This is the second time I’ve read this book and both times I found it very thorough and packed with good information. I read this book the first time because I was interested in trading as a career. I read two more of Dr. Aziz’s books and made a decision to pursue an education in trading, and eventually trade as a supplement to another career. Living on the West Coast gives me the opportunity to trade when the market opens at 6:30 in the morning, and be finished before 9:30am, leaving the rest of the day for pursuing other projects. I believe I have the discipline to put in the necessary work to learn how to day trade profitably.
Day Trading has a long and dangerous learning curve. Statistically only 10%-15% of day traders make money on the year. This is for a number of reasons. People have a tendency to see day trading as a form of gambling. They don’t realize that trading is a serious business, and they fail to treat it as such. Profits don’t come from getting lucky or reading a couple of books. The come from practice, the right tools and software, and an ongoing education. Money is made in trading by practicing self-discipline and defensive money management. It usually takes at least 6 to 8 months before a new trader makes money trading, and there are several things you need to do before you get started. You must create a business plan for yourself. Which includes mapping out your education, which will include at least 3 months of trading in a simulator before ever trading with real money. You need to know how much start up cash you’re going to need. If you’re using a broker in the U.S. this means having at least 25k in your trading account, per regulations. If you want to start with less you can use a broker based outside of the U.S., but commission will be higher. You’re also going to need the right hardware, a high speed internet connection, a fast execution platform that supports hotkeys, scanning software for finding the right stocks to trade, and support from a community of traders. This last one could be in a chatroom, or a training course, either of which cost money. All of these costs need to be figured out beforehand, and skipping anything can lead to failure.
How it works: Traders are looking for stocks that are moving in a relatively predictable manner. They are going to be traded in one day and never held overnight. The kinds of trades that qualify to hold for longer than one day are not the same as the trades that day traders are looking for, which are volatile by nature. Trading is not investing. Trading is short term. The Author explains the difference between long and short which I won’t elaborate on, but I will note that shorting is riskier because there is no bottom like there is if trading long. A short can go the wrong way forever if you let it, but it can be very profitable. Short sellers are good for the market because they provide it with information. Good short sellers do a lot of research to find where companies are overvalued, and this balances out the market.
The difference between Retail Traders and Institutional Traders is that Retail Traders work for themselves with small accounts and take relatively small positions. Institutional Traders work for a firm or manage other peoples money and take huge positions. Retail Traders can enter and exit quickly with smaller positions, and the more retail traders are trading a stock with a particular strategy, the better it will work. Day Traders are actually working together to compete against the big Institutional and high frequency traders.
The HFT programs out there should definitely be respected, but not feared. The algorithms are not always right, and a good trader will find the opportunities in the market.
When the overall market is moving one way, most stocks are obviously going to be moving the same way. But there are always going to be a few stocks that buck the trend because they have some sort of catalyst. These are the Stocks in Play that day traders need to identify. Stocks that are running because they have a fundamental reason to move and are not just going with the crowd. These Stocks in Play usually have fresh, unexpected news like earnings warnings, earnings surprises, FDA approvals or disapprovals, mergers, alliances or partnerships, major contract wins or losses, restructurings, layoffs, management changes, stock splits, buybacks, or debt offerings. All different kinds of traders are going to be watching for these things, and it’s important to be where the day traders are and not get stuck on the wrong side of a trade against institutional traders.
Dr. Aziz explains that there are three essential components or trading. Sound Psychology, a series of logical trading strategies, and an effective risk management strategy.
A good trading strategy has positive expectancy, which means it will generate more profits than losses over a period of time. Failure to manage losses is a common reason many traders fail. A good trader will have a set of rules that they never break when executing a trade, they have a line in the sand and can lose gracefully and walk away. Holding onto a trade that is going against you in the hopes that it will go back your way is bad trading. Many traders get stuck on wanting to be right, forgetting that their job is not to be right, it’s to make money. To make money you must manage risk. That means finding low risk entries with high potential reward before ever entering a trade. Having a minimum risk to reward ratio of 2:1 is mandatory. Risking more than you’re expecting to make is bad risk management. In order to achieve good risk management you must determine your stop loss to be at a reasonable technical level, not some arbitrary number. Which means that there will be many times you miss an opportunity to enter a trade because your stop loss level will be too far from you entry and you have to let it go. Identifying set-ups is difficult and takes experience and training, and there are several criteria for determining whether a set-up is good for a trade. There are questions you need to ask. Am I trading the right stock? Is this stock being heavily traded by computers or institutional traders? Is there enough trading volume to get in and out quickly? Is there a reason this stock is moving? What size should I take?
The amount of shares traded at one time should reflect your account size. The maximum dollar amount should never equal more than 2% of your account size. A 30k account means that risking $600 on any one trade is the limit. Even if the risk/reward is highly favorable, if risking more than 2% of your account, you’re trading too many shares. A 3 step risk management system is used by the Author. 1. Determine the max dollar risk for the trade you’re planning. Calculate this before your day starts. 2. Estimate your maximum risk per share, the strategy stop loss in dollars from your entry. 3. Divide step 1 by step 2 to find the max shares you are allowed to trade. Ex. $400 risk/40 cents a share risk= 1000 shares. This is going to be very hard to do quickly. But with time and practice it will become automatic. This formula helps you find the maximum amount of shares you can trade, but that doesn’t mean you have to take a position that size. You can always trade less.
Having sound trading psychology is explained in terms of how a trader takes his or her losses. Traders succeed or fail based on how they deal with them. Taking losses personally will ruin a trader. Losses are part of the game and everyone has them. Successful traders trade for the skill more than the money. They take every positive or negative trade as an opportunity to learn and they are always working to get better. In a constantly evolving market, a trader must always stay vigilant in figuring out what’s working and what isn’t. Most successful traders understand that their trading psychology is linked to lifestyle, and that physical and mental well being will affect performance in executing trades. Keeping track of both physical and trading results is important.
It’s very challenging to predict what the market is going to do, you can’t know with absolute certainty what’s going to happen. But there are some things you must know and some questions you have to ask yourself before you enter a trade, and you have to know what you will do in any given situation. Like if this trade goes wrong, where is my stop? What strategy does this fit into? What is my risk/reward ratio? Equally important is keeping a detailed journal of trades to review at the end of the day and at the end of the week. You need to see if you’re trading profitably, if you’re on a winning or losing streak, and what factors might be contributing to your struggles or success. Something to remember is that a good trade doesn’t always mean that it was one that made money. A trade was successful if you were disciplined, traded sound strategies, and did not break any rules.
Next we get into how to find what stocks are in play. This is the first thing any day trader does before the market opens, and there should only be a few that make the shortlist to watch pre-open. Certain stocks may have some of the criteria you need, but without checking all the boxes you need to qualify as a good trade. A stock may be moving $5 intraday, but never provide a good risk/reward opportunity. A good stock to trade offers an excellent risk/reward setup, and moves in a predictable and catchable way. This could be a stock with fresh news and is up or down more than 2% before the market opens, has an unusual amount of pre-market activity, and develops important intraday levels that can be used to trade off of. These stocks need to be both trading in high volume, and be trading higher than their average daily volume. But the most important characteristic of these high relative volume stocks is that they’re trading independent of what their sector and the overall market is doing.
The next thing to do is look at float and market cap. Float is the number of shares available for trading. A stock is considered low float if it has under 10 million shares available to trade, and is usually priced under $10. These stocks can be very volatile and move very fast. These are companies that for the most part are not profitable, but hope to grow and issue more shares to raise money from the public market. These micro cap stocks are very difficult to trade because they’re so volatile and beginner traders should probably stay away from them. Medium float stocks fall in the range of 10-50 million shares and are priced from $10-$100. Anything over 500 million share is considered mega-cap and should only be traded if there is a major catalyst.
There are two ways stocks in play are found, and they both involve scanning the market for conditions that make for good trading opportunities. In the pre-market, your scanners are looking for specific criteria that mean a stock has the potential to set up for a good trade.The trader programs the scanner to find stocks that have gapped up or down at least 2% in the pre-market, have daily average volume of over 500k shares, and have an average true range of at least 50 cents, which means that it moves up and down at least 50 cents intraday. Stocks that meet these criteria are the mornings watchlist, and need further investigating to determine if there is a fundamental catalyst driving their movement. These are the stocks that get shortlisted and monitored for a good set-up.Of those being monitored, the author stays away from stocks with short interest above 30%. A large amount of shorts that have not yet been covered are susceptible to an unpredictable short squeeze.
The second way traders find stocks is using intraday scanners. These scanners look for a similar set of criteria to build a list, and different strategies are employed for these set-ups. A real-time volume radar is a scanner used for finding stocks that have (1) Gapped up or down at least $1. (2) An average true range of more than 50 cents. (3)average relative volume of at least 1.5times the normal volume, and (4) average daily trading volume of 500k shares. It’s important to check the sectors of stocks that fit this criteria. If several stocks in the same sector come up in this scan it could mean that the entire sector is moving one way. A real-time Bull Flag Momentum scanner looks for low float stocks that momentum strategies work well for. In addition to float, this scanner is searching for high relative volume and high activity. A real-time reversal scanner looks for top and bottom reversals that cannot be found in pre-market. The next chapter explores tools and platforms. Your Broker irresponsible for executing your orders, and there are many to choose from.All offer different commission structure and have different allowances for margin.
Most fall in between 3 to 6 times leverage. Leverage allows you to take larger positions but exposes you to more risk. It is important to choose a good platform to use, one that has fast execution, supports hotkeys, and provides real time market data. Buying market data is also an option, but having it is a must. Level 2 data is a leading indicator that tells you what kind of traders are trading a particular stock, what the price action is, and which direction a stock is likely to go. All other indicators on your chart are lagging indicators, and are used as technical levels for entry, exit, and profit taking. The author lists his own technical indicators that include simple moving averages, EMA’s, VWAP, volume, and the previous day close. He feels that anything more than that just adds clutter to a chart and can create confusion, which I agree with.
We then get into the different types of orders, which I won’t elaborate on, except to say that marketable limit orders are the only ones to use day trading. They tell the platform to buy now up to a certain price, or sell now down to a certain price, which allows trades to happen quickly. A limit order is subject to missing an entry or an exit if the price is moving quickly.
Next we look at candlesticks, price action and mass psychology. There are three camps watching a stock at any given time. The buyers, the sellers, and the undecided. Those undecided players are really what put pressure on the buyers and sellers to trade with each other. The candlesticks indicate buying or selling pressure, and the goal of the day trader is to determine the balance of power. Certain indecision candles can indicate a change in power from buying to selling or vice versa.
The next chapter is all about strategies. Seven of the most important day trading strategies are explained in detail, along with a recap of the criteria that makes the stocks good ones for each strategy. I’m not going to go over them all because this is already way too long, but there are a few very important things to remember. Your trade must be planned before you execute. Figuring it out as you go will not work. Plan a trade and then trade it. Also, you cannot change strategy in the middle of a trade. If the strategy doesn’t work, get out and start over. Chasing a losing trade will blow up your account. You only have to master a few solid setups to be profitable, so don’t get overwhelmed by too many strategies or technical indicators. A consistent routine and action plan is more important than knowing a hundred different strategies. Every day new traders should follow the same morning routine to prepare for the day. A good breakfast and a run are what the author does. Then develop a watchlist, organize a trade plan, initiate the trade according to plan, execute the trade according to plan, then journal and reflect every time. This last part will help to keep the emotion out, which has no place in trading.
Dr. Aziz lists seven essentials for day trading. They are education and simulated trading, preparation, determination and hard work, patience, discipline, mentorship and a community of traders, reflection and review. If a new trader cannot master these elements, and be prepared to spend 8-12 months working before becoming consistently profitable, it is probably not the right career. Professionals spend years in school to work in finance and trade the markets. Day traders must take their education seriously if they want to do more than throw their money away.
