My Notes: How to Day Trade for a Living by Andrew Aziz


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My Notes:

  • Rule 1: Day trading is not a strategy to get rich quickly.


  • Rule 2: Day trading is not easy. It is a serious business, and you should treat it as such.

  • You can succeed in day trading only if you handle it as a serious intellectual pursuit. Emotional trading is the number one reason traders fail.

  • Good traders watch their capital as carefully as professional scuba divers watch their supply of air.

  • A compelling question to begin with is: What do you look for as a day trader? The answer is simple. First, you’re looking for stocks that are moving in a relatively predictable manner. Secondly, you are going to trade them in one day.

  • Swing trading is a form of trading in which you hold stocks over a period of time, generally from one day to a few weeks.

  • Do you remember Rule 2, where I mentioned that day trading is a business? Swing trading is also a business, but a completely different kind of business.

  • Day traders always close their positions before the market closes.

  • Swing traders usually look for stocks in solid companies that they know won’t lose their entire value overnight. For day trading, however, you can trade anything, including companies that will soon go bankrupt, because you don’t care what happens after the market closes.

  • Rule 3: Day traders do not hold positions overnight. If necessary, you must sell with a loss to make sure you do not hold onto any stock overnight.

  • Fear is a more powerful feeling than greed.

  • Individual traders, like you and I, are called retail traders.

  • On the other hand, there are Wall Street investment banks, mutual funds and hedge funds, the so-called institutional traders, and most of their trading is based on sophisticated computer algorithms and high frequency trading.

  • The Achilles’ heel of most institutional traders is that they must trade, while individual traders are free to trade or to stay out of the market as they deem best.

  • Unfortunately, however, the majority of retail traders fritter away this fantastic advantage by over-trading. An individual who wants to succeed against the giants must develop patience and eliminate greed.

  • The ultimate problem of losers is not their account size but their lack of self-discipline, over-trading, and their bad money management.

  • In guerrilla trading, as the term suggests, you are in hiding, waiting for an opportunity to move in and out of the financial jungle in a short period of time to generate quick profits while keeping your risk to a minimum.

  • As a retail day trader, you profit from volatility in the market.

  • It is extremely important to stay away from stocks that are being heavily traded by institutional traders.

  • So, if the market is moving up, the majority of stocks will be moving up. If the overall market is going down, the prices of the majority of stocks will also go down.

  • But, remember, there will be a handful of stocks that will buck the trend of the market because they have a catalyst. I call these stocks Alpha Predators. I will explain them in Chapter 4 and describe how to find them. This is what retail traders are looking for -that small handful of stocks that are going to be running when the markets are tanking, or tanking when the markets are running.

  • Earnings reports Earnings warnings/ pre-announcements Earnings surprises FDA approval/ disapproval Mergers/ acquisitions Alliances/ partnerships/ major product releases Major contract wins/ losses Restructuring/ layoffs/ management changes Stock splits/ buybacks/ debt offerings

  • Rule 4: Always ask, “Is this stock moving because the overall market is moving, or is it moving because it has a unique catalyst?”

  • But how do you stay out of their way? Instead of trying to find institutional traders, you find out where the retail traders are hanging out on that day and then you trade with them.

  • Focus where everyone else is focused: focus on the stock that is moving every single day and receiving literally a ton of action. That is what day traders will be looking at.

  • One is by watching day trading stock scanners.

  • The stocks that are gapping significantly up or down are going to be the stocks that retail traders are watching.

  • Secondly, it's good to be in touch with social media and a community of traders. StockTwits and Twitter are usually good places to learn what is trending.

  • If you follow a handful of traders, then you'll be able to see for yourself what everyone is talking about. There is a huge advantage to being in a community of traders, such as a chat room, and there are many chatrooms on the Internet.

  • From when the market opens at 9: 30 a.m. until around 11: 30 a.m. New York time, is when the market will have the most trading volume and also the most volatility. This is the best time to trade and to especially focus on momentum trading

  • The advantage of having all of that volume is that it provides liquidity. This means there are plenty of buyers and plenty of sellers, which in turn means that you can easily get in and out of trades.

  • Around mid-day, you can have good trading patterns but you won't have the volume. This means a lack of liquidity, which makes it harder to get in and out of stocks.

  • I avoid pre-market trading because there’s a very low liquidity as there are very few traders trading.

  • Once you have some money in your pocket, you should hold on to it.

  • To be a successful day trader, you need to master three essential components of trading: sound psychology, a series of logical trading strategies, and an effective risk management plan.

  • The inability to manage losses is the number one reason that new traders fail in day trading.

  • To be a successful trader, you must learn risk management rules and then firmly implement them.

  • You must have a line in the sand that tells you when to get out of the trade. It’s going to be necessary from time to time to admit defeat

  • You must follow the rules and plans of your strategy, and this is one of the challenges you will face when you are in a bad trade.

  • Take the quick losses, get out, and come back when the timing is better.

  • Rule 5: Success in day trading comes from risk management -finding low-risk entries with a high potential reward. The minimum win:lose ratio for me is 2: 1.

  • That means you might be risking $ 100, but you have the potential to make $ 300. You would call that a 3 to 1 profit-to-loss ratio. On the other hand, if you get into a setup where you're risking $ 100 to make $ 10, you have a less than 1 risk-reward ratio, and that's going to be a trade that you should not take.

  • Good traders will not take trades with profit-to-loss ratios of less than 2 to 1. It means if you buy $ 1,000 worth of stock, and are risking $ 100 on it, you must sell it for at least $ 1,200 so you will make at least $ 200. Of course, if the price comes down to $ 900, you must accept the loss and exit the trade with only $ 900 ($ 100 loss).

  • If you cannot find a setup with a good profit-to-loss ratio, then you should move on and keep looking for another trade. As a trader, you are always looking for opportunities to get low risk entries with big win potential.

  • Using a 2 to 1 win:lose ratio, I can be wrong 40% of the time and still make money.

  • Again, your job as a day trader is managing risk, it is not buying and selling stocks.

  • Your job is to manage your risk and account.

  • You must avoid stocks that (1) are heavily traded by computers and institutional traders, (2) have small relative trading volume, (3) are penny stocks that are highly manipulated, and (4) don’t have any reason to move (no fundamental catalysts). I will explain these in more detail in Chapter 4. Do remember that risk management starts from choosing the right type of stock to trade.

  • What share size should I take?

  • I am holding around $ 25,000 in my trading account and I usually choose 800 shares to trade. My daily goal is $ 500 or $ 120,000/ year. That is sufficient for my lifestyle. What is your trading goal?

  • What is my stop loss?

  • The absolute maximum a trader should risk on any trade is 2% of his or her account equity.

  • You can risk less, but you should never risk more. You must avoid risking more than 2% on a trade.

  • Three-Step Risk Management

  • Step 1: Determine your maximum dollar risk for the trade you’re planning (never more than 2% of your account). Calculate this before your trading day starts.

  • Step 2: Estimate your maximum risk per share, the strategy stop loss, in dollars, from your entry. This comes from the strategies set out in Chapter 7, where I explain in each strategy what the stop loss should be.

  • Step 3: Divide “1” by “2” to find the absolute maximum number of shares you are allowed to trade each time. For example, if you have a $ 40,000 account, the 2% rule will limit your risk on any trade to $ 800. Let’s assume you want to be conservative and risk only 1% of that account, or $ 400. That will be Step 1. Suppose you look at the stock of BlackBerry (ticker: BBRY) for ABCD Pattern Strategy (Chapter 7). You buy the stock at $ 16 and want to sell it at $ 19, with a stop loss at $ 14.50. You’ll be risking $ 1.50 per share. That will be the Step 2 of risk control.

  • For Step 3, calculate your share size by dividing “Step 1” by “Step 2”

  • to find the maximum size you may trade. In this example, you will be allowed to buy only 266 shares (or rounded to 250 shares).

  • With the strategies introduced in Chapter 7, I explain where my stop loss would be based on technical analysis and my trade plan. I cannot consider maximum loss for your account because I of course don’t know your account size. You need to make that judgment for yourself. For example, when your stop would be above of a moving average, you need to calculate and see if that stop would be bigger than your maximum account size or not. If break of moving average will yield a $ 600 loss, and you have set a $ 400 maximum loss per trade, then you should either take fewer shares in that trade or not take that trade at all and wait for another opportunity.

  • Trading Psychology and Risk Management

  • Day trading requires you to make quick decisions and at the same time to be very disciplined. But the breakthrough came when I realized that the key to winning was controlling myself and practicing self-discipline.

  • You must ask yourself questions: Does this fit into my trading strategy? What strategy will this fit into? If this trade goes the wrong way, where is my stop? How much money am I risking in the trade, and what is the reward potential?

  • Are you focused? Are you calm? Are you making good decisions?

  • Are you trading profitably? Have you had five winners in a row or have you had five losses in a row? If you are on a losing streak, will you be in touch with your own emotions and maintain your composure, or will you let your judgment?

  • Consider skill and discipline to be your trading muscles.

  • But remember, discipline is something you will need to constantly work at to be a successful trader.

  • You’ve entered a profession in which you will always be learning. That’s great. In fact, it’s better than great -it’s stimulating.

  • But it's important to remember that if you start to get over-confident and think you’ve outsmarted the market on trading wisdom, or that you don’t need to learn any more, you’ll often get a quick reminder from that market. You’ll lose money and you will see that the market is correcting you.

  • I will reiterate: being able to make quick decisions and being able to make and then follow your trading rules are critical for success in the market.

  • All day long, you are managing risk. Related to this is the ability to manage risk so that you will make good decisions -even in the heat of the moment.

  • Rule 6: Your broker will buy and sell stocks for you. Your only job as a day trader is to manage risk. You cannot be a successful day trader without excellent risk management skills, even if you are the master of many effective strategies.

  • The absolute maximum traders may risk on any trade is 2% of their account equity. For example, if you have a $ 30,000 account, you may not risk more than $ 600 per trade, and if you have a $ 10,000 account, you may not risk more than $ 200. If your account is small, limit yourself to trading fewer shares. If you see an attractive trade, but a logical stop would have to be placed where more than 2% of your equity would be at risk, pass on that trade and look for another trade. You may risk less, but you may never risk more. You must avoid risking more than 2% on a trade.

  • If trading volume is not higher than normal, it means that the trading is being dominated by institutional traders and high frequency trading computers. Stay away from it.

  • Retail traders should stay away from stocks that are trading normally.

  • The most important characteristics of high relative volume stocks is that these stocks trade independent of what their sector and overall market are doing.

  • The behavior of stocks that have high relative volume is independent of the overall market. Every day, only a handful of stocks are being traded independently of their sector and the overall market. Day traders trade only those stocks. I call those stocks “Alpha Predators”.

  • In day trading, Alpha Predator stocks are the ones that are independent of both the overall market and their sector. The market cannot control them.

  • Rule 7: Retail traders trade only Alpha Predators, high relative volume stocks that have fundamental catalysts and are being traded regardless of the overall market.

  • Earnings reports Earnings warnings/ pre-announcements Earnings surprises FDA approval/ disapproval Mergers/ acquisitions Alliances/ partnerships/ major product releases Major contract wins/ losses Restructuring/ layoffs/ management changes Stock splits/ buybacks/ debt offerings

  • Float means the number of shares available for trading.

  • Day traders look for volatility.

  • Low float stocks can be volatile and move very fast. Most of the low float stocks are under $ 10 because they are early stage companies which for the most part are not profitable. They hope to grow, and by growing further, they issue more shares and raise more money from the public market and slowly become mega cap stocks. These low float stocks are called small cap or micro-cap stocks. Day traders love low float stocks.

  • Low float stocks under $ 10 are often highly manipulated and difficult to trade, and therefore only very experienced and highly equipped retail traders should trade these stocks.

  • When it comes to low float stocks, the Bull Flag Momentum Strategy which I detail in Chapter 7—works best. The other strategies in this book are not suitable for low float sub-$ 10 stocks.

  • The second category is medium float stocks in the range of $ 10-$ 100. These stocks have medium floats of around 5 million to 500 million shares. Most of my strategies explained in this book work well on these stocks, especially the VWAP and Support or Resistance Strategies. Medium float stocks that are more expensive than $ 100 are not popular among retail day traders and I myself avoid them. You usually cannot buy many shares of them because of their high price. Therefore, it is basically useless to day trade them. Leave them for the institutional traders.

  • The table below summarizes these categories: Float Price Range My Favorite Strategy (Chapter 7) Low float (less than 5 million) Under $ 10 Only Momentum (Long) Medium float (5-500 million) $ 10-$ 100 All, mostly VWAP and Support or Resistance Large floats (+ 500 million) Any (usually + $ 20) All, mostly Moving Average and Reversal

  • Trades can be found in two ways: pre-market morning watch list real time intraday scans

  • I use my scanner every morning and program it to find stocks suitable for my day trading based on the following criteria: Stocks that in the pre-market gapped up or down at least $ 1 Stocks that have traded at least 50,000 shares in the pre-market Stocks that have an average daily volume of over 1 million shares Stocks that have Average True Range of over 50 cents There is a fundamental catalyst for the stock

  • When there are some fundamental catalysts, there will be unusual pre-market activity. Stocks gap up or down before the market opens with a significant number of shares being traded (such as 50,000 shares). I look for highly traded stocks, so that buying and selling 1,000 shares won’t be a problem. That is why I am looking at stocks with an average daily volume of over 1 million shares. I also am looking for stocks that usually move in a good range for trading. That is why I look at Average True Range (ATR). ATR means how large of a range a stock has on average every day. If ATR is $ 1, then you can expect the stock to move around $ 1 daily. That is a good number. If you have 1,000 shares, you may profit $ 1,000 from the trade. But if ATR is only 10 cents, then the trading range is not attractive for me.

  • As you can see, I have highlighted the Gap% and Float columns on my watch list. From over 4,000 stocks, I now have only nine candidates. I will go over each of them before the market opens at 9: 30 a.m. I will check the news on each of them to learn why they gapped up or down. Is there a fundamental catalyst for that stock? Has there been any news coverage or extreme events for the company? From these nine, I usually select three or four stocks to watch closely. You cannot watch nine stocks, and regardless, there are usually no more than two or three good candidates. I watch them closely on my screen, looking for potential setups. I plan my trades before the market opens and then wait for the market bell. I then trade my plan.

  • My intraday Volume Radar scanner looking for real time Alpha Predators. Have gapped up or down at least $ 1 Have ATR of more than 50 cents Have average relative volume of at least 1.5 Have average daily trading volume of at least 500,000 shares

  • These are my requirements for an Alpha Predator. Having ATR of more than 50 cents is important because you want stock to move during the day so you can make profit out of its volatility. There is no point in trading a stock that is moving only 5 cents on average in a day.

  • For example, when oil stocks are selling off, almost all of the oil companies sell off. Therefore, it is important to recognize your real Alpha Predators from the herd.

  • This strategy involves taking only the best setups and waiting on the sidelines until I see something worth trading.

  • Day trading can be a boring profession –most of the time you are just sitting and watching your list. In fact, if day trading is not boring for you, then you are probably over-trading.

  • Remember, your goal is to trade well, not to trade often.

  • Rule 8: Experienced traders are like guerrilla soldiers. They jump out at just the right time, take their profit, and get out.

  • Profitable traders usually make only two or three trades each day. They then cash out and enjoy the rest of their day.

  • IB (www.interactivebrokers.com).

  • What Broker to Use?

  • If you are in the USA, you will probably need a minimum of $ 25,000 for day trading. You can read further about the “Pattern Day Trade” regulation online.
  •  
  • Fast trade execution is the key for day trader success.

  • If your broker doesn't use a software or platform that has hotkeys, you're not going to get in and out of trades fast enough.

  • I use DAS Trader (www.dastrader.com) as my trading platform. DAS systems provide one of the most efficient execution solutions for online brokers, institutional trading desks and traders worldwide that demand smarter execution services.

  • I use Trade Ideas software (www.trade-ideas.com) for scanning the market and finding good trades.

  • If you are interested in watching me or talking to me, check out our private chatroom at www.Vancouver-Traders.com

  • Never forget that successful traders are independent thinkers.

  • In order to create a candlestick chart, you must have a data set that contains (1) open price, (2) highest price in the chosen time frame, (3) lowest price in that period, and (4) closing price values for each time period you want to display. The time frame can be daily, 1-hour, 5-minute, 1-minute or any other period you prefer.

  • Price and the bottom of the body representing the closing price.

  • Rule 9: Hollow candlesticks, where the close is greater than the open, indicate buying pressure. Filled candlesticks, where the close is less than the open, indicate selling pressure.

  • Traders can be divided into three groups: buyers, sellers, and the undecided. Buyers want to pay as little as possible and sellers want to charge as much as possible.

  • Their permanent conflict is reflected in bid-ask spreads. “Ask” is what a seller asks for merchandise.

  • Bid” is what a buyer offers for that merchandise. Prices are created by masses of traders—buyers, sellers, and undecided people.

  • The goal of a successful day trader is to discover the balance of power between buyers and sellers and bet on the winning group.

  • Fortunately, candlestick charts reflect this fight in action. A successful day trader is a social psychologist armed with a computer and charting software. Day trading is the study of mass psychology.

  • The presence of undecided traders puts pressure on bulls and bears. Buyers and sellers move the prices fast because they know that they’re surrounded by a crowd of undecided traders who could step in and snatch away their deal at any moment. Buyers know that if they think too long, another trader can step in and buy ahead of them. Sellers know that if they try to hold out for a higher price, another trader might step in and sell at a lower price. The crowd of undecided traders makes buyers and sellers more willing to deal with their opponents.

  • Candles are always born neutral. After birth, they can grow to become either bearish, bullish or, on rare occasions, neither. When a candle is born, traders do not know what it will become. They may speculate but they do not truly know what a candle is until it dies (closes).

  • That little candle is an excellent indicator that tells you who is currently winning the battle, the bulls (buyers) or the bears (sellers).

  • Red candles that have this big red body mean the open was at a high and the close was at a low. This is a good indicator of a bearishness in the market.

  • This is called “price action”. Understanding who is in control of the price is an extremely important skill in day trading.

  • A major goal of a serious day trader is to discover the balance of power between bulls and bears and to bet on the winning group.

  • If bulls are much stronger, you should buy and hold. If bears are much stronger, you should sell and sell short. If both camps are about equal in strength, wise traders stand aside.

  • I will introduce some of my strategies, based on three elements: (1) price action, (2) technical indicators, and (3) chart patterns.

  • As a day trader, you shouldn’t care about companies and their earnings. Day traders are not concerned about what companies do or what they make. Your attention should only be on price action, technical indicators and chart patterns.

  • I do hunt for a fundamental catalyst, a reason why a stock is running up. If I have a stock that's running up 80%, I want to know what the catalyst is, and I don’t stop until I find out.

  • Every trader needs their own strategy and edge.

  • These trading strategies give signals relatively infrequently and allow you to enter the markets during the quiet times, just like the professionals do.

  • Another point to remember is that in the market right now, over 60% of the volume is algorithmic high frequency trading.

  • My preference is 5-minute charts because I believe a 1-minute chart is too noisy and at times you can be misled by normal price movement in a 1-minute interval.

  • My trade size depends on the price of the stock and on my account and risk management rule (Chapter 3), but 800 shares is my usual size. I buy 800 shares all at once. I sell 400 shares in the first target, bringing my stop loss to break-even (entry point). I sell another 200 shares in the next target point. I usually keep the last 200 shares until I am stopped out. I always retain some shares in case the prices keep moving in my favor.

  • ABCD Pattern The ABCD Pattern is the most basic and the easiest pattern to trade, and it is an excellent choice for beginner and intermediate traders. Although it is simple and has been known for a long time, it still works very effectively because many traders are still trading it. As mentioned earlier, it has a self-fulfilling prophecy effect. You should do whatever all of the other traders are doing because a trend is your friend. A trend may very well be your only friend. Let’s take a look at this pattern: Example of an ABCD Pattern.

  • You must never enter a trade without knowing your stop.

  • At point B, traders who bought the stock earlier start slowly selling it for profit and the prices come down. Still you should not enter the trade because you don’t know where the bottom of this pull back will be. However, if you see that the price does not come down from a certain level, such as point C, it means that the stock has found a potential support. Therefore, you can plan your trade and set up stops and a profit taking point.

  • To summarize my trading strategy for the ABCD Pattern: When I observe with my scanner or I’m advised by someone in our chatroom that a stock is surging up from point A and reaching a big new high for the day (point B), I wait to see if the price makes a support higher than point A. I call this point C. I do not jump into the trade right away. I watch the stock during its consolidation period. I choose my share size and stop and exit strategy. When I see that the price is holding support at level C, I enter the trade close to the price of point C in anticipation of moving forward to point D or higher. My stop is the loss of point C. If the price goes lower than point C, I sell and accept the loss. Therefore, it is important to buy the stock close to point C to minimize the loss. Some traders wait and buy only at point D to make sure that the ABCD Pattern is really working. In my opinion that is reducing your reward and increasing your risk. If the price moves higher, I sell half of my position at point D, and bring my stop higher to my entry point (break-even). I sell the remaining position as soon as my target hits or I feel that the price is losing steam or that the sellers are acquiring control of the price action.

  • Bull Flag Momentum In day trading, Bull Flag is a momentum fast execution strategy that usually works great on low float stocks (Chapter 4). I believe Bull Flag is a scalping strategy because these flags won’t last long and you must scalp the trade -get in quickly, take your profit, and then get out. Example of Bull Flag formation with one consolidation period.

  • This pattern is named Bull Flag because it resembles a flag on a pole. In Bull Flag, you have several large candles going up (like a pole), and you also have a series of small candles moving sideways (like a flag), or, as we day traders say, “consolidating”. Consolidation means that the traders who bought stocks at a lower price are now selling and taking their profits. Although that is happening, the price does not decrease sharply because buyers are still entering into trades and the sellers are not yet in control of the price. Many traders will miss purchasing the stock before the Bull Flag starts. It is risky to buy stock when the price is increasing. That’s called “chasing the stock”. Professional traders aim to enter the trade during quiet times and take their profits during wild times. That, of course, is the total opposite of how amateurs trade. They jump in or out when stocks begin to run, but grow bored and lose interest when the prices are, shall I say, sleepy.

  • Chasing the stocks is an account killer for beginners. You must wait until the stock finds its high point, and then wait for the consolidation. As soon as the price breaks up in the consolidation area, you can begin purchasing stocks.

  • Usually a Bull Flag will show several consolidation periods. I enter in only the first and second consolidation periods. Third and higher consolidation periods are risky because the price has probably been very extended in a way that indicates that the buyers will soon be losing their control.

  • Example of Bull Flag formation with two consolidation periods on RIGL. This is an example of two Bull Flag Patterns. It is normally hard to catch the first Bull Flag, and you will probably miss it, but your scanner should alert you to it. Let’s look at an example from my scanner in this time period:

  • Example of my intraday Bull Flag Strategy. As you can see, my scanner showed RIGL at 12: 36: 15 pm. As soon as I saw that, I realized that there was also a very high relative volume of trading, which made this a perfect setup for day trading. I waited for the first consolidation period to finish and, as soon as the stock started to move towards its high for the day, I jumped into the trade. My stop loss would be the breakdown of the consolidation period. I marked my exit and entry in the picture below. As you can see, if you had wanted to wait for a second consolidation period in hope of the third Bull Flag, you would probably have been stopped out. That is why I usually enter the first and second Bull Flags, but not the third one.

  • Entry, stop and exit of a Bull Flag Strategy on RIGL. To summarize my trading strategy: When I see a stock surging up (either on my scanner or when advised by someone in our chatroom), I patiently wait until the consolidation period. I do not jump into the trade right away (you will recall that is the dangerous act of “chasing”). I watch the stock during the consolidation period. I choose my share size and stop and exit strategy. As soon as prices are moving over the high of the consolidation candlesticks, I enter the trade. My stop loss is the break below the consolidation periods. I sell half of my position and take a profit on the way up. I bring my stop loss from the low of the consolidation to my entry price (break-even). I sell my remaining positions as soon as my target hits or I feel that the price is losing steam and the sellers are gaining control of the price action.

  • Momentum Scalping Strategy.

  • Scalpers buy when a stock is running. They rarely like to buy during consolidation (during that waiting and holding phase).

  • Waiting for the stocks to break the top of a consolidation area is a way of reducing your risk and exposure time.

  • Get in, scalp, and get out quickly. That’s the philosophy of momentum scalpers: Get in at the breakout Take your profit Get out of the way.

  • Top and Bottom Reversals are among the easiest trading strategies. Day traders love using them because they have a very defined entry and exit point and a very high profit-to-loss ratio.

  • Don’t chase the trade if it is too extended.

  • When a stock starts to sell off significantly, there are two reasons behind it: Institutional traders and hedge funds have started selling their large position to the public market and the stock price is tanking. Retail traders have started short selling the stock but they will have to cover their shorts sooner or later. That is where you wait for an entry. When short sellers are trying to cover their shorts, the stock will reverse.

  • What goes up, must come down.

  • Example of a Reversal Strategy on EBS. Each Reversal Strategy has four important elements: At least 5 candlesticks (5 min) moving upward or downward. The stock is trading close to or outside of the Bollinger Bands. Bollinger Bands are an indicator of volatility, and stocks usually stay inside of these bands. The stock will have an extreme RSI indicator (Relative Strength Index). An RSI above 90 or below 10 will pique my interest. If you are not familiar with what an RSI indicator is, you can do a Google search or ask me in our chatroom. Your trading platform will probably have an RSI indicator built into it.

  • When the trend is going to end, usually indecision candles, such as a spinning top or Doji, form. That is when we need to be ready.

  • In reversal trading, you are looking for one of these indecision candlesticks -spinning tops or Dojis.

  • Top Reversal Strategy with an indecision Shooting Star candlestick formed as sign of entry.

  • When you’ve had a long run of consecutive candles making new lows, the first candle that makes the new high is very significant.

  • That’s my entry point.

  • The 5-minute chart is cleaner.

  • Usually, if a stock goes 30 cents against me, I will admit defeat, recognize that I mistimed my entry, and try again rather than continue to hold.

  • At times, especially on stocks that are more expensive or more volatile, I’ll simply use a 20-or 30-cent arbitrary stop if the low of the day is too far away.

  • If I get in and I hold for a few minutes and the price stays flat, I get out, no matter what happens after that.

  • I need to be in the right setup, and if it is not ready yet, I’m out.

  • You must realize that almost all of the big moves will eventually be corrected.

  • If stocks are dropping, you want to wait for the confirmation of the reversal.

  • Bottom Reversal Bottom Reversal Strategy with an indecision hammer candlestick formed as sign of entry.

  • You will probably miss the moment when the stock starts to sell off, and you won’t have the time to short the stock for profit, but you can always prepare for the reversal trade.

  • When you’re looking at reversals, you want to make sure that you only trade extremes.

  • I’ll say it again: the key to the success with top and bottom reversals is trading the extremes. How do I quantify these extremes? There are a few things I look for: An extreme RSI above 90 or below 10 will pique my interest. A candle outside of the Bollinger bands is also going to interest me. Finally, seeing five to ten consecutive candles ending with an indecision candle or a Doji is definitely going to catch my interest. These candles usually show that sellers are losing their control while buyers are becoming more powerful, and that indicates the end of a trend.

  • I will add a caveat to that final point: there will be times when you will have five to ten consecutive candles without much price action. They may be drifting down slowly, but not quickly enough for you to sense that it’s a good reversal. You must look for a combination of these indicators all occurring at the same time. Never sell short just because the prices are too high. You should never argue with the crowd’s decision, even if it doesn’t make sense to you. You do not have to run with the crowd -but you should not run against it.

  • Your profit-to-loss ratio is your average winners versus your average losers.

  • To summarize my trading strategy for the Bottom Reversal Strategy: I set up a scanner that show me stocks with four or more consecutive candlesticks going downward. When I see a stock hit my scanner, I quickly review the volume and level of resistance or support near the stock to see if it is a good trade or not. I wait for confirmation of a Reversal Strategy: (1) formation of a bearish Doji or indecision candle, (2) candlesticks being very close or outside of the Bollinger Bands, and (3) the RSI must be lower than 10. When I see the stock make a new 5-minute high, I buy the stock. My stop loss is the low of the previous red candlestick or the low of the day. My profit target is (1) the next level of support or (2) VWAP (Volume Weighted Average Price, described later in this chapter) or moving averages or (3) the stock makes a new 5-minute high, which means that the buyers are once again gaining control.

  • To summarize my trading strategy for the Top Reversal Strategy: I set up a scanner that shows me stocks with four or more consecutive candlesticks moving upward. When I see the stock hit my scanner, I quickly review the volume and level of resistance or support near the stock to see if it is a good trade or not. I wait for confirmation of a Reversal Strategy: (1) formation of a bearish Doji or indecision candle, (2) candlesticks being very close or outside of Bollinger Bands, and (3) the RSI must be higher than 90. When I see the stock make a new 5-minute low, I start short selling the stock. My stop will be the high of the previous candlestick or simply the high of the day. My profit target is (1) the next level of support or (2) VWAP or moving averages or (3) when the stock makes a new 5-minute

  • high, which means the buyers are once again gaining control.

  • There is no fundamental reason behind moving averages being a support or resistance line.

  • I use 9 and 20 exponential moving averages (EMA) and 50 and 200 simple moving averages (SMA).

  • Your charting software will haves most of the moving averages built in. They are ready to be used and there is no need to change the default setting in them.

  • To summarize my trading strategy for Moving Average Trend Trading: When I am monitoring a stock and notice a trend is respecting moving average, I consider trend trading. I quickly look at the previous days’ trading data to see if the stock is responding to these moving averages in a 1-minute or 5-minute chart. I have 9 and 20 EMA and 50 and 200 SMA. Once I learn which moving average is more suitable to the behavior of the trade, I buy the stock after confirmation of moving averages as a support, and I buy as close as possible to the moving average line (in order to have a small stop). My stop will usually be 5 cents below the break of moving average line. I ride the trend until the break of moving average. I never use trailing stops and I constantly monitor the trend with my eyes. If the stock is moving really high away from the moving average, I take some profit, usually at half-position. I do not always wait until the break of moving average for my exit.

  • I personally don’t trade very often based on moving averages.

  • Some trend trades can last as long as several hours and that is too long for my personality.

  • I recommend using either: 9, 20 EMA and 50 and 200 SMA or: 11, 21 EMA and 50 and 200 SMA

  • Having said that, Moving Average Trend Strategy is an excellent strategy for beginners, because it usually does not require a very fast decision making process and trade execution.

  • In addition, stop loss and entry points can be clearly recognized from the moving average on the charts.

  • There is nothing wrong with any strategy if it works for you.

  • VWAP Trading

  • Volume Weighted Average Price, or VWAP, is the most important technical indicator in day trading.

  • VWAP is a moving average that takes into account the volumes of the stock being traded.

  • VWAP is a good indicator of who is in control of the price action -buyers or sellers. When stock is traded above VWAP, it means that the buyers are in overall control of the price. When a stock price breaks below the VWAP, it is safe to assume that the sellers are gaining control over the price action.

  • Trading based on VWAP can be very easy for beginner traders because so many traders are studying the VWAP and making decisions based on it. Therefore, a beginner trader can easily be on the right side of the trade. When a stock tries to break the VWAP but cannot, you can short stock because you can safely assume that other traders that are watching will also begin to short. A trading strategy based on VWAP is a simple and easy strategy to follow.

  • I sold another position at $ 22 because I know half-dollars (such as $ 1.50, $ 2.50, $ 3.50) and whole dollars ($ 1, $ 2, $ 3) usually act at a support or resistance level.

  • To summarize my trading strategy for VWAP trading: When I make my watch list for the day, I monitor the price action around VWAP. If a stock shows respect toward VWAP, then I wait until a confirmation of the VWAP break or support. I usually buy as close as possible to minimize my risk. My stop will be a break and close 5-minute chart below VWAP. I keep the trade until I hit my profit target or until I reach a new support or resistance level. I usually sell half-positions near the profit target or support or resistance level and move my stop up to my entry point or break-even.

  • Horizontal support or resistance trading is my favorite style of trading. The market doesn’t know diagonals. It remembers price levels, which is why horizontal support or resistance lines make sense, but diagonal trend lines are subjective and open to self-deception.

  • I therefore avoid trend lines because, in my opinion, they are wildly subjective and result in wishful thinking and self-deception. In fact, trend lines are among the most deceptive of all tools. You can draw a trend line across the prices or zones in a way that can change its slope and its message. If you’re in a mood to buy, for example, you can draw your trend line somehow steeper.

  • Support is a price level where buying is strong enough to interrupt or reverse a downtrend. When a downtrend hits support, it bounces like a diver who hits the bottom of the ocean and then automatically pushes away from it. Support is represented on a chart by a horizontal line connecting two or more bottoms (see the figure below).

  • Resistance is a price level where selling is strong enough to interrupt or reverse an uptrend. When an uptrend hits resistance, it acts like a person who hits their head on a branch while climbing a tree -they stop and might even tumble down. Resistance is represented on a chart by a horizontal line connecting two or more tops.

  • Traders buy at support and sell at resistance, making their effectiveness a self-fulfilling prophecy.

  • I cannot see anything clear, I don’t have to draw anything. There is a good chance that other traders will also not see these lines clearly and therefore there is no point in forcing myself to draw support or resistance lines. In that case, I will plan my trades based on the VWAP or Moving Averages or chart patterns that I earlier discussed.

  • Here are some hints for drawing support or resistance lines: You will usually see indecision candles (Chapter 6) in the area of support or resistance because that is where buyers and sellers are closely fighting each other. Half-dollars and whole dollars usually act at a support or resistance level. If you don’t find a support or resistance line around these numbers on daily charts, remember that in intraday these numbers can act as an invisible support or resistance line.

  • You should always look at the recent data to draw lines. The more of a line that is touching price lines, the more that the line is a better support or resistance and has more value. Give that line more emphasis. Only the support or resistance lines in the current price range are important. If the price of the stock is currently $ 20, there is no point in finding support or resistance lines in the region when it was $ 40. It is unlikely that the stock will move and reach that area. Find only the support or resistance area that is close to your day trading range. Support or resistance lines are actually an “area” and not exact numbers. For example, when you find an area around $ 19.69 as a support line, you must expect price action movement around that number but not at exactly $ 19.69. Depending on the price of the stock, an area of 5 to 10 cents is safe to assume. In the example with a support line of $ 19.69, the real support area might be anything from $ 19.62 to $ 19.72. The price must have a clear bounce from that level. If you are not certain if the price has bounced in that level, then it is probably not a support or resistance level. For day trading, it is better to draw support or resistance lines across the extreme prices rather than across areas where the bulk of the bars stopped. This is the complete opposite of swing trading. For swing trading, you need to draw support or resistance lines across the edges of congestion areas where the bulk of the bars stopped rather than across the extreme prices.

  • To summarize my trading strategy for support or resistance trading: Each morning, when I make my watch list for the day, I quickly look at the daily charts for my watch list and find the area of support or resistance. I monitor the price action around those areas on a 5-minute chart. If an indecision candle forms around that area, that is the confirmation of the level and I enter the trade. I usually buy as close as possible to minimize my risk. Stop would be a break and a close 5-minute chart under support or resistance level. I will take profit near the next support or resistance level. I keep the trade open until I hit my profit target or I reach a new support or resistance level.

  • I usually sell half-positions near the profit target or support or resistance level and move my stop up to my entry point for break-even. If there are no next obvious support or resistance levels, I will consider closing my trade at or near half-dollar or round-dollar levels.

  • Rule 10: Indicators only indicate; they should not be allowed to dictate.

  • This is simply a matter of spending time in the chair. The more time you spend watching your charts, the more you will learn.

  • It is absolutely critical for every trader to be trading a strategy. Plan a trade, and trade the plan.

  • The psychological aspect of trading, which is truly what separates the winners from the losers.

  • Morning routine Develop watch list Organize a trade plan Initiate the trade according to plan Execute the trade according to plan Journaling and reflection

  • Rule 11: Profitable trading does not involve emotion. If you are an emotional trader, you will lose your money.

  • In day trading, simply being better than average is not sufficient.

  • You must be significantly above the crowd to win in day trading. Unfortunately, day trading often appeals to impulsive people, gamblers, and those who feel that the world owes them a living. You cannot be one of them, and you should not act like one of them. You need to start developing the discipline of a winner. Winners think, feel, and act differently than losers. You must look within yourself, discard your illusions, and change your old ways of being, thinking and acting. Change is hard, but if you want to be a successful trader, you must work on changing and developing your personality. To succeed, you will need motivation, knowledge, and discipline.

  • What is my plan if it sets up to the long side? What’s my plan if it sets up to the short side? What setup do I want to see? What are my profit targets? Where will my stop be? Is the profit window large enough for the trade to make sense?

  • Successful day trading is based on three important skills. You need to analyze the balance of power between buyers and sellers and bet on the winning group (Chapter 6). You need to practice excellent money and trade management (Chapter 3). And you need sufficient self-discipline to follow your trading plan, to avoid getting overexcited or depressed in the markets, and to resist the temptation to make emotional decisions.

  • Day trading requires a certain mindset, as well as a discipline and a set of skills that not everyone possesses.

  • Day trading is a science, a skill, and a career, and has nothing to do with gambling. It is the serious business of selling and buying stocks, sometimes in a matter of seconds. You should be able to make decisions fast, with no emotion or hesitation. Doing otherwise results in losing real money.

  • You need to make decisions real time.

  • VWAP, Support or Resistance, and Reversal Strategies are the easiest.
  • Keep your strategy simple.

  • When you have a solid strategy that you’ve mastered, make sure there is no emotion attached to it.

  • you should not follow the pack but should be an independent thinker.

  • Never forget that successful traders are independent thinkers.

  • If you’re ever interested in connecting with me, check out our private chatroom at www.Vancouver-Traders.com or send me an email at andrew@ Vancouver-Traders.com . I’d be happy to have a chat with you. 

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