Let me say it out first: this book won’t make you a successful day-trader. But this book will prepare you for your journey towards learning more about day-trading. If day-trading is a universe you are looking to explore then, definitely this book is one of the places you won’t regret visiting. Once you are here, you’ll realize the divergence in the mindset of a trader and an investor. Novices to technical analysis will find themselves a bit lost however since for the purposes of brevity this book won’t explain what is MACD? or what is ATR? or what is RSI? Andrew would leave you on your own to figure that out. I would recommend that you make yourself aware of the nuances of technical analysis before you begin reading this book.
I’m sharing my notes from this book here, you may now stop reading this review if you don’t want the spoilers. However go ahead if you’d like a gist of what this book talks about:
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.”
You must avoid stocks that:
(1) are heavily traded by computers and institutional traders,
(2) have small relative trading volume,
(3) are penny stocks and are therefore highly manipulated, and
(4) don’t have any reason to move (no fundamental catalysts).
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.
Step 1: Let’s say my trading capital is Rs 1,00,000. Accordingly, the 2% rule will limit my risk on any trade to Rs 2,000.
Step 2: Using my strategy I can estimate the maximum risk per share. This number is calculated as Buy Price – Stop Loss. Assuming that this number is Rs 20 for my example.
Step 3: Rs 2,000 / Rs 20 = 100 shares. I can safely trade 100 shares in this case.
“Remember, you can always risk less, but you are not allowed to risk more than 2% of your account under any circumstance.”
“Trading needs practice and I strongly recommend that new traders paper trade under supervision for at least three months in a live simulated account.”
“A key reason why many traders fail is that they take negative events and losses in trading personally. Their confidence and peace of mind are connected to their trading results. When traders do well, they feel good. When they encounter losses, they become discouraged, doubtful, and frustrated, questioning themselves, their strategy, and their career. Instead of dealing directly and constructively with their losses, they react to the emotions triggered by personalizing the events.”
“Successful traders are those who trade for skill and not for the money. Almost all professional traders hide their unrealized Profit and Loss (P&L) column while in a trade. They have no interest in seeing how much they are up or down. They focus on the perfect execution of a profit target or a stop loss level. Consistently profitable traders take every negative or positive trade they make as an opportunity to improve themselves.”
Note: LEARN HOW NOT TO TAKE THINGS PERSONALLY.
Physical and Mental Health are important. Eat well balanced nutritional meals, exercise, maintain body weight, fitness levels, get adequate rest.
“One of the fundamentals you must learn from this book is that every day trading strategy comes with a stop loss level and you must stop out from stocks that trade against your strategy.”
“Many traders think a good trading day is a positive day. Wrong. A good trading day is a day that you were disciplined, traded sound strategies, and did not violate any trading rules. ”
How to Find Stock for Trades
“You are only as good as the stocks you trade.”
Stocks in Play
• A stock with fresh news
• A stock that is up or down more than 2% before the market Open
• A stock that has unusual pre-market trading activity
• A stock that develops important intraday levels which we can trade-off from
• Earnings reports
• Earnings warnings/pre-announcements
• Earnings surprises
• FDA approvals/disapprovals
• Alliances/partnerships/major product releases
• Major contract wins/losses
• Restructurings/layoffs/management changes
• Stock splits/buybacks/debt offerings
Float and Market Cap
“Trading low float stocks is very difficult for the new trader. It is difficult to read the direction of their next move and therefore they are very difficult to manage your risk while trading them. I discourage new traders from trading low float stocks. When the new trader is wrong, the loss is such that it wipes out many gains.”
“The second category is medium float stocks in the range of $10-$100. These stocks have medium floats of around 10 million to 500 million shares. Many 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 third category of stocks for trading is mega cap stocks like Apple, Alibaba, Yahoo, Microsoft and Home Depot. These are well-established companies that usually have over $500 million in public shares available for trading. These stocks are traded in millions of shares every day. As you may guess, these stocks move only when large institutional traders, investment banks, and hedge funds are buying or selling large positions. Retail traders like us, who typically trade 100 to 1,000 shares, usually cannot move the price of these stocks. Retail traders should avoid these stocks unless there is a good fundamental catalyst for them. From the strategies set forth in Chapter 7, Reversals and Moving Average Strategies usually work well on these stocks. Do not forget though, unless there is a fundamental catalyst, these stocks are being heavily traded by computers and high-frequency traders and are not suitable for retail day trading.”
• Stocks that in the pre-market gapped up or down at least 2%
• Stocks that have traded at least 50,000 shares in the pre-market
• Stocks that have an average daily volume of over 500,000 shares
• Stocks that have Average True Range of at least 50 cents (how large of a range a stock has on average every day)
• There is a fundamental catalyst for the stock
• As a rule, I do not trade stocks with an enormous short interest higher than 30% (the short interest is the quantity of stock shares that investors or traders have sold short but not yet covered or closed out)
“A high short interest indicates traders or investors think a stock’s price is likely to fall. But the challenge with high short interest is that these stocks are more prone to a short squeeze by bullish investors and traders. A short squeeze occurs when short sellers panic and are scrambling to return their borrowed shares, forcing prices to increase quickly and dangerously. You do not want to be stuck short in a short squeeze.”
Real-Time Intraday Scans
• Have gapped up or down at least $1
• Have ATR of more than 50 cents
• Have average relative volume of at least 1.5 (the stock is trading at 1.5 times its normal volume)
• Have average daily trading volume of at least 500,000 shares
“I will also take a look at the sector of stocks. If I have a few stocks in one sector, there is a good chance that these stocks are not in play. They have high relative volume because their sector is under heavy trading by institutional traders. It is important to know that stocks usually trade with their sector. For example, when oil stocks are selling off, almost all of the oil companies sell off. Therefore, it is important to recognize Stocks in Play from the herd. Remember, you are only as good as the stock you trade, so if you are the best trader in the world, but in a wrong stock, you will lose money.”
Indicators on my Charts
1. Price action in the form of candlesticks
2. Volume of shares being traded
3. 9 Exponential Moving Average (9 EMA)
4. 20 Exponential Moving Average (20 EMA)
5. 50 Simple Moving Average (50 SMA)
6. 200 Simple Moving Average (200 SMA)
7. Volume Weighted Average Price (VWAP)
8. Previous day’s closing price
9. Daily levels of support or resistance
I keep the color of all my moving average indicators in grey except VWAP which is colored in blue. VWAP is the most important day trading indicator and needs to be easily and quickly distinguished from other moving averages. I don’t want to have a lot of colors on my charts so I maintain a white background with mostly red and black coloring.
“Buy me at any price! Now!”
“Sell me at any price! Now!”
“Buy me at this price only! Not higher!”
“Sell me at this price only! Not lower!”
Marketable Limit Orders
“Buy me now, but up to this price! Not higher!”
“Sell me now, but down to this price! Not lower!”
Check out: Trade2Win dot com and https://www.elitetrader.com/et/
Green candles indicate buying pressure. Red candles indicate selling pressure. There are three types of people in the market: a) Buyers b) Sellers and c) Undecided.
Bid-ask spread is the difference between what buyers are ready to pay for a stock and what sellers are willing to accept for the same stock.
The goal of successful day trading is to identify whether buyers are in control or whether sellers are in control, and then make a calculated move, at the appropriate time, quickly and stealthily.
Price action means reading the candlesticks to generate an opinion on the general attitude for the stock.
Must know candlesticks:
a) Bullish Candlesticks
b) Bearish Candlesticks
c) Indecision Candlesticks:
a. Spinning Top
ii. Shooting Star: Seller’s may take control
iii. Hammer: Buyer’s may take control
a) Price Action
b) Technical Indicators
c) Candlesticks and Chart Patterns
The author prefers to trade on 5-min charts, and also monitors 1-minute charts.
You must master only a few solid setups to be consistently profitable. Simple trading methods reduce confusion and stress and allow you to concentrate on the psychological aspect of trading.
For $10-$50 price range, the author prefers to have a trade size of 800 shares
1. I buy 400 shares.
2. If trade goes in my favor, I add another 400 shares (note that I add into my winning position, not into losing one).
3. I sell 400 shares in the first target, bringing my stop loss to break-even (my entry point).
4. I sell another 200 shares in the next target point.
5. 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.
For $50-$100 price range, the author reduces the trade size to 400 shares.
Also, you can enter a trade small, with say 100 shares and then add to your position in various steps.
Never average down losing positions. When something is selling off, you really do not know if it will be a massive bear market until you see the charts. And sadly, you cannot see the charts until it is too late, not until after the sell off is finished.
Strategy 1: ABCD Pattern
Strategy 2: Bull Flag Momentum
Strategy 3 & 4: Reversal Trading
Strategy 5: Moving Average Trend Trading
Strategy 6: VWAP Trading
Strategy 7: Support or Resistance Trading
Strategy 8: Red-to-Green Trading
Strategy 9: Open Range Breakout
Remember that the market is always going to be there, you don’t need to rush this.
Trading Strategy Based on the Time of Day
Open: first 1.5 hours
• Bull Flag Momentum and VWAP trades tend to be the best strategies for open.
• Market is slow. Worst time of day to trade. There is less volume and liquidity.
• Reversal, VWAP, Moving Average, and Support or Resistance trades tend to be the best strategies for the Mid-day.
• Never trade Bull Flag Momentum in Mid-day or at close.
Close: last 1 hour
• Stocks are more directional, so I stick with those that are trending up or down in the last hour of the trading day.
• VWAP, Support or Resistance, and Moving Average trades tend to be the best strategies for the close.
You are not allowed to lose more than 30% of what you have made in the Open during Mid-day and the Close.
Step-by-Step to a Successful Trade
1. Morning Routine: Waking up on early, physical workout (like running), good breakfast.
2. Build a Watchlist.
3. Organize a Trade Plan. (entry, exit, and stop loss)
4. Initiate the Trade according to the Trade Plan.
5. Execute the Trade according to the Trade Plan.
6. Journaling and Reflection.
Question you must ask:
• Who is in control of the price: the buyers or the sellers?
• What technical levels are most important?
• Is the stock stronger or weaker than the market?
• Where is most of the volume being traded? At the VWAP? Or the first five minutes? Or near moving averages?
• How much volume at a price causes the stock to move up or down?
• What is the bid-ask spread? Is it tradeable?
• How quickly does the stock move? Is it being traded smoothly or is it choppy, jumping up and down with every trade?
• Is the stock trading in a particular pattern on a 5-minute chart? How is the stock being traded on a 1-minute chart?
All of this information should be gathered before you make any trade.
Trading teaches you a lot about yourself, about your mental weaknesses, and about your strengths.