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 No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning or otherwise, except as permitted under Sections 107 or 108 of the 1976 United States Copyright Act, without the prior written permission of the Publisher. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permissions.
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.
vi 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.
viii 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.