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- Herausgeber: John Wiley & Sons
- Kategorie: Fachliteratur
- Sprache: Englisch
- Veröffentlichungsjahr: 2014
In an ever-changing market, get the advantage of trading for yourself Day trading is undoubtedly the most exciting way to make your own money. Before you begin, you need three things: patience, nerves of steel, and a well-thumbed copy of Day Trading For Dummies. This plain-English guide shows you how day trading works, identifies its all-too-numerous pitfalls, and gets you started with an action plan. From classic and renegade strategies to the nitty-gritty of daily trading practices, it gives you the knowledge and confidence you'll need to keep a cool head, manage risk, and make decisions instantly as you buy and sell your positions. * Expanded coverage of day trading resources and sites available * Help choosing an online broker in the current market * New trading products * Updated information on SEC rules and regulations (and tax laws) * New investment options * Updated examples that reflect current market and economic conditions Read Day Trading For Dummies and get the tips, guidance, and solid foundation you need to succeed in this thrilling, lucrative, and rewarding career!
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Day Trading For Dummies®, 3rd Edition
Published by: John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030-5774, www.wiley.com
Copyright © 2014 by John Wiley & Sons, Inc., Hoboken, New Jersey
Published simultaneously in Canada
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Library of Congress Control Number: 2013954192
ISBN 978-1-118-77960-6 (pbk); ISBN 978-1-118-80813-9 (ebk); ISBN 978-1-118-80808-5 (ebk)
Manufactured in the United States of America
10 9 8 7 6 5 4 3 2 1
Day Trading For Dummies®, 3rd Edition
Visit www.dummies.com/cheatsheet/daytrading to view this book's cheat sheet.
Table of Contents
Introduction
About This Book
Foolish Assumptions
Icons Used in This Book
Beyond the Book
Where to Go from Here
Part I: Getting Started with Day Trading
Chapter 1: So You Want to Be a Day Trader
It's All in a Day's Work: Defining Day Trading
Speculating, not hedging
Understanding zero-sum markets
Being disciplined: Closing out each night
Committing to Trading As a Business
Trading part-time: An okay idea if done right
Trading as a hobby: A bad idea
Defining the Principles of Successful Day Trading
Working with a small number of assets
Managing your positions
Focusing your attention
Identifying the Personality Traits of Successful Day Traders
Independence
Quick-wittedness
Decisiveness
Seeing What Day Trading Is Not
It's not investing
It's not gambling
It's not dangerous — if you use risk capital
It's not easy
Looking at Success Rates
Chapter 2: Planning to Succeed As a Day Trader
Planning Your Trading Business
Setting your goals
Finding volatility
Fixing hours, vacation, and sick leave
Getting yourself set up
Investing in your business
Evaluating and revising your plan
Planning Your Trades
What do you want to trade?
How do you want to trade?
Figuring out when to buy and when to sell
Setting profit goals
Setting limits on your trades
What if the trade goes wrong?
Closing Out Your Position
Swing trading: Holding for days
Position trading: Holding for weeks
Investing: Holding for months or years
Maxims and Clichés That Guide and Mislead Traders
Pigs get fat, hogs get slaughtered
In a bear market, the money returns to its rightful owners
The trend is your friend
Buy the rumor, sell the news
Cut your losses and ride your winners
You're only as good as your last trade
If you don't know who you are, Wall Street is an expensive place to find out
Chapter 3: Deciding What to Trade and How to Trade It
Defining a Good Day-Trading Asset
Looking for liquidity
Homing in on high volatility
Staying within your budget
Making sure you can use margin
Trading Types of Securities
Stocks
Bonds
Exchange-traded funds (ETFs)
Cashing In with Currency, the Big Kahuna
How currency trades
Where currency trades
Considering Commodities and How They Trade
Dealing in Derivatives
Getting to know types of derivatives
Buying and selling derivatives
Chapter 4: Defining Trading: Risk, Reward, and T iming
Understanding Risk and Return
What is risk, anyway?
Getting rewarded for the risk you take
Market efficiency in the real world
Differentiating Trading, Investing, and Gambling
Investing is slow and steady
Trading works fast
Gambling is nothing more than luck
Managing the Risks of Day Trading
It's your business
It's your life
Chapter 5: Regulation and the Modern Trader
Looking Back on the Road to Regulations
Reviewing the Regulators
Stock and corporate bond market regulation
Treasury bond market regulation
Derivatives market regulation
Foreign exchange (forex) regulation
Working with Brokers’ Rules
Gauging suitability
Making sure the money is legit
Following special rules for pattern day traders
Reporting taxes
Watching Out for Insider Trading
Preparing for Rule Changes in Crisis Conditions
Taking on Partners
Part II: Exploring Popular Day-Trading Strategies
Chapter 6: Managing Your Money and Positions
Setting Your Earnings Expectations
Finding your expected return
Determining your probability of ruin
Gaining Advantage with a Money-Management Plan
Minimizing damage while increasing opportunity
Staying in the market longer
Getting out before you lose everything
Accounting for opportunity costs
Examining Styles of Money Management
Limiting portions: Fixed fractional
Protecting profits: Fixed ratio
Sticking to 10 percent: Gann
Finding the ideal percentage: Kelly Criterion
Doubling down: Martingale
Letting a program guide you: Monte Carlo simulation
Considering past performance: Optimal F
Seeing How Money Management Affects Your Return
Planning for Your Profits
Compounding interest
Pyramiding power
Making regular withdrawals
Chapter 7: Technical Analysis 101
Comparing Research Techniques Used in Day Trading
What direction is your research?
Fundamental research
Technical analysis
Using Technical Analysis
First things first: Should you follow a trend or deviate from it?
Finding trends
Those ever-changing trends
Reading the Charts
Wave your pennants and flags
Not just for the shower: Head and shoulders
Drink from a cup and handle
Mind the gap
Grab your pitchforks!
Considering Different Approaches to Technical Analysis
Dow Theory
Fibonacci numbers and the Elliott Wave
Japanese candlestick charting
The Gann system
Avoiding Technical-Analysis Pitfalls
If it's obvious, there's no opportunity
Overanalyzing the data
Success may be the result of an upward bias
Chapter 8: Following Market Indicators and Tried-and-True Day-Trading Strategies
Psyching Out the Markets
Betting on the buy side
Avoiding the projection trap
Taking the Temperature of the Market
Pinpointing with price indicators
Volume
Volatility, crisis, and opportunity
Measuring Money Flows
Accumulation/distribution index
Money-flow ratio and money-flow index
Short interest ratios
Considering Information That Crops Up during the Trading Day
Price, time, and sales
Order book
Quote stuffing
News flows
Identifying Anomalies and Traps
Bear traps and bull traps
Calendar effects
Building on Some Standard Strategies
Range trading
Contrarian trading
News trading
Pairs trading
Developing a Program
Chapter 9: Increasing Risk and Potential Return with Short Selling and Leverage
The Magic of Margin
Making margin agreements
Understanding the costs and fees of margin
Managing margin calls
Enjoying margin bargains for day traders
The Switch-Up of Short Selling
Selling short
Choosing shorts
Losing your shorts?
Leveraging All Kinds of Accounts
In stock and bond markets
In options markets
In futures trading
In foreign exchange
Borrowing in Your Trading Business
Taking margin loans for cash flow
Borrowing for trading capital
The costs of free riding
Assessing Risks and Returns from Short Selling and Leverage
Losing your money
Losing your nerve
Chapter 10: Looking for Easy Profits: Navigating the Tricky World of Arbitrage and High-Frequency Trading
Arbitrage and the Law of One Price
Understanding how arbitrage and market efficiency interact
Taking advantage of price discrepancies
Reducing arbitrage opportunities: High-frequency trading
Scalping, the Dangerous Game
Those Pesky Transaction Costs
Risk Arbitrage and Its Tools
Arbitrating derivatives
Levering with leverage
Short selling
Creating synthetic securities
Arbitrage Strategies for Day Traders
Convertible arbitrage
ETF arbitrage
Fixed income and interest-rate arbitrage
Index arbitrage
Merger arbitrage
Option arbitrage
Chapter 11: All About Accounts
Choosing a Brokerage
Getting proper pricing
Evaluating types of platform
Opening an account
Brokers for Day Traders
Brokers for stocks and a bit of the rest
Brokers for options and futures
Brokers for foreign exchange
Part III: Necessities and Niceties for Successful Day Trading
Chapter 12: Equipping to Day Trade
Setting Up Your Trading Laboratory
Where to sit, where to work
Counting on your computer
Seeing it on the big screen
Connecting to the Internet
Staying virus- and hacker-free
The department of redundancy department: Backing up your systems
Getting Mobile with the Markets
Chapter 13: Researching Research Services
The Trade of Trading
Enjoying freebies from the exchanges and the regulators
Hitting the road for conferences
Taking training classes
Getting the Research You Need
(Price) Quote me on that
Charting your strategy
News, newsletters, gurus, and strategic advice
Doing Your Due Diligence
Where to start your research
Questions to ask
Chapter 14: Stress Management in the Trading Day
Heeding Tales of Those Who Failed
Jesse Livermore
Steve Perkins
Knight Capital
Controlling Your Emotions
Dealing with destructive emotions
Having an outlet
Setting up support systems
Watching your walk-away money
Managing Stress with Your Trading Plan
Avoiding problems following your plan
Revising and troubleshooting your trading plan
Chapter 15: Taxes for Traders
Getting the Lay of the Land: What You Need to Know Based on What You Trade
Commodities and futures
Currency trading
Options
Stock trading
Hiring a Tax Adviser
The many flavors of tax experts
Questions to ask a prospective adviser
Doing Your Taxes Yourself
Finding out everything you want to know
Making it easier with tax-preparation software
Income Categories You Need to Know
Earned income
Investment income
Capital gains and losses
Miscellaneous income
Tracking Your Investment Expenses
Qualified and deductible expenses
What you can't deduct
Naturally, there are limitations!
Top Secret Tax Information for IRS-Qualified Traders Only
Mark-to-market accounting
Greater deductibility of business expenses
Other Important Tax Info: Forms and Deadlines
Using the right tax forms
Paying all year: The joy of estimated taxes
Using Self-Directed IRAs
Chapter 16: But Did You Make Money? Testing, Tracking, and Evaluating Performance
Before You Trade: Testing Your System
Backtesting
Simulation trading
Backtesting and simulation software
During the Day: Tracking Your Trades
Setting up your spreadsheet
Pulling everything into a profit and loss statement
Keeping a trading diary
After You Trade: Calculating Overall Performance
Reviewing types of return
Calculating returns
Determining the risk to your return
Using benchmarks to evaluate your performance
Chapter 17: Day Trading for Investors
What Investors Can Learn from Traders
Being disciplined
Dealing with breaking news and breaking markets
Setting targets and limits
Judging execution quality
Applying Momentum
Earnings momentum
Price momentum
For investors only: Momentum-research systems
When an Investor Considers Trading
The idea has a short shelf life
Your research shows you some trading opportunities
You see some great short opportunities
Part IV: The Part of Tens
Chapter 18: Ten Good Reasons to Day Trade
You Love Being Independent
You Want to Work Anywhere You Like
You're Comfortable with Technology
You Want to Eat What You Kill
You Love the Markets
You Have Market Experience
You've Studied Trading Systems and Know What Works for You
You Are Decisive and Persistent
You Can Afford to Lose Money
You Have a Support System
Chapter 19: Ten or So Good Reasons to Avoid Day Trading
You Want to Learn Investing by Day Trading
You Love Fundamental Research
You're Short on Time and Capital
You Like Working As Part of a Group
You Can't Be Bothered with the Details of Running a Business
You Crave Excitement
You're Impulsive
You Love Going to the Casino
You Have Trouble Setting Boundaries
You Want to Get Rich Quick
The Guy on the Infomercial Said It Would Work
Chapter 20: Ten Common Day-Trading Mistakes
Starting with Unrealistic Expectations
Starting without a Business and Trading Plan
Ignoring Cash Management
Failing to Manage Risk
Not Committing the Time and Money to Do It Right
Chasing the Herd
Switching between Research Systems
Overtrading
Sticking Too Long with Losing Trades
Getting Too Emotionally Involved
Chapter 21: Ten Tested Money-Management Techniques
Taking Money off the Table
Using Stops
Applying Gann's 10 Percent Rule
Limiting Your Losses with the Fixed Fractional System
Increasing Returns with the Fixed-Ratio System
Following the Kelly Criterion Formula
Figuring the Amount to Trade with Optimal F
Measuring Risk and Sizing Trades with Monte Carlo Simulation
Taking a Risk with the Martingale System
Throwing It to the Fates
Appendix: Additional Resources for Day Traders
Great Books for Great Trading
Basic trading guides
Technical analysis guides
Schools of price theory
Trading psychology
History and memoir
The Trader's Internet
Other Mainstream Media
About the Author
Cheat Sheet
More Dummies Products
Guide
Table of Contents
Begin Reading
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Introduction
A lot has happened since the first version of Day Trading For Dummies came out. We've had a global financial crisis. Brokerage firms have introduced smartphone apps for trading. NASDAQ shut down for three hours due to a systems failure. A new currency, the bitcoin, was invented. The rules of trading have changed along with all the financial and economic upheaval, and savvy people looking for success in day trading need an up-to-the-minute reference like this new edition to steer them straight.
Day trading is a business in which you use real money to take on the markets. If you love the thrill of the markets and have the patience to sit and stare at a screen for hours, waiting for the right moment to get in and get out of securities, then day trading may be a great career option. But it has risks, too. Any day can be your best day, but it can also put you out of business forever. For that reason, day trading requires the right psychological makeup. Good day traders are patient and decisive, confident but not arrogant. They most certainly are not gamblers, although day trading attracts gamblers who discover it's a great way to lose money from home.
Day Trading For Dummies, 3rd Edition, is for people who are looking for a new business or who simply want to supplement their investment returns with new techniques. In this book you can find all the information you need to determine whether you're cut out for day trading, to lay out your home office, to research and plan trades, and more. (And even if you decide day trading isn't for you, you can still find lots of sound general advice about markets, trading, and investing strategies that you can benefit from. Plus you'll have saved all the money you would have otherwise invested on research and training, not to mention the trading losses!)
A lot of people make a lot of money selling services to neophyte day traders, claiming to be the best thing going. And maybe so — for some people. In this book, I give a wider perspective. Instead of telling you to use a particular trading strategy, for example, I help you research and evaluate the different day-trading methods available so that you can find one that works for you. And I also tell you up front that if you decide to day trade, this book shouldn't be your only guide.
About This Book
First, let me tell you what this book is not: It's not a textbook, and it's not a handbook for professional investors. Several of those are on the market already, and they're fabulous, but they're often dry and assume you already have a lot of knowledge about day trading.
This book doesn't make those assumptions. It contains straightforward explanations of how day trading works, how to get started, what the pitfalls are, and what some of the alternatives are for your portfolio and for your career. It's designed for you to be able to skip around and read the chapters or sections that interest you, without having to read every word that comes before them. This book has more than enough content to get you started — or to guide you to something that's a better fit for your sensibilities. If you really want to read some textbooks, I list a few in the appendix.
Oh, and I like to think this book isn't dry, either.
As for conventions, here are the basics: I put important words that I define in italics. I often bold the key words of lists to bring the important ideas to your attention. And I place all web addresses in monofont to set them apart.
During printing of this book, some of the web addresses may have broken across two lines of text. If you come across such an address, rest assured that I haven't put in any extra characters (such as hyphens) to indicate the break. When using a broken web address, type in exactly what you see on the page, pretending that the line break doesn't exist.
I also include sidebars in the book that you don't really need to read in order to follow the chapter text. With that stated, though, I do encourage you to go back and read through this extra material when you have the time. Many of the sidebars contain practice examples that help you get an even better idea of how some of the investment concepts work. Some of the information is pretty fun, too.
Foolish Assumptions
In writing this book, I made some assumptions about you, the reader.
You're someone who needs to know a lot about day trading in a short period of time.You may be considering a career change, looking for a productive part-time retirement activity, or bored and looking for a challenge. Maybe you just want to know if day trading is a good way to supplement your current investment program. Whatever your reason for considering day trading, you want to know how to decide whether it's the right option for you.If you already know that day trading is right for you, you want to know how to get started, from opening an account to setting up your computer monitors. (And yep, that's plural.)You have extra money to trade (whether it's yours or not) and you want to try day trading techniques to goose up your portfolio returns.You have some understanding of the basics of investing — that you know what mutual funds and brokerage accounts are, for example. If you don't feel comfortable with that much, you may want to read the latest editions of Investing For Dummies (by Eric Tyson, published by Wiley) or Mutual Funds For Dummies (also by Tyson; Wiley) and then come back here. I can wait.Icons Used in This Book
As you read this book, you'll see icons scattered around the margins of the text. Each icon points out a certain type of information, most of which you should know or may find interesting about day trading. They go as follows:
This icon notes something you should keep in mind about day trading. It may refer to something I covered earlier in the book, or it may highlight something you need to remember for future investing decisions.
Tip information tells you how to invest a little better, a little smarter, and a little more efficiently. The information can help you make better day trades or ask better questions of people who want to supply you with research, training, and trading systems.
I've included nothing in this book that can cause death or bodily harm, as far as I can figure out, but plenty of things in the world of day trading can cause you to lose big money or, worse, your sanity. These points help you avoid big problems.
I put the nonessential (but often helpful) academic stuff here. By reading material marked by this icon, you get the detailed information behind the investment theories or, sometimes, some interesting trivia or background information.
Beyond the Book
In addition to the book content, you can find a free online Cheat Sheet that includes information on accounts, definitions, indicators, and performance calculation. Go to www.dummies.com/cheatsheet/daytrading to access this handy reference material, and then print it out and keep it by your side as you get started.
You can also access additional free articles that cover information I simply couldn't fit into the book. You'll find information on a day in the life of a trade. I also offer advice about chat rooms and Internet forums and a list of ten alternatives to day trading. You can find them at www.dummies.com/extras/daytrading.
Where to Go from Here
Well, open up the book and get going! If you have a particular area of interest, use the index and table of contents to go to the topic you want. If you're not sure, you can either turn the page and start at the beginning or flip through and see whether a topic catches your eye.
Need more guidance than that? Then allow me to give you some ideas. You may want to start with Chapter 1 if you know nothing about day trading. If you need to get set up to start trading, look at Chapters 11 and 12. If you want to know about some of the potential problems in day trading, turn to Chapters 4, 14, 15, and 16. If you are thinking about day trading as a career, Chapter 2 describes what day traders do all day. For ideas about developing strategies, whether you're going to hold for a few minutes or several years, go to Part II.
Bottom line: Anywhere you go, you'll find interesting and useful information.
Part I
Getting Started with Day Trading
For Dummies can help you get started with lots of subjects. Visit www.dummies.com to learn more and do more with For Dummies.
In this part…
Get comfortable with the basic idea of day trading: the process of making a large number of short-term trades during a single day.Consider whether you have the steady temperament to handle day trading in treacherous markets. It is a business. Even part-time day traders need to approach the markets with the same seriousness as a business owner.Find out the basics of markets, trades, and strategies to help you get started — if day trading is right for you.Discover how to plan your trades so you can trade your plan and increase your chances for success.Chapter 1
So You Want to Be a Day Trader
In This Chapter
Figuring out just what day traders do
Setting up a trading business
Concentrating on a few assets, a few dollars at a time
Knowing what being a successful trader takes
Dispelling a few day-trading myths
Make money from the comfort of your home! Be your own boss! Beat the market with your own smarts! Build real wealth! Tempting, isn't it? Day trading can be a great way to make money all on your own. It's also a great way to lose a ton of money all on your own. Do you have the fortitude to face the market every morning?
Day trading is a crazy business. Traders work in front of their computer screens, reacting to blips, each of which represents real dollars. They make quick decisions because their ability to make money depends on successfully executing a large number of trades that generate small profits. They close out their positions in the stocks, options, and futures contracts they own at the end of the day, which limits some of the risks — nothing can happen overnight to disturb an existing profit position — but those limits on risk can limit profits. After all, a lot can happen in a year, increasing the likelihood that your trade idea will work out, but in a day? You have to be patient and work fast. Some days offer nothing good to buy. Other days, every trade seems to lose money.
The individual human-being day trader is up against a tough opponent: high-frequency algorithms programmed and operated by brokerage firms and hedge funds that have no emotion and can make trades in less time than it takes to blink your eye. If you're not prepared for that competition, you will be crushed.
In this chapter, I cover what day traders do, share the advantages and disadvantages of day trading, list the personality traits of successful day traders, and give you information on your likelihood of success. You may find that day trading is a great career option that takes advantage of your street smarts and clear thinking — or that the risk outweighs the potential benefits. Either is okay: The more you know before you make the decision to trade, the greater your chance of being successful. If you decide that day trading isn't right for you, you can apply strategies and techniques that day traders use to improve the performance of your investment portfolio.
It's All in a Day's Work: Defining Day Trading
The definition of day trading is that day traders hold their securities for only one day. They close out their positions at the end of every day and then start all over again the next day. By contrast, swing traders hold securities for days and sometimes even months; investors sometimes hold for years. The short-term nature of day trading reduces some risks, because nothing can happen overnight to cause big losses. Meanwhile, many other types of investors go to bed thinking their position is in great shape only to wake up the next morning to find that the company has announced terrible earnings or that its CEO is being indicted on fraud charges.
But there's a flip side (there's always a flip side, isn't there?): The day trader's choice of securities and positions has to work out in a day, or it's gone. Tomorrow doesn't exist for any specific position. Meanwhile, the swing trader or the investor has the luxury of time, because it sometimes takes a while for a position to work out the way your research shows it should. In the long run, markets are efficient, and prices reflect all information about a security. Unfortunately, a few days of short runs may need to occur for this efficiency to kick in.
Day traders are speculators working in zero-sum markets one day at a time. That makes the dynamics different from other types of financial activities you may have been involved in. When you take up day trading, the rules that may have helped you pick good stocks or find great mutual funds over the years no longer apply. Day trading is a different game with different rules.
Speculating, not hedging
Professional traders fall into two categories: speculators and hedgers. Speculators look to make a profit from price changes. Hedgers look to protect against a price change. They make their buy and sell choices as insurance, not as a way to make a profit, so they choose positions that offset their exposure in another market.
As examples of hedging, consider a food-processing company and the farmer who raises or grows the ingredients the company needs. The company may look to hedge against the risks of price increases of key ingredients — like corn, cooking oil, or meat — by buying futures contracts on those ingredients. That way, if prices do go up, the company's profits on the contracts help fund the higher prices it has to pay for those ingredients. If the prices stay the same or go down, the company loses only the price of the contract, which may be a fair tradeoff to the company. The farmer raising corn, soybeans, or cattle, on the other hand, benefits if prices go up and suffers if they go down. To protect against a price decline, the farmer would sell futures on those commodities. His futures position would make money if the price went down, offsetting the decline on his products. And if the prices went up, he'd lose money on the contracts, but that loss would be offset by his gain on his harvest.
The commodity markets were intended to help agricultural producers manage risk and find buyers for their products. The stock and bond markets were intended to create an incentive for investors to finance companies. Speculation emerged in all of these markets almost immediately, but it was not their primary purpose.
Day traders are all speculators. They look to make money from the market as they see it now. They manage their risks by carefully allocating their money, using stop and limit orders (which close out positions as soon as predetermined price levels are reached), and closing out at the end of the night. Day traders don't manage risk with offsetting positions the way a hedger does. They use other techniques to limit losses, like careful money management and stop and limit orders (which you can read about in Chapter 2).
Markets have both hedgers and speculators in them. Knowing that different participants have different profit and loss expectations can help you navigate the turmoil of each day's trading. And that's important, because to make money in a zero-sum market, you only make money if someone else loses.
Understanding zero-sum markets
A zero-sum game has exactly as many winners as losers. And options and futures markets, which are popular with day traders, are zero-sum markets. If the person who holds an option makes a profit, then the person who wrote (which is option-speak for sold) that option loses the same amount. There's no net gain or net loss in the market as a whole.
Now some of those people buying and selling in zero-sum markets are hedgers who are content to take small losses in order to prevent big ones. Speculators may have the profit advantage in certain market conditions, but they can't count on having that advantage all the time.
So who wins and who loses in a zero-sum market? Some days, whether you win or lose all depends on luck, but over the long run, the winners are the people who are the most disciplined: They have a trading plan, set limits and stick to them, and can trade based on the data on the screen rather than on emotions like hope, fear, and greed.
Unlike the options and futures markets, the stock market is not a zero-sum game. As long as the economy grows, company profits grow, which in turn lead to growing stock prices. The stock market really has more winners than losers over the long run. That doesn't mean that any given day will have more winners than losers, however. In the short run, the stock market should be treated like a zero-sum market.
If you understand how profits are divided in the markets that you choose to trade, you have a better awareness of the risks that you face as well as the risks that the other participants are taking. People do make money in zero-sum markets, but you don't want those winners to be making a profit off you.
Some traders make money — lots of money — doing what they like. Trading is all about risk and reward. The traders who are rewarded risked the 80 percent washout rate. Knowing that, do you want to take the plunge? If so, read on. And if not, read on anyway, because you may get some ideas that can help you manage your other investments.
Being disciplined: Closing out each night
Day traders start each day fresh and finish each day with a clean slate. This daily regimen reduces some of the risk, and it forces discipline. You can't keep your losers longer than a day, and you have to take your profits at the end of the day before those winning positions turn into losers.
That discipline is important for day traders. When you day trade, you face a market that does not know and does not care who you are, what you're doing, or what your personal or financial goals are. There's no kindly boss who may cut you a little slack today, no friendly coworker to help you through a jam, no great client dropping you a little hint about her spending plans for the next fiscal year. Unless you have rules in place to guide your trading decisions, you'll fall prey to hope, fear, doubt, and greed — the Four Horsemen of trading ruin.
So how do you start? First you develop a business plan and a trading plan that reflect your goals and your personality. Then you set your working days and hours, and you accept that you'll close out every night. Both of these steps are covered in Chapter 2. As you think about the securities that you'll trade (Chapter 3) and how you may trade them (Part II), you'll also want to test your trading system (Chapter 16) to see how it may work in actual trading.
In other words, you prepare and have a plan. That's a basic strategy for any endeavor, whether you're running a marathon, building a new garage, or taking up day trading.
Committing to Trading As a Business
For many people, the attraction of day trading is that traders can very much control their own hours. Many markets, like foreign exchange, trade around the clock. With mobile trading apps, day trading seems like a way to make money while the baby is napping, during your lunch hour, or on just a few mornings a week in between golf games and woodworking.
That myth that day trading is an easy activity that you can do on the side actually does makes some traders very rich. Who are these traders? The professional traders who approach day trading as a business rather than a pastime. They make money when traders who are not fully committed lose their money.
But day trading is a business, and the best traders approach it as such. They have business plans for what they will trade, how they'll invest in their business, and how they'll protect their trading profits. Therefore, much of this book is about this business of trading: how to create a business plan (Chapter 2), how to set up your office (Chapter 12), tax considerations (Chapter 15), and performance evaluation (Chapter 16). If you catch a late-night infomercial about trading, the story will be about the ease and the excitement. But if you want that excitement to last, you have to make the commitment to doing trading as a business to which you dedicate your time and your energy.
Trading part-time: An okay idea if done right
Can you make money trading part-time? You can, and some people do. Successful part-time day traders approach trading as a part-time job, not as a little game to play when they have nothing else going on. A part-time trader may commit to trading three days a week or to closing out at noon instead of at the close of the market. A successful part-time trader still has a business plan, still sets limits, and still acts like any professional trader would, just for a smaller part of the day.
Part-time trading works best when you can set and maintain fixed business hours. Working on a fixed schedule helps your brain know when to go to work and concentrate on the market, because the habit is ingrained. The successful part-timer operates as a professional with fixed hours. Think of it this way: My son is a patient in a group pediatric practice that has some part-time doctors. These part-time doctors keep set hours and behave like the other doctors in the practice; the only difference is that they work fewer hours each week. They commit their attention to medicine when they are on the job, and patients only know about their part-time hours when it comes time to make an appointment. These doctors don't pop into the office and start giving shots during their lunch break from their “real” job, sneaking around so that their real boss doesn't find out.
If you want to be a part-time day trader, approach it the same way that a part-time doctor, part-time lawyer, or part-time accountant would approach work. Find hours that fit your schedule and commit to trading during them. Have a dedicated office space with high-speed Internet access and a computer that you use just for trading. If you have children at home, you may need to have child care during your trading hours. And if you have another job, set your trading hours away from your work time. Trading via cellphone during your morning commute is a really good way to lose a lot of money (not to mention your life if you try it while driving).
Trading as a hobby: A bad idea
Because of the excitement of day trading and the supposed ease of doing it, you may think that day trading makes a great hobby. On a boring Saturday afternoon, you could just spend a few hours trading in the forex market (foreign exchange) to make more money than if you spent those few hours playing video games! Right?
Uh, no.
Trading without a plan and without committing the time and energy to do it right is a route to losses. Professional traders are betting that plenty of suckers are out there, trading in just such a random way because that creates the losers that allow them to take profits in a zero-sum market.
The biggest mistake amateur traders make? Making a lot of money the first time trading and then assuming that all such successes will come as easily. That first success was almost definitely due to luck, and that luck can turn against a trader on a dime. If you make money your first time out, take a step back and see whether you can figure out why. Then test your strategy, using Chapter 16 as a guide, to see whether your strategy is a good one that you can use often.
Yes, I have two warnings in this section, and for good reason: Successful day traders commit to their business. Even then, most day traders fail in their first year. Brokerage firms, training services, and other traders have a vested interest in making trading seem like an easy activity that you can work into your life. But it's a job — a job that some people love, but a job nonetheless.
If you really love the excitement of the markets, you can find ways to invest on a hobbyist's schedule: You can spend your time doing fundamental research to find long-term investments (see Chapter 17 for information on that); you can look into alternative investments to help diversify your portfolio (head to Chapter 3); and you can trade with play money, either in demo accounts or in trading contests, to try trading without committing real money.
Defining the Principles of Successful Day Trading
Although you can day trade almost every asset with wild abandon, doing so probably isn't a good idea. Some traders spend their entire careers working with just one or two types of securities. This section covers the basics of success: working with just a few assets in one market, managing positions carefully, and concentrating on the work at hand.
Working with a small number of assets
Most day traders pick one or two markets and concentrate on those to the exclusion of all others. That way they can learn how the markets trade, how news affects prices, and how the other participants react to new information. Also, concentrating on just one or two markets helps a trader maintain focus.
And what do day traders trade? Chapter 3 has information on all of the different markets and how they work, but here's a quick summary, in no particular order, of the most popular assets with day traders right now:
Financial futures: Futures contracts allow traders to profit from price changes in such market indexes as the S&P 500 or the Dow Jones Industrial Average. They give traders exposure to the prices at a much lower cost than buying all the stocks in the index individually. Of course, they tend to be more volatile than the indexes they track because they are based on expectations.Forex: Forex, short for foreign exchange, involves trading in currencies all over the world to profit from changes in exchange rates. Forex is the largest and most liquid market there is, and it's open for trading all day, every day. Traders like the huge number of opportunities. Because most price changes are small, they have to use leverage (borrowed money) to make a profit. The borrowings have to be repaid no matter what happens to the trade, which adds to the risk of forex.Common stock and exchange-traded funds: The entire business of day trading began in the stock market, and the stock market continues to be popular with day traders. They look for news on company performance and investor perception that affect stock prices, and they look to make money from those price changes. A similar asset is the exchange-traded fund, which trades like a stock but is based on a market index or strategy. The big drawback? Stock and ETF traders can get killed at tax time if they aren't careful. See Chapter 15 for more information.Managing your positions
A key to successful trading is knowing how much you're going to trade and when you're going to get out of your position. Sure, day traders are always going to close out at the end of the day — or they wouldn't be day traders — but they also need to cut their losses and take their profits as they occur during the day. Specifically, they need to determine the size of the trade and the maximum profit or loss:
Determining what portion of their money they risk for any particular trade: Traders rarely place all their money on one trade. That's a good way to lose it! Instead, they trade just some of their money, keeping the rest to make other trades as new opportunities in the market present themselves. If any one trade fails, the trader still has money to place new trades. Some traders divide their money into fixed proportions, and others determine how much money to trade based on the expected risk and expected return of the security they're trading. Careful money management helps a trader stay in the game longer, and the longer a trader stays in, the better the chance of making good money. Chapter 6 has more information on money-management strategies.Protecting their funds by using stop and limit orders: Stop and limit orders are placed with the brokerage firm and kick in whenever the security reaches a predetermined price level. If the security starts to fall in price more than the trader likes — bam! — it's sold, and no more losses will occur on that trade. The trader doesn't agonize over the decision or second-guess herself. Instead, she just moves on to the next trade, putting her money to work on a trade that's likely to be better.Day traders make a lot of trades, and a lot of those trades are going to be losers. The key is to have more winners than losers. By limiting the amount of losses, the trader makes it easier for the gains to be big enough to generate more than enough money to make up for the losers.
Focusing your attention
Day traders are often undone by stress and emotion. Keeping a steady eye on what's happening in the market is hard when you're looking at screens all day and working alone. But as a trader, you have to be able to concentrate on the market and stick to your trading system, staying as calm and rational as possible.
Day traders who do well have support systems in place. They are able to close their positions and spend the rest of the day on other activities. They do something to get rid of their excess energy and clear their minds, such as running or yoga or meditation. They understand that their ability to maintain a clear mind when the market is open is crucial.
Traders sometimes think of the market itself, or everyone else who is trading, as the enemy. The real enemies are emotions: doubt, fear, greed, and hope. Those four feelings keep traders from concentrating on the market and sticking to their systems.
One of the frustrations of trading is that some days offer more opportunities to trade than you have time or money to trade. On these days, good trades get away from you because you simply don't have the resources to take advantage of every opportunity you see. That's why having a plan and concentrating on what works for you are so important.
Identifying the Personality Traits of Successful Day Traders
Successful traders are a special breed. They can be blunt and crude, because they act fast against a market that has absolutely no consideration for them. For all their rough exterior, they maintain strict discipline about how they approach their trading day and what they do during market hours.
The discipline begins with a plan for how to start the day, including reviews of news events and trading patterns. It includes keeping track of trades made during the day, to help the trader figure out what works and why. And it depends on cutting losses as they occur, reaping all profits that appear, and refining a set of trading rules so that tomorrow will be even better. No, this strategy isn't as much fun as just jumping in and placing orders, but it's more likely to lead to success.
Not everyone can be a day trader, nor should everyone try it. In this section, I cover some of the traits that the best day traders possess.
Independence
For the most part, day traders work by themselves. Computers and monitors are relatively inexpensive, high-speed Internet connectivity is easier to get, and many brokerage firms cater to the needs of traders who are working by themselves — all of which leaves the day trader at home, alone, stuck in a room with nothing but the computer screen for company. Being alone all day may be boring and make it hard to concentrate. Some people can't handle it.
But other traders thrive on being alone all day, because it brings out their best qualities. They know that their trading depends on them alone, not on anyone else. The trader has sole responsibility when something goes wrong, but he also gets to keep all the spoils. He can make his own decisions about what works and what doesn't, with no pesky boss or annoying corporate drone telling him what he needs to do today.
If the idea of being in charge of your own business and your own trading account is exciting, then day trading may be a good career option for you.
What if you want to trade but don't want to work by yourself? Consider going to work for a brokerage firm, a hedge fund, a mutual fund, or a commodities company. These businesses need traders to manage their own money, and they usually have large numbers of people working together on their trading desks to share ideas, cheer each other on, and give each other support when things go wrong.
No matter how independent you are, your trading will benefit if you have friends and family to offer you support and encouragement. That network can help you better manage the emotional aspects of trading. Besides, celebrating your success is more fun with someone else!
Quick-wittedness
Day trading is a game of minutes. An hour may as well be a decade when the markets are moving fast. And that means a day trader can't be deliberative or panicky. When it's time to buy or sell, it's time to buy or sell, period.
Many investors prefer to spend hours doing a careful study of a security and markets before committing money. Some of these people are enormously successful. Warren Buffett, the CEO of Berkshire Hathaway, amassed $54 billion from his careful investing style, money that he is giving to charity. But Buffett and people like him are not traders.
Traders have to have enough trust in their system and enough experience in the markets to act quickly when they see a buy or sell opportunity. Many brokerage firms offer their clients demonstration accounts or backtesting services that enable traders to work with their system before committing actual dollars, helping them learn to recognize market patterns that signal potential profits.
A trader with a great system who isn't quick on the mouse button has another option: automating trades. Many brokerage firms offer software that executes trades automatically whenever certain market conditions occur. For many traders, automatic trades are a perfect way to take the emotion out of a trading strategy. Others dislike this type of trading, because it takes some of the fun out of the job. And let's face it, successful traders find the whole process to be a good time.
Decisiveness
Day traders have to move quickly, so they also have to be able to make decisions quickly. You can't wait until tomorrow to see how the charts play out before committing capital. If you see an opportunity, you have to go with it. Now.
But what if the decision is a bad one? Well, of course some decisions are going to be bad. That's the risk of making any kind of an investment, and without risk, there is no return. Anyone playing around in the markets has to accept that.
But two good day-trading practices help limit the effects of making a bad decision. The first is the use of stop and limit orders, which automatically close out losing positions. The second is closing out all positions at the end of every day, which lets you start fresh the next day.
If you have some downside protection in place, you're more psychologically prepared to make the decisions you need to make in order to earn a profit. And if you're one of those people who has a hard time making a decision, day trading probably isn't right for you.
Seeing What Day Trading Is Not
So much mythology surrounds day trading: Day traders lose money. Day traders make money. Day traders are insane. Day traders are cold and rational. Day trading is easy. Day trading is a direct path to alcoholism and ruin.
In this section, I bust a few day trading myths. Someone has to do it, right? You find both good news and bad news in this section, so read it through to get some perspective on what, exactly, you can expect from day trading.
It's not investing
While swing traders hold positions for a few days, maybe even a few weeks, and investors hold their stakes for the long term, with some looking to hang onto their securities for decades and maybe even hand them down to their children, day traders never hold a position for more than a day.
Day trading is most definitely not investing. Day traders perform an important function to the capital markets because they force the price changes that bring the supply and demand of the market into balance. Day trading, however, doesn't create new sources of funding for companies and governments. It doesn't generate long-term growth.
Just because day trading isn't investing doesn't mean day traders don't have investments elsewhere. Many day traders withdraw their trading capital on a regular basis to put into investments, helping them build a long-term portfolio for their retirement or for other ventures they may want to take on. Still, because investing and trading have different mindsets, chances are the trader will have someone else manage this money.
It's not gambling
One of the biggest knocks on day trading is that it's just another form of gambling. And as everyone knows, or should know, in gambling, the odds always favor the house. That's not the case with day trading, however. Consider these points:
In day trading, the odds are even in many markets. The options and futures markets, for example, are zero-sum markets with as many winners as losers, but those markets also include people looking to hedge risk and who thus have lower profit expectations than do day traders.The stock market has the potential for more winning trades than losing trades, especially over the long run. For this reason, the stock market isn't a zero-sum market, like options and futures markets. In the stock market, the odds are ever so slightly in the trader's favor.In all markets, the prepared and disciplined trader can do better than the frantic, naïve trader. That's not the case when gambling, because no matter how prepared the gambler is, the casino has the upper hand.
People with gambling problems sometimes turn to day trading as a socially acceptable way to feed their addiction. If you know you have a gambling problem or suspect you are at risk, taking up day trading is probably not a good idea for you. Day traders who are closet gamblers tend to make bad trades and have trouble setting limits and closing out at the end of the day. They turn the odds against themselves. Chapter 4 has some information on the line between day trading and gambling.
It's not dangerous — if you use risk capital
A lot of day traders lose money, and some lose everything that they start with. Others don't lose all of their trading capital; they just decide that there are better uses of their time and better ways to make money. (For more on day trading success rates, head to the later section “Looking at Success Rates.”)
A responsible trader works with risk capital, which is money that she can afford to lose. She uses stop and limit orders to minimize her losses, and she always closes out at the end of the day. She understands the risks and rewards of trading, and that keeps her sane.
Many day trading strategies rely on leverage,
