How To Day Trade Stocks For Profit
By Harvey Walsh
3rd Edition
Copyright 2011 Beige Media
Published by Beige Media at Smashwords
Smashwords Edition, License Notes
This ebook is licensed for your personal enjoyment only. This ebook may not be resold or given away to other people. If you would like to share this book with another person, please purchase an additional copy for each recipient. If you're reading this book and did not purchase it, or it was not purchased for your use only, then please return to Smashwords.com and purchase your own copy. Thank you for respecting the hard work of this author.
Table Of Contents
Praise
For Earlier Editions
Risk
Disclosure Statement
Forward
To The Third Edition
How
To Use This Book
Part
One - Trading Foundation
Chapter
1 - Trading Objectives
Chapter
2 - Analysis Basics
Chapter
3 - Trading Instruments
Chapter
4 - The Market
Chapter
5 - Charting Introduction
Chapter
6 - Technical Analysis Basics
Chapter
7 - Indicators
Chapter
8 - Placing Trades
Chapter
9 - Trading Objectives Revisited
Chapter
10 - Putting It All Together
Chapter
11 - Setting Up To Trade
Chapter
12 - Trader Psychology
Part
Three - The Trading Strategy
Chapter
1 - Introduction
Chapter
2 - The Trading Day
Chapter
3 - Putting It All Together
Chapter
4 - Log & Analyze
Chapter
5 - Day Trading Golden Rules
Chapter
6 - Getting Started
Part Four - Strategy Exercises
Praise For Earlier Editions
"This
is by far the best course I've ever read. I paid over $5,000 for
seven days of school for day trading. It does not even come close to
what you are teaching.
Donnell Smith"
"...have
been using the info in your book for three days. $1,490 in the
bank...The best thing about the book is that it not only tells you
what to do, but why you should do it.
John Foy"
"I've
worked in the world of training for almost 20 years and I have to say
I have found your training manual to be one of the most comprehensive
and straight forward that I have ever read. Started trading this week
using your strategies on the FTSE and my account is up 25%
David
Mac"
"...very
inexpensive for a straight-to-the-point trading course that actually
works!
Leo Tognetti"
"Yesterday
I made an average of 46 cents per/share [$460] for 3 trades, the
previous day I did 36 cents/share [$360]
Chris Verm"
"...such
a great trading course. For the money [$197 at the time], it is
easily the best course on the market.
John Coan"
"I've
been paper trading for the last four days and have an average gain of
1.25 points per day [$1,250] with no losses (I'm pretty proud of it
actually)
Rob in Toronto"
"..,after
several months of practicing your day trading principals outlined in
your book, I ended my first day of live trading with a net profit of
$279.53
Peter Scott"
“I've
now made about 350% in 4 months and am close to earning the
equivalent of my annual wage and can see a way to break free from my
day job (as a senior engineer at a large defense contractor).
Michael
Snoswell. Adelaide, Australia."
"It
was a great day! I made a $1,175.50 profit...I was real happy with
the results, but I wanted to make sure it wasn't a fluke or
something, but I had to wait until Monday. Monday came, I went to the
NASDAQ again to pick my stocks...the day felt slow in comparison to
Friday, I made a couple of hundred dollars
Salvador Alba"
"..simply
superb. Excellent material
Jeffrey Powell, Active Trader"
"You
are an amazing trader and a very gifted teacher. I diligently studied
your book . You opened my eyes to a whole new world of
possibilities.
Micah Brunson"
"Per
1 january I started day trading full time...I must say that your
strategy is working fine!
Mario Bouwmeester (Holland)"
"...ever
since I have studied your system I have improved so much as a trader
and have grown my account very nicely. ...I am already making my job
salary in trading,
Jaime Leal"
Risk Disclosure Statement
Day trading has large potential rewards, and also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in the stock markets. Do not trade with money that you cannot afford to lose. The contents of this ebook is for general information purposes only. Although every attempt has been made to assure accuracy, we assume no responsibility for errors or omissions. Examples are provided for illustrative purposes and should not be construed as investment advice or strategy. Hypothetical or simulated performance results have certain inherent limitations; unlike an actual performance record, simulated results do not represent actual trading. Also, since the trades have not actually been executed, the results may have under or over compensated for the impact, if any, of certain market factors, such as lack of liquidity. Past performance is not indicative of future results.
Forward To The Third Edition
When I wrote the first edition of this book (back then, it was called Day Trading Freedom), ebooks were still a pretty new idea. The Kindle hadn't been invented yet, neither had the iPhone. Electronic publishing was limited to PDF files. For the reader, that meant either being stuck in front of a computer screen to digest the material, or a long print run on the home inkjet!
Since then, many things have changed, both in publishing and in the world at large. Financially, the world has seen the biggest recession in generations. Banks have been bailed out. Whole countries have gone bankrupt. And even now, many experts say the worst is yet to come.
In publishing, ebooks have really taken off. The Kindle has seen to it that Amazon now sells more digital editions than print books. The iPad and iPhone have helped Apple turn their own iBooks store into a serious contender. New electronic stores and reading devices seem to launch every week.
One thing has remained constant throughout all these changes. The stock markets continue to provide opportunities to make straightforward and sizeable profits, every day of the working week. Entire economies may well be collapsing in smaller indebted nations, but the major world markets keep chugging along, not exactly oblivious to the turmoil all around, but neither derailed by it.
Quite the opposite in fact. As more and bigger fincancial stories continue to hit the headlines, the markets react by offering up increasingly more profitable trading opportunities. As you will learn in this book, news - good or bad - means oppotunity. As long as the world continues to change, creating a flow of news, so the markets remain constant in presenting opportunity for profit.
How To Use This Book
This is a work in four parts. Whilst it can be tempting to jump ahead and go straight for the good stuff - the nitty gritty on specific trading setups, I urge you to be patient and read through everything in order. Like building a new house, building a set of skills requires solid foundations. They may not be the most exciting part of the process, but without them, everything can come crumbling down when it matters most.
So Part One of the book, Trading Foundation, lays down those all important underpinnings. Even if you've already done some trading, it is well worth reading Part One. I never cease to be amazed at how many 'traders' have somewhat confused ideas about the very basics of the subject. Part One will make sure you have a good solid understanding of how the markets work. This alone will put you ahead of 80% of other market participants, and as we shall see later, any edge you can gain will ultimately help you become more profitable. Part One also deals with trading psychology (which is the hardest part of this business), and how to get set up and actually start trading
Part Two gives you a chance to test your newly built foundations. Once laid, we need to know they are solid. Any cracks could lead to costly failings down the line. I will present you with some stock charts accompanied by questions. If you find you can't answer them easily, do go back and re-read the relevant section in Part One. The brain abhors a vacuum, and so when presented with a question it cannot answer, and then shown the information required to provide the answer, it sucks up that information with such force, it will remain firmly in place. These questions are an essential tool in learning, and again, I urge you to resist the temptation to skip them.
In Part Three, The Trading Strategy, I will pull back the curtain and show you exactly how I make my money - and how you can do the same. You will build on your solid, tested foundations, a strong and proven structure. It's a structure that plays to the way the market works at a most fundamental level. Unlike short term trading methods that are whipped together in a hurry to take advantage of transient market conditions, our structure will work as long as the markets are open and are traded by people. It will provide you with dependable, solid, profit generating trades every day for as long as you want to trade.
Finally Part Four follows up with more questions and answers. Again, this will really help you consolidate everything you have read. Feedback from customers of the first two editions of this book have shown time and again that students who take it seriously, read everything, and take action and do the exercises, always do better in their trading than those who simply skim the material looking for a few nuggets of information.
Part One - Trading Foundation
Chapter 1 - Trading Objectives
"If
no one ever took risks, Michelangelo would have painted the Sistine
floor"
Neil
Simon
Why Trade?
The reasons people take up trading are varied, but there are two which account for the majority. The desire to make large amounts of money, and the desire for freedom from a traditional job.
For me, it was the freedom. I'd had enough of working for 'the man'. Not only did my efforts in the workplace go largely unnoticed, I saw they were making other people (the owners of the company) wealthy! The harder I worked, the richer they got. And the less enjoyable my life became. I saw less of my family, and more of a dull office. Something had to change.
Trading for a living gave me the freedom to work for just a few hours day. I could work from anywhere in the world with an internet connection. Take vacations whenever I felt like it. Spend quality time with my family. See my kids grow up. And certainly, the fact it put more cash into my bank account than my old day job ever could have hoped to have done didn't hurt!
Perhaps you've had similar thoughts, which is what has led you to this book. Or perhaps you want to trade to supplement the income from your job. Whatever your own personal reasons might be, I think you'll find making money from the markets fun and rewarding, and not just in the financial sense. So let's dive in, and learn How To Day Trade Stocks For Profit!
Defining Our Objective
Before we commence our journey, it is important to be clear about our destination. A simple statement of our ultimate goal will help us to keep focused: "Our objective as day traders is to take consistent daily profits from the stock market."
In other words, we want to be able to make money every day. Does that sound like a reasonable goal? Great! Let's get building that foundation.
Why Day Trade Instead of Buy And Hold?
Traditional stock market investing is based on the process of buying stock in a company, holding it while the price - hopefully - goes higher, and then selling it for a profit. This is often called a "buy and hold" strategy. Whilst that certainly offers good profit potential, day trading offers us a number of advantages.
Firstly, stocks make lots of moves during the day, and as we'll see, these individual moves can add up to more potential profit than the longer term price movements associated with regular buy and hold trading.
Not only that, but day trading involves no exposure to the market at times we are not actively trading. That means we as day traders are at less risk from news events which can range from company profit warnings through to terrorist attacks.
Last but by no means least, by taking profits at the end of each day, we are provided with a steady income stream. We get to meet the "daily profits" part of our objective.
Let's go back and consider the first point briefly. Take a look at this chart (don't worry if you don't fully understand the chart just yet):
Using a Buy & Hold strategy, we could have bought this stock (which happens to be IBM) at about $83.45 when the market opened. At the end of the day, it had risen to a closing price of $83.50, a gain of just $0.05 for every share we held.
As day traders, if we were able to buy at the lowest price during the day, which was about $82.90 (the point marked 2 on the chart), and sell about half an hour later at point 3, we would have realized a profit of $0.70 for every share, and not have any further exposure to the market. So not only would we have made more money than if we simply bought the stock and held on, we also wouldn't be worried if IBM suddenly issued a profits warning after the market closed, causing the price to fall, because we would no longer be holding any of its stock. More profit, less time in the market, and less stress. Sounds good, doesn't it?
How Do We Make Money From The Market?
In the simplest terms, we can make money in two ways:
1. We
can buy stock at one price, and sell it at a higher price. When we
buy stock to sell later on, we call this "going long".
2.
We can also sell stock we don't own, at one price, and buy it back at
a lower price. When we sell stock we don't currently own with a view
to buying it back later, we call this "going short".
Going short, or short selling as it's also called, is a vital tool to us as day traders, because it means we can make money when prices are falling, not just when they're going up.
An example will make this clearer. Let's imagine we decide to sell 1000 shares in IBM at a price of $83.00 per share. We don't currently own any IBM stock, so our broker lends us some to sell. Once this stock is sold, our trading account is credited with the proceeds, i.e. $83,000 ($83 x 1000 shares). We are now "short" 1000 shares
At some point we have to buy back the stock so that we can give it back to our broker. If the price were to fall to $82.50 we may decide it's the right time to buy back our stock. This will cost us $82,500 ($82.50 x 1000 shares) thus leaving us with a profit of $500 ($83,000 credited from the sale - $82,500 spent to buy back the stock).
By the way, don't worry if buying and selling tens of thousands of dollars worth of stock sounds like it's out of your price range, later on I will show you how you can buy and sell using other peoples money.
All this borrowing and paying back of stock might sound complicated and hard to keep track off, but the in fact process is entirely automatic and transparent, so we can go short and profit from falling prices just as easily as we can go long when we think prices will rise.
If you look back at the previous chart of the IBM stock, you can see that we could have gone short at point 1, and covered our position (bought back the shares we borrowed) at point 2, capturing a move of about $0.90 per share. Of course, we could then have gone long at point 2 and profited from the move back up to point 3, giving us a total profit of $1.60 per share in a period of just 2 hours, instead of the $0.05 per share had we held all day. All these moves happening throughthe day can add up to big money, and this is just one stock. When we consider there are thousands of stocks moving every day, it becomes apparent that the potential to make money from the stock market is gigantic.
So far so good, but there's an obvious question that presents itself at this point. How do we know whether the price of a stock is going to go up or down, and therefore whether we need to go long or short? The answer is we don't. We can only trade based on where we believe the greatest probability of the next price move lies.
Nobody can predict with 100% accuracy what direction a stock price is going to go in next, or how far in that direction it will go. However, we don't need 100% accuracy to make money. In fact, we don't even need 50% accuracy, as long as we manage each trade correctly.
Time for another example: Let's imagine we make 10 trades on a particular day. On four of those trades, our predictions about which way the price will go are right and the trade is a winner (i.e. profitable). The six other trades don't go so well, in fact, our predictions for those six are completely wrong and we lose money on each of them. The average profit we got from from each of the four winning trades was $75.00. However, because we saw that the losing trades weren't going the way we hoped, we ended them quickly, making our average loss from each of them just $25.00. Our total profit from the four winning trades then, was $300.00 (4 winners x $75 per win). Our total loss from the six losing trades was $150.00 (6 losers x $25 per loss). Our net profit at the end of the day was $150.00 ($300 won - $150 lost).
So in this example, even though we were wrong about the market direction more times than we were right, we still made a profit! This was simply because we made sure that our losses were smaller than our profits.
This brings us to Rule Number One of day trading, the importance of which cannot be overstated: End losing trades quickly, and let winning trades run as far as you can.
This is something we must bear in mind as we go through the rest of this book. It is something that every trader knows they should do, but very few actually practice, and that is the most common difference between profitable traders, and losing ones.
Summary
Our job as day traders is to evaluate the probabilities of potential stock price movements, make trades by buying and selling stock based on those probabilities, and manage those trades effectively by minimizing our loss when the market proves us wrong, and maximizing our profit when we are right.
Clearly, a large part of our job is forming an opinion of future stock price direction based on probability. We can never know for sure what is going to happen next to any stock price, but the price itself does give us lots of clues as to what it is likely to do. We need to gather these clues and combine them to put us on the side of the greatest probability.
Now we need to look in some detail at how we find those clues, and form that initial opinion.
Chapter 2 - Analysis Basics
"Buy
land. They're not making it any more."
Mark
Twain
Analysis Methods
We analyze the stock we are trading in order to form an opinion of where its price is likely to move next. There are two basic types of analysis traders can use:
1:
Fundamental Analysis (FA)
2: Technical Analysis (TA)
Fundamental Analysis
As its name suggests, fundamental analysis is the study of the underlying fundamentals of whatever we are trading. For example, if we are looking to trade IBM stock, fundamental analysis would have us look at things like:
Earnings reports: Is the company profitable? Are the profits or losses increasing or decreasing?
Market share: Is the company in a dominant position from which it can dictate prices, or is it at the mercy of bigger players?
Price to Earnings (p/e) ratios: A measure of how accurately the current share price represents the value of the company based on its current and projected earnings
New product launches: Are there potentially profitable new products on the horizon?
Relative sector performance: Is the company doing better or worse than its peers?
And so on...
Essentially we would be looking to find out as much about the company (or commodity, or whatever we were trading) as we possibly could, to form an opinion as to whether the current market price accurately reflected its value.
In the case of the IBM example we may look at all of the above, the current balance sheet, likely earnings for the next quarter and so on, add it all up and divide by the issued share capital (the number of shares in existence), and decide that IBM is worth $95 per share.
If the actual current price were $90, we would have a valid reason to buy. There would be no guarantees that the price would move to $95 of course, a stock price only reflects perceived value - an important point to remember. However, if enough people came to the same conclusion as us, and started buying up the stock, this would push the price higher (we'll look in more detail exactly why this is so later on).
Technical Analysis
Technical analysis is the study of graphs and charts of prices. Technical Analysis (TA) does not care what the underlying instrument is, in other words, whether it is a stock, a futures contract, or an interest rate bond, the principles remain the same.
TA is based on the idea that patterns can be found in price movements, and that these patterns have a tendency to repeat themselves thus giving an opportunity to predict likely future direction of price.
Comparing The Two
Opinions vary on the two analysis methods, and proponents of one often go to great lengths to put down the other (Technical Analysts often refer to "Funnymentals"!)
For the purposes of our trading it is sufficient to say that Fundamental Analysis is best suited to a longer term buy and hold type strategy, and that Technical Analysis is well suited to short term moves. That's not to say each cannot be used in the other scenario, and indeed when we come to Part Three of this book, we will use some Fundamentals in our trading strategy.
Why We Will Use Mostly TA
Fundamental analysis will not help us predict the sort of short term intraday moves that we will be trading. TA on the other hand, is very good at this.
As day traders, TA offers us certain other advantages. We don't need to spend a great deal of time finding out about the stock we are about to trade, because TA works the same on all stocks. Indeed, TA works on any type of trading instrument - a chart is a chart, whatever it may be charting. Thus we can become proficient in TA and subsequently trade many different instruments, we don't need to become expert in those instruments.
TA also works in any timeframe. Concepts we learn and practice in day trading can be used equally well in longer timeframes (like buy and hold) should we choose to do so.
Chapter 3 - Trading Instruments
"Not
everything that can be counted counts, and not everything that counts
can be counted."
Albert Einstein
What Is There Out There To Trade?
More than just stocks! In the main, there are the following types of trading instruments:
Stocks
(Shares)
Futures
Options
Currencies
Bonds
CFDs
Spread
Bets
We'll look at each in turn, concentrating more on stocks and futures because as we'll see later on, those are going to be the most important to us.
Stocks (Shares)
You might here these referred to as stocks, shares, or equities - they are all the same thing. Shares in a company are exactly that - when you buy a share (stock) in a company you become a part owner of that company.
Companies list their stock on one ore more stock exchanges. There are many such exchanges around the world, examples you may have heard of include the London Stock Exchange (LSE), the New York Stock Exchange (NYSE), the NASDAQ, and the Deutsch Bourse.
In fact, almost every developed country in the world has at least one stock exchange. Whilst companies usually list themselves at an exchange in the country in which they are based, they are not obliged to do so. Many larger companies list on a number of different exchanges at the same time - making it easier for international investors to invest in them.
Stocks are bought and sold through a broker, who acts as an intermediary between the trader and the exchange, taking a commission for their trouble. We'll look more at brokers in a little while. A stock market is an open market, and under certain circumstances it is possible to buy stock through one broker and then sell it through another if we so desire.