Day Trading For Dummies

363 Pages·2014·7.28 MB·English

by  Ann C. Logue MBA

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Day Trading
3rd Edition
by Ann C. Logue, MBA
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
Contents at a Glance
Introduction ................................................................ 1
Part I: Getting Started with Day Trading ....................... 5
Chapter 1: So You Want to Be a Day Trader ..................................................................7
Chapter 2: Planning to Succeed As a Day Trader ........................................................23
Chapter 3: Deciding What to Trade and How to Trade It ...........................................45
Chapter 4: Defining Trading: Risk, Reward, and T iming .............................................69
Chapter 5: Regulation and the Modern Trader ............................................................81
Part II: Exploring Popular Day-Trading Strategies ........ 97
Chapter 6: Managing Your Money and Positions ........................................................99
Chapter 7: Technical Analysis 101 ...............................................................................115
Chapter 8: Following Market Indicators and Tried-and-True
Day-Trading Strategies ...............................................................................................137
Chapter 9: Increasing Risk and Potential Return with Short Selling and Leverage ......161
Chapter 10: Looking for Easy Profits: Navigating the Tricky
World of Arbitrage and High-Frequency Trading ....................................................177
Chapter 11: All About Accounts ...................................................................................191
Part III: Necessities and Niceties for Successful
Day Trading ............................................................ 205
Chapter 12: Equipping to Day Trade ...........................................................................207
Chapter 13: Researching Research Services ..............................................................215
Chapter 14: Stress Management in the Trading Day .................................................231
Chapter 15: Taxes for Traders .....................................................................................243
Chapter 16: But Did You Make Money? Testing, Tracking, and Evaluating
Performance .................................................................................................................263
Chapter 17: Day Trading for Investors ........................................................................283
Part IV: The Part of Tens .......................................... 295
Chapter 18: Ten Good Reasons to Day Trade ............................................................297
Chapter 19: Ten or So Good Reasons to Avoid Day Trading....................................303
Chapter 20: Ten Common Day-Trading Mistakes ......................................................309
Chapter 21: Ten Tested Money-Management Techniques .......................................315
Appendix: Additional Resources for Day Traders ......... 321
Index ...................................................................... 329

Table of Contents
Introduction ................................................................. 1
About This Book ..............................................................................................2
Foolish Assumptions .......................................................................................2
Icons Used in This Book .................................................................................3
Beyond the Book .............................................................................................4
Where to Go from Here ...................................................................................4
Part I: Getting Started with Day Trading ........................ 5
Chapter 1: So You Want to Be a Day Trader . . . . . . . . . . . . . . . . . . . . . . . 7
It’s All in a Day’s Work: Defining Day Trading .............................................8
Speculating, not hedging .......................................................................8
Understanding zero-sum markets ........................................................9
Being disciplined: Closing out each night.........................................10
Committing to Trading As a Business .........................................................11
Trading part-time: An okay idea if done right ..................................11
Trading as a hobby: A bad idea .........................................................12
Defining the Principles of Successful Day Trading ....................................13
Working with a small number of assets ............................................13
Managing your positions ....................................................................14
Focusing your attention ......................................................................15
Identifying the Personality Traits of Successful Day Traders ..................15
Independence .......................................................................................16
Quick-wittedness..................................................................................16
Decisiveness .........................................................................................17
Seeing What Day Trading Is Not ..................................................................18
It’s not investing ...................................................................................18
It’s not gambling...................................................................................18
It’s not dangerous — if you use risk capital .....................................19
It’s not easy ...........................................................................................19
Looking at Success Rates .............................................................................20
Chapter 2: Planning to Succeed As a Day Trader . . . . . . . . . . . . . . . . . 23
Planning Your Trading Business .................................................................24
Setting your goals ................................................................................24
Finding volatility ..................................................................................25
Fixing hours, vacation, and sick leave ..............................................26
Getting yourself set up ........................................................................27
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Day Trading For Dummies, 3rd Edition
Investing in your business ..................................................................27
Evaluating and revising your plan .....................................................28
Planning Your Trades ...................................................................................30
What do you want to trade? ...............................................................30
How do you want to trade? .................................................................31
Figuring out when to buy and when to sell ......................................32
Setting profit goals ...............................................................................32
Setting limits on your trades ..............................................................34
What if the trade goes wrong? ...........................................................36
Closing Out Your Position ............................................................................38
Swing trading: Holding for days .........................................................38
Position trading: Holding for weeks ..................................................39
Investing: Holding for months or years ............................................39
Maxims and Clichés That Guide and Mislead Traders .............................39
Pigs get fat, hogs get slaughtered ......................................................40
In a bear market, the money returns to its rightful owners ...........40
The trend is your friend ......................................................................41
Buy the rumor, sell the news..............................................................41
Cut your losses and ride your winners .............................................42
You’re only as good as your last trade .............................................42
If you don’t know who you are, Wall Street is an expensive
place to find out ...............................................................................43
Chapter 3: Deciding What to Trade and How to Trade It . . . . . . . . . . . 45
Defining a Good Day-Trading Asset .............................................................45
Looking for liquidity ............................................................................46
Homing in on high volatility ...............................................................48
Staying within your budget.................................................................48
Making sure you can use margin .......................................................49
Trading Types of Securities .........................................................................51
Stocks ....................................................................................................52
Bonds .....................................................................................................57
Exchange-traded funds (ETFs) ...........................................................60
Cashing In with Currency, the Big Kahuna .................................................62
How currency trades ...........................................................................62
Where currency trades .......................................................................63
Considering Commodities and How They Trade ......................................63
Dealing in Derivatives ...................................................................................64
Getting to know types of derivatives.................................................64
Buying and selling derivatives ...........................................................66
Chapter 4: Defining Trading: Risk, Reward, and T iming . . . . . . . . . . . 69
Understanding Risk and Return ...................................................................70
What is risk, anyway? ..........................................................................70
Getting rewarded for the risk you take .............................................73
Market efficiency in the real world ....................................................75
vii
Table of Contents
Differentiating Trading, Investing, and Gambling ......................................76
Investing is slow and steady ...............................................................77
Trading works fast ...............................................................................77
Gambling is nothing more than luck .................................................78
Managing the Risks of Day Trading .............................................................79
It’s your business .................................................................................79
It’s your life ...........................................................................................80
Chapter 5: Regulation and the Modern Trader . . . . . . . . . . . . . . . . . . . . 81
Looking Back on the Road to Regulations ..................................................82
Reviewing the Regulators .............................................................................83
Stock and corporate bond market regulation ..................................84
Treasury bond market regulation ......................................................86
Derivatives market regulation ............................................................86
Foreign exchange (forex) regulation .................................................88
Working with Brokers’ Rules ........................................................................90
Gauging suitability ...............................................................................90
Making sure the money is legit ..........................................................91
Following special rules for pattern day traders ...............................92
Reporting taxes ....................................................................................93
Watching Out for Insider Trading ................................................................93
Preparing for Rule Changes in Crisis Conditions ......................................94
Taking on Partners ........................................................................................95
Part II: Exploring Popular Day-Trading Strategies ......... 97
Chapter 6: Managing Your Money and Positions . . . . . . . . . . . . . . . . . 99
Setting Your Earnings Expectations ..........................................................100
Finding your expected return...........................................................100
Determining your probability of ruin ..............................................101
Gaining Advantage with a Money-Management Plan ..............................103
Minimizing damage while increasing opportunity ........................103
Staying in the market longer ............................................................104
Getting out before you lose everything ..........................................104
Accounting for opportunity costs ...................................................105
Examining Styles of Money Management .................................................105
Limiting portions: Fixed fractional ..................................................106
Protecting profits: Fixed ratio ..........................................................106
Sticking to 10 percent: Gann .............................................................107
Finding the ideal percentage: Kelly Criterion .................................108
Doubling down: Martingale...............................................................109
Letting a program guide you: Monte Carlo simulation .................109
Considering past performance: Optimal F ......................................110
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Day Trading For Dummies, 3rd Edition
Seeing How Money Management Affects Your Return ...........................111
Planning for Your Profits ............................................................................111
Compounding interest.......................................................................112
Pyramiding power ..............................................................................113
Making regular withdrawals .............................................................113
Chapter 7: Technical Analysis 101 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115
Comparing Research Techniques Used in Day Trading .........................116
What direction is your research? ....................................................116
Fundamental research.......................................................................117
Technical analysis .............................................................................118
Using Technical Analysis ............................................................................120
First things first: Should you follow a trend or deviate from it? ....120
Finding trends ....................................................................................121
Those ever-changing trends .............................................................125
Reading the Charts ......................................................................................127
Wave your pennants and flags .........................................................127
Not just for the shower: Head and shoulders ................................128
Drink from a cup and handle ............................................................129
Mind the gap .......................................................................................130
Grab your pitchforks! ........................................................................131
Considering Different Approaches to Technical Analysis .....................132
Dow Theory ........................................................................................132
Fibonacci numbers and the Elliott Wave ........................................132
Japanese candlestick charting .........................................................133
The Gann system ...............................................................................134
Avoiding Technical-Analysis Pitfalls .........................................................134
If it’s obvious, there’s no opportunity ............................................135
Overanalyzing the data .....................................................................135
Success may be the result of an upward bias ................................136
Chapter 8: Following Market Indicators and
Tried-and-True Day-Trading Strategies . . . . . . . . . . . . . . . . . . . . . . . . 137
Psyching Out the Markets ..........................................................................138
Betting on the buy side .....................................................................139
Avoiding the projection trap ............................................................139
Taking the Temperature of the Market .....................................................140
Pinpointing with price indicators ....................................................140
Volatility, crisis, and opportunity ....................................................145
Measuring Money Flows .............................................................................147
Accumulation/distribution index .....................................................148
Money-flow ratio and money-flow index .........................................148
Short interest ratios ..........................................................................149