
Shorting, or short selling is when a Day Trader borrows shares and immediately sells them. He is hoping to buy them later at a lower price, return them to the lender, and pocket the difference. So one might borrow 10 shares at $100 each current price and immediately sells them for 10x$100 = $1000. Later, if the price moves down as hoped, to for example $80, one buys 10 stocks at 10x$80 = $800 and then returns the stocks to the original owner. Making a profit of $200.
Technical Analysis vs Fundamental Analysis
Technical Analysis is a mathematical and graphical way of selecting a trade based on perceived patterns and is used a lot by Day Traders. Fundamental Analysis is a more in depth analysis of the underling business and its predicted long term trends, taking into account the economy and it predicted long term trends. Fundamental analysis is used a lot by Investors. Day Traders may use some fundamental analysis and investors may use some technical anlaysis.
Technical Analysis of Charts
Much focus is placed on prices, trading volumes, and chart patterns. A Day Trader can test out his Day Trading Strategies by looking at historical charts and historical data. The Day Trader can formulate his own strategies, or he can learn strategies from other Day Traders. The successful Day Trader would continually refine his strategies until they produce relatively consistent results and profits. Losses are unavoidable and are part of the game of Day Trading, but a Good Day Trading Strategy should produce profits quite consistently.
These are simply a predetermined average plotted next to the price graph.
Moving Average Convergence Divergence (MACD)
Convergence and Divergence Lines
The Day Trader prefers stocks with greater volatility since this can lead to greater profits.
The Day Trader should have detailed charts showing the movement of stock prices. This is read in conjunction with trading volumes and other indicators.
The Day Trader looks for stocks with high liquidity so that they can get out of a position fast if needed.
Especially 233 and 612 Tick Charts.
Over time build up your own personal set of Patterns that you know work for you. Test them with historical data. Test them with live data and paper money. Continually refine them over time. Do not over complicate the analysis unless the variable adds real extra prediction power.
Strategies and Systems
A Strategy or System is simply a set of rules. If all of the conditions of all of the rules are met, then it is fine to enter into a trade. Write down your Trading Strategies. Give the hard numbers. Note down the reasons for the numbers.
A good Day Trader will have a predefined checklist that he ticks off before going into a trade. This helps to enforce predefined strategies and keeps emotions out of the picture.
Stop Orders, Stop Loss
These are needed to cut losses. These should be set up once a position is taken. They are intended to get you out of a position once a pre-specified loss threshold is reached. This cuts losses and frees up capital to make other trades.
A Breakout Strategy
A breakout is when a price has tested a resistance point a few times and then has moved on through that resistance point.
Do not take all your money and dump it into one stock. Trading is a probability game. You need to size your positions correctly. Refer to a position sizing calculator that you set up in a spreadsheet. A Day Trader must protect his downside. The Day Trader’s capital must not hit zero. Risk management is essentially about protecting your capital. Proper Position Sizing will reduce risk. Trades must be selected that make sense with ratios. Look at the upside risk and the downside risk and the ratio between the upside risk and downside risk. A good risk management strategy is the use of a Capital Risk Percentage of from 1 percent to 2 percent of the capital. Perhaps beginners should use 1% and later move up to 2% of capital. Call this the Capital Risk Percentage (CRP). So if for example, a Day Trader has capital of $10 000 and if he selected to use a CRP of 2%, then he should not risk more than $200 (2% of $10 000) on any trade. Call this amount the CRA, the Capital Risk Amount.
You might subdivide your potential trades into various Trade Categories (TC), depending upon how strongly the trade fits the requirements of your Pattern analysis. You could also consider some fundamental analysis when setting the TC.
For Example you might have TC1 being the very best potential trade, TC2 being a high potential trade, TC3 being an average potential trade and TC4 being a slightly below average potential trade, and lastly, TC5 being a bad fit trade. You will never trade TC5 plays. Then you might set a different Capital Risk Percentage (CRP) for each Trade Category (TC). You might set CRP1=4%; CRP2=3%, CRP3=2%, CRP4=1%, CRP5=0% .
So, CRA = Capital x CRP.
Capital Risk Amount = Capital x Capital Risk Percentage.
In this example,
Capital = $10 000
CRP = Captial Risk Percentage = 2%
CRA = Captial Risk Amount = $10 000 x 2% = Capital x CRP = $200
So this Day Trader would only risk $200 per play because his CRA is $200. The CRA is the maximum loss that you should be prepared to take on a trade. In other words, the maximum that you should be prepared to risk on any single play is dependent upon the size of your capital. The more capital that you have, the greater the amount that you can risk on any single trade. The less capital that you have the less you can risk on any one single trade.
Assume that you buy a stock at PP, the Purchase Price.
Assume that you set a Stop Loss Price as well, called the SLP. This SLP is set taking into account many factors, including support levels, SMA levels, key demand areas, and supply areas.
So, for every 1 share, you can loose up to PP-SLP, the Maximum Loss Per share, the MLPS.
MLPS = PP – SLP
Maximum Loss Per Share = Purchase Price – Stop Loss Price.
Say the shares cost $12.00 and you set the Stop Loss Price at $10.50. So PP=$ 12.00. SLP = $10.50 .
Then MLPS = PP – SLP = $1.50
Given that you do not want to loose more than CRA, in this case, $200 per play, then you can only purchase $200 / $1.50 = 133 shares.
Define Play Count or PC as the maximum number of shares that you can buy to keep your total losses for this play within your Capital risk Amount.
So PC = CRA / (PP – SLP) = CRA / MLPS
In this case PC = $200 / ($12.00 – $10.50) = $200 / $1.50 = 133 shares maximum for this play to keep the maximum potential loss under the CRA, the Capital Risk Amount.
Making a Play
Making a Play or Making a Trade is the terminology for getting into the market.
Green Days. Red Days.
Red Days are days when a Day Trader loses money. Green days are days when a Day Trader makes money.
Blowing Up an Account
This refers to the situation where you make losses and the losses empty your account. When this happens, learn from your mistakes, get smarter and start again. To minimize the risk of blowing up your account, paper trade until you think that you are ready for the real thing. Paper trading simply means practicing with pretend money. Many of the better platforms off this feature.
Tips from advanced Day Traders
When receiving a hot tip from an advanced Day Trader, do not trade his position, trade his stocks. It is really important to know when to enter and when to exit a position. Perhaps a Day Trader should focus on a few stocks with which they become very familiar, having seen the price movements in the past. Operating on stocks that seem to be going down seems to be a smarter way of making money. It is less intuitive and has fewer operators. This means options trading, selling short.
Why Day Traders Fail
Remember, 90 percent of Day Traders fail. To get into the 10 percent that makes profits, avoid all of the failure traps.
1 – Lack of Knowledge
You need to know as much as possible about investing via Day Trading and you need to know how to apply the knowledge. Practice with a paper trading account using fake money in real markets. Consider yourself educated only once you can consistently make profits with paper trading.
2 – Improper Risk Management
Risk management is crucial. You must set your maximum loss per trade. With proper risk management, you should not lose more than 2 percent of your account size per trade.
3 – Not having a Trading Plan
A trading Plan or Trading Strategy is crucial for sustained success. Without one you are gambling. You must set entry and exit points.
4 – Emotions
A Day Trader must control his emotions. One of the best ways to do this is to have and stick to a Trading Plan. Write down your Trading Plan.
5 – Having the wrong goals
Goals should not be financial, as in “I want to make $5000 per week”. If the week progresses and the goal is not met then you start to trade emotionally. This causes losses.
6 – Wanting instant results
Getting good at Day Trading takes time. The time to results shortens as you put in more hours per day. The more capital that you have to use also increases the arrival of results. You need proper Strategies and Risk Management. You have a proper Trading Plan and you need to understand price movements.
Top Day Traders to Learn From
His Youtube Channel can be FOUND HERE.
CAP = Capital
CRP = The Capital Risk Percentage. Normally 1% to 2%.
CRA, the Capital Risk Amount
CRA = CAP x CRP
Capital Risk Amount = Capital x Capital Risk Percentage
PP = the Purchase Price
SLP = Stop Loss Price
MLPS = Maximum Loss Per share
MLPS = PP – SLP
Maximum Loss Per Share = Purchase Price – Stop Loss Price.
PC = Play Count, the maximum number of shares that you can buy to keep your total losses for this play within your Capital risk Amount, CRA.
PC = CRA / (PP – SLP) = CRA / MLPS
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