Day Trading

Day trading is about...

Looking for stocks that are moving in a relatively predictable manner.
Not holding positions overnight (a strict rule)
- as a day trader, your time span is measured in seconds and minutes; and rarely in hours.
- if positions are held overnight, then it is swing trading

Day trading (within 1 day) and swing trading (1+ days to weeks) require completely different strategies.

so you would never keep a position overnight, thereby turning it into swing trading. You day trade and swing trade different type of stocks. To hold onto the stock overnight would betray the strategy, and you would all of a sudden be playing a different ballgame.

The strength of day trading strategies is that other day traders are also trading the stock. Therefore, you should not be trading stocks that other day traders are not aware of.

The more traders using these strategies, the better they will work
- This is why many traders are happy to share their day trading strategies
join a community of traders, such as those found on Twitter or StockTwits

Profitable traders usually make only two or three trades each day.

Penny stocks should be avoided, as they are extremely manipulated and they do not follow any of the rules of the standard strategies

Successful trading depends on a high amount of trade volume (liquidity) so as to be able to easily close out/buy shares.

there is typically much higher volume in the morning than in afternoon

Your broker will buy and sell stocks for you at the Exchange. Your only job as a day trader is to manage risk.

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. The normal uncertainty of the stock market will result in some of your days being negative, but that does not mean that a negative day was a bad trading day.

Stocks in play

Stocks in play are the stocks that don't follow the overall trajectory of the market. They do this because there is some catalyst that causes them to perform distinctly independently of the market.

this small handful of stocks that are going to be running when the markets are tanking, or tanking when the markets are running.
If these stocks move with the market, that's fine too— you just want to ensure that there is some fundamental reason that it is moving, and not just tracing the overall stock market.

Stocks in play are the stocks that day traders are looking to trade.

Stocks in play generally have some fresh news (positive/negative) that causes them to move, such as:

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

Institutions vs individual traders

Rarely is any human involved in the day trading operations of the large accounts of investment banks, proprietary trading firms (called prop traders), mutual funds and hedge funds.

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

This means that to be a successful individual trader, you must learn when not to trade.

If an individual is trading in lots of 100 shares, then an institution is trading in lots of 1,000,000; which takes plenty of time to unload. Unloading 100 shares is a lot quicker, and allows you to play the day-trading game a lot more guerilla-like.

This means that institutions get burned harder for losses than individuals do.

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

The absolute maximum a trader should risk on any trade is 2% of their account equity.

Principles

Always stick to your strategy

Holding a position that is trading against you because you are primarily interested in proving your prediction to be correct is bad trading.

you have to be careful of justifying your continued ownership of a stock.

Keep focus on profit-loss ratio

A good setup is an opportunity for you to get into a trade with as little risk as possible. 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.

A 2:1 win:loss ratio is a realistic minimum to have, meaning if you have to risk $100, then you are expecting no less than a $200 return.
- That means if you buy $1,000 worth of stock, and are risking $100 on it, you must sell it for at least $1,20; if the price comes down to $900, you must accept the loss
- with a 2:1 win:loss ratio, you can be wrong 40% of the time and still make money.

Timing is everything

You're setting your stop loss in accordance with your profit-loss ratio, but what happens if you miss an opportunity to buy, and bought the stock anyway (say, 3 min past the point of your planned strategy)? At this point, all your calculations that went into determining if this was a good trade or not are out the window. Because you have now provided different variables than anticipated to the function, you will get a far less favorable return than you expected

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