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Day Trading 4th Edition by Ann C. Logue, MBA Author of Hedge Funds For Dummies Day Trading For Dummies®, 4th Edition Published by: John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030-5774, www.wiley.com Copyright © 2019 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 Trademarks: Wiley, For Dummies, the Dummies Man logo, Dummies.com, Making Everything Easier, and related trade dress are trademarks or registered trademarks of John Wiley & Sons, Inc., and may not be used without written permission All other trademarks are the property of their respective owners John Wiley & Sons, Inc., is not associated with any product or vendor mentioned in this book LIMIT OF LIABILITY/DISCLAIMER OF WARRANTY: WHILE THE PUBLISHER AND AUTHOR HAVE USED THEIR BEST EFFORTS IN PREPARING THIS BOOK, THEY MAKE NO REPRESENTATIONS OR WARRANTIES WITH RESPECT TO THE ACCURACY OR COMPLETENESS OF THE CONTENTS OF THIS BOOK AND SPECIFICALLY DISCLAIM ANY IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE NO WARRANTY MAY BE CREATED OR EXTENDED BY SALES REPRESENTATIVES OR WRITTEN SALES MATERIALS THE ADVISE AND STRATEGIES CONTAINED HEREIN MAY NOT BE SUITABLE FOR YOUR SITUATION YOU SHOULD CONSULT WITH A PROFESSIONAL WHERE APPROPRIATE NEITHER THE PUBLISHER NOR THE AUTHOR SHALL BE LIABLE FOR DAMAGES ARISING HEREFROM For general information on our other products and services, please contact our Customer Care Department within the U.S at 877-762-2974, outside the U.S at 317-572-3993, or fax 317-572-4002 For technical support, please visit https://hub.wiley.com/community/support/dummies Wiley publishes in a variety of print and electronic formats and by print-on-demand Some material included with standard print versions of this book may not be included in e-books or in print-on-demand If this book refers to media such as a CD or DVD that is not included in the version you purchased, you may download this material at http://booksupport.wiley.com For more information about Wiley products, visit www.wiley.com Library of Congress Control Number: 2019932586 ISBN 978-1-119-55408-0 (pbk); ISBN 978-1-119-55404-2 (ebk); 978-1-119-55409-7 (ebk) Manufactured in the United States of America 10 Table of Contents INTRODUCTION About This Book Foolish Assumptions Icons Used in This Book Where to Go from Here 2 3 PART 1: GETTING STARTED WITH DAY TRADING CHAPTER 1: So You Want to Be a Day Trader Defining Day Trading: It’s All in a Day’s Work Speculating, not hedging Understanding zero-sum markets 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 Identifying the Personality Traits of Successful Day Traders 13 Independence 13 Quick-wittedness 14 Decisiveness 14 Seeing What Day Trading Is Not 15 It’s not investing 15 It’s not gambling 16 It’s not dangerous — if you use risk capital 16 It’s not easy 17 CHAPTER 2: Introducing the Financial Markets 19 Having a Firm Grasp How Markets Work Supply and demand Exchanges versus over the counter Commissions, fees, and spreads Understanding zero-sum games Opening an Account and Placing an Order Opening a brokerage account Placing your initial order Closing out your order Taking your cash Defining the Principles of Successful Day Trading Working with a small number of assets Managing your positions Focusing your attention Table of Contents 20 20 21 22 23 24 24 24 24 25 25 25 26 27 iii Understanding Risk and Return 27 Recognizing what risk is 28 Getting rewarded for the risk you take 31 Market efficiency in the real world 32 Differentiating Trading, Investing, and Gambling 34 Investing is slow and steady 35 Trading works fast 35 Gambling is nothing more than luck 36 Managing the Risks of Day Trading .37 It’s your business 37 It’s your life 38 CHAPTER 3: Assets 101: Stocks, Bonds, Currencies, and Commodities 39 Grasping the Different Things to Trade Defining a Good Day Trading Asset Looking for liquidity Homing in on high volatility Staying within your budget Making sure you can use margin Taking a Closer Look at Stocks How U.S stocks trade Where U.S stocks trade Alternative exchanges The high-risk over-the-counter exchanges Dark pools Examining Bonds How bonds trade Listed bonds Over-the-counter trading Treasury dealers Cashing In with Currency How currency trades Where currency trades Considering Commodities and How They Trade CHAPTER 4: 39 40 40 42 43 43 46 46 47 49 50 52 52 53 54 54 54 55 55 56 56 Assets 102: ETFs, Cryptocurrency, Options, and Derivatives 59 Explaining Exchange-Traded Funds (ETFs) in Plain English 60 Traditional ETFs 61 Strategy ETFs 62 How U.S ETFs trade 63 Being aware of risks of ETFs .64 iv Day Trading For Dummies Getting Familiar with Cryptocurrency Bitcoin and blockchain Other cryptocurrencies Understanding how cryptocurrencies trade Watching out for the risks of cryptocurrencies Dealing in Derivatives Getting to know types of derivatives Buying and selling derivatives Comprehending Arbitrage and the Law of One Price Understanding how arbitrage and market efficiency interact Creating synthetic securities Taking advantage of price discrepancies Reducing arbitrage opportunities: High-frequency trading CHAPTER 5: Increasing Risk and Potential Return with Short Selling and Leverage 79 Understanding 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 6: 64 65 66 66 69 69 70 72 74 74 75 76 77 80 81 82 83 83 84 84 85 86 87 87 88 88 90 91 91 91 92 93 93 93 Managing Your Money and Positions 95 Setting Your Earnings Expectations 96 Finding your expected return 96 Determining your probability of ruin 97 Table of Contents v Gaining Advantage with a Money-Management Plan 99 Minimizing damage while increasing opportunity 99 Staying in the market longer 99 Getting out before you lose everything 100 Accounting for opportunity costs 101 Examining Styles of Money Management 101 Limiting portions: Fixed fractional 102 Protecting profits: Fixed ratio 102 Sticking to 10 percent: Gann 103 Finding the ideal percentage: Kelly criterion 103 Doubling down: Martingale 104 Letting a program guide you: Monte Carlo simulation 105 Considering past performance: Optimal F 106 Seeing How Money Management Affects Your Return 106 Planning for Your Profits 108 Compounding interest 108 Pyramiding power 109 Making regular withdrawals .109 CHAPTER 7: vi Planning Your Trades and Trading Your Plans 111 Starting to Plan Your Trades: Just the Basics, Please What you want to trade? When will you be trading? How 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 There are old traders and bold traders, but no old, bold traders 112 112 113 113 115 115 117 120 122 122 122 123 123 123 124 124 125 125 126 Day Trading For Dummies 126 127 PART 2: DEVELOPING YOUR TRADING STRATEGY CHAPTER 8: CHAPTER 9: 129 Picture This: Technical Analysis 131 Comparing Research Techniques Used in Day Trading Knowing what direction your research is Examining fundamental research Looking closer at 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 132 132 133 134 136 136 137 141 143 143 144 145 146 147 148 148 148 149 150 150 151 151 151 Following Market Indicators and Tried-andTrue Day Trading Strategies 153 Psyching Out the Markets 154 Betting on the buy side 155 Avoiding the projection trap 155 Taking the Temperature of the Market 156 Pinpointing with price indicators .156 Volume 159 Volatility, crisis, and opportunity 161 Measuring Money Flows 163 Accumulation/distribution index 164 Money-flow ratio and money-flow index 164 Short interest ratios 165 Considering Information That Crops Up during the Trading Day 166 Price, time, and sales 166 Order book 167 Quote stuffing 168 News flows 168 Table of Contents vii Identifying Anomalies and Traps 169 Bear traps and bull traps 169 Calendar effects 170 CHAPTER 10: Eliminating Emotion with Program Trading 173 Creating Your Own Trading Program 174 Recognizing what you want to automate 174 Knowing the limitations of robots 175 Programming, the Day Trading Way 175 Looking at basic brokerage offerings 176 Adding a trading platform 176 Finding trading modules .176 Backtesting Once, Backtesting Twice 177 Building on Some Standard Strategies 177 Range trading 178 Contrarian trading 178 News trading 179 Pairs trading 179 Arbitraging for Fun . . . and Profit 179 Understanding how arbitrage and market efficiency interact 180 Taking advantages of price discrepancies 181 Scalping, the Dangerous Game 182 Understanding Risk Arbitrage and Its Tools 183 Arbitrating derivatives 184 Levering with leverage 185 Short selling 185 Creating synthetic securities 185 Examining Arbitrage Strategies 186 Convertible arbitrage 187 ETF arbitrage 187 Fixed income and interest-rate arbitrage 188 Index arbitrage 189 Merger arbitrage 189 Option arbitrage 190 Being Aware of Those Pesky Transaction Costs 191 CHAPTER 11: viii Day Trading for Investors 193 Recognizing What Investors Can Glean 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 193 194 195 196 197 199 200 200 201 Day Trading For Dummies Index Numerics 1-2-3-4 criterion, securities, 158 10-percent strategy, 103 60/40 rule, 292 A accredited investors, 290 accumulation phase, trends, 141 accumulation/distribution index, money flow, 164 risk arbitrage, 183–186 synthetic securities, 75–76 overview, 60–61 assets retail shares, 61 arbitrage trading strategy ETFs, 62 market efficiency and, 74–75 trading, 63 one-price rule, 76 synthetic securities, 75–76 bonds listed, 54 Ally Invest, 267 trading, 53–54 American options, 190 Treasury dealers, 54 overview, 52–53 AmiBroker, 228 budget and, 43 amortizing bonds, 52–53 commodities, 56–57 Andrews, Alan, 147 cryptocurrency, 25 anomalies, market calendar effects, 170–172 defined, 169 anxiety, managing, 256 arbitrage trading, 33 convertible arbitrage, 187 ETF arbitrage, 187–188 fixed-income arbitrage, 188–189 high-frequency trading, 77 index arbitrage, 189 law of one price, 180 market efficiency and, 74–75, 180–181 merger arbitrage, 189–190 one-price rule, 76 option arbitrage, 190–191 overview, 179–180 price changes, 181–182 risks, 64 high-frequency trading, 77 over-the-counter trading, 54 anger, managing, 255 defined, 26 Art of War, The (Sun Tzu), 259 algorithmic trading strategies, 77 See also program trading Andrews pitchforks, technical analysis, 147 exchange-traded funds Bitcoin, 65 blockchain, 65 Coinbase website, 217 forks, 66 initial coin offerings, 66 overview, 64–65 regulation, 283 risks, 69 trading, 66–69 currency, 55–56 defined, 40 derivatives defined, 40 futures contracts, 71–72 leverage and, 89 options, 70–71 overview, 69–70 regulation, 281–282 trading, 72–73 traditional ETFs, 61 forex brokers with day trader services for, 272–273 currency, 55 defined, 25–26 leverage in, 25, 90 regulation, 283–284 futures contracts, 25 liquidity frequency, 41–42 volume, 41 margin overview, 43–44 for pattern day traders, 45 regulation, 45–46 options, 25 overview, 39–40 stocks, 26 ask price, 46–47 bid price, 46–47 exchanges, 47–52 volatility, 42–43 ATC Brokers, 272 at-risk rules, 306 authorized participants, ETF, 187–188 automatic trades, 14 See also program trading average true range, volatility, 161–162 warrants, 72 Index 343 B backing up systems, 252 backtesting comparing results with market cycles, 225–226 defined, 31 hypothesis, 224 program trading, 177 running test, 224–225 boredom, managing, 256 SogoTrade, 270 borrowing See leverage tastyworks, 272 bottom-up analysis, 133 thinkorswim, 270 break trades, 289–290 TradeMONSTER, 272 breaking news, reacting to, 195–196 breakouts, 142–143 Briefing.com, 216 brokerage accounts closing out orders, 24 simulation software and, 227–229 opening, 24, 266 currency trading, 56 defined, 21 margin policies, 45–46 program trading, 176 regulation financial stability, 284 placing orders, 24 thinkOnDemand, 270 banks TradeStation, 229, 271 dealers versus, 47 money laundering, 284–286 transferring money from, 25 pattern day traders, 286–287 brokers Federal Reserve, 280 regulation, 283–284 bars, 134 bear market, 124, 136 behavioral finance, 253 benchmarks, performance, 241–242 beta, volatility, 30–31, 162 bid-ask spread (bid-offer), 182, 197 bills, 52 See also bonds binary options, 71 Bitcoin, 65 blockchain, 65 bonds amortizing, 52–53 bills, 52 convertible bonds, 72 coupons, 52 brokerage scams, 273–274 choosing opening brokerage account, 266 overview, 261–262 price quotes, 262–263 software-based trading platform, 264 web-based trading platform, 264–266 with day trader services Ally Invest, 267 ATC Brokers, 272 tax reporting, 287 bucket shops, 276 Buffett, Warren, 14, 35 bull market, 124, 136 business partners, 290 business plan choosing trade market and assets, 247–248 goals, 246 investing in business, 248 revising, 249 setting trading hours, 248 business risk, 37 Charles Schwab Active Trading, 267–268 buy orders, 119, 155, 160 ChoiceTrade, 268 C Cobra Trading, 268 E*TRADE, 268 eOption, 271 CAGR (compound average rate of return), 235 calendar effects discount bonds, 52–53 Fidelity Active Trader Pro, 268–269 leverage in, 87 Firstrade, 269 listed, 54 FOREX.com, 273 maturity, 52 Infinity Futures, 271 notes, 52 Interactive Brokers, 269 over-the-counter trading, 54 Just2Trade, 269 performance bonds, 44 Lightspeed Trading, 269–270 plain vanilla, 52 MB Trading, 271–272 trading, 53–54 OANDA, 273 Treasury dealers, 54 capital assets pricing model, 31, 162, 226 overview, 266–267 zero-coupon bonds, 52 capital gains/losses, 234, 299–300 ScottradeELITE, 270 Capone, Al, 286 344 Day Trading For Dummies January effect, 171 Monday effect, 171 October effect, 172 overview, 170–171 call options, 71, 75, 88 CAN SLIM criteria, William O’Neil research service, 202–203 candlestick charts, 149–150 certified public accountants (CPAs), 295 convertible arbitrage, 187 hedging, 8–9 CFTC (Commodity Futures Trading Commission), 219, 281 convertible bonds, 72 as hobby, 12–13 corrections (retracements), 137, 141, 143 investing versus, 15 counseling services, 259 as part-time business, 11–12 channel trading (range trading), 178 Charles Schwab Active Trading, 267–268 chart traps, 170 Chicago Board Options Exchange, 73 Chicago Board Options Exchange Education Center, 207 Chicago Mercantile Exchange, 73 ChoiceTrade, 268 circuit breakers, 289 closing out position investing, 123 position trading, 122 swing trading, 122 CME Group, 207 coaching services, 259 Cobra Trading, 268 Coinbase, 217 coins, cryptocurrency, 66 Cold Turkey app, 256 commissions, 22, 191, 197–198, 267 overtrading and, 329–330 regulation, 276 taxes and, 304–305 commodities, 56–57, 292 Commodity Futures Trading Commission (CFTC), 219, 281 coupons, 52 See also bonds CPAs (certified public accountants), 295 creation units, ETF, 60–61, 75–76, 187 crossovers, technical analysis, 139–140 cryptocurrency, 25 Bitcoin, 65 blockchain, 65 Coinbase website, 217 forks, 66 initial coin offerings, 66 overview, 64–65 pump and dump, 67 regulation, 283 risk, 69 trading, 66–69 wallet, 68 cup and handle formation, technical analysis, 145–146 currency trading, 55–56 regulation, 283 taxes, 292–293 cutting losses, 125–126 D momentum investing, 199–203 personality traits of successful day traders, 13–15 reasons to, 313–318 risk capital, 16 setting targets/limits, 196–197 short selling, 204 speculating, 8–9 success rates, 17–18 trade execution, 197–199 zero-sum market, 9–10 Day Trading Academy, 210 dealers, 47 deductible expenses, taxes business expenses, 308 investments advisory services, 303 attorney and accounting fees, 302 interest paid on loans, 303 office expenses, 302–303 safe-deposit box rent, 303 state income taxes, 304 delta, volatility, 100 depression, managing, 256 derivatives defined, 40 futures contracts, 71–72 common stock, 26 See also stocks dark pools (dark liquidity), 52, 167, 262 leverage and, 89 compound average rate of return (CAGR), 235 data mining, 221 overview, 69–70 compound interest, 108 computers, choosing, 250 consolidation (congestion) phase, trends, 141 continuation (main) phase, trends, 141 day trading avoiding, 319–324 common mistakes of, 325–330 defined, difficulty of, 17 discipline, importance of, 194 contrarian trading, 178 factors influencing volatility, contrarian traps, 170 gambling versus, 16 convergence, technical analysis, 140 handling breaking news, 195–196 options, 70–71 regulation, 281–282 risk arbitrage, 184 trading, 72–73 warrants, 72 discount bonds, 52–53 distribution phase, trends, 141 divergence, technical analysis, 140 diversification, 96 dividends, stock, 46 Index 345 dollar-weighted (money-weighted) return, 238 doubling down, 104–105, 335 ETF arbitrage, 187–188 Federal Reserve System, 280 ETFs (exchange-traded funds) fees doubt, managing, 254 Dow, Charles, 147 creation units, 60–61, 75–76, 187 broker, 23 defined, 26 margin, 82–83 ETF arbitrage, 187–188 Dow Theory, 148 due diligence, on research services Commodity Futures Trading Commission, 219 Fibonacci numbers, 148–149 retail shares, 61 Fidelity Active Trader Pro, 268–269 risk, 64 Financial Industry Regulatory Authority See FINRA shareholders, 187 FINRA BrokerCheck service, 219 strategy ETFs, 62 National Futures Association BASIC, 220 trading, 63 tracking error, 64 traditional ETFs, 61 overview, 218–219 questions to ask, 220–221 ETNs (exchange-traded notes), 61 SEC, 220 European options, 190 excess margin, 44 E exchanges dark pools, 52, 167, 262 E*TRADE, 268 tax deductible, 302 overview, 60–61 earned income, taxes on, 298–299 electronic communications networks, 49–50 earnings expectations Nasdaq, 48–49 expected return, 96–97 NYSE, 48 probability of ruin, 97–99 over-the-counter financial markets assets, 25–26 brokerage accounts closing out orders, 24 opening, 24 placing orders, 24 transferring money from, 25 commissions, 22 concentration/focus, importance of, 27 exchanges, 21–22 fees, 23 gambling, 36–37 investing, 35 earnings momentum, 200 OTC Link, 51 market efficiency, 32–34 electronic communications networks (ECNs), 49–50 Over-the-Counter Bulletin Board, 50–51 over the counter trades, 22 overview, 19–20 Elite Trader, 341 penny stocks, 51 positions, 26–27 Elliott, Ralph, 149 overview, 21–22, 47–48 Elliott Wave system, 149 regulation, 279–280, 282 returns opportunity cost, 31 Elliott Wave website, 217 exchange-traded funds See ETFs risk-free rate of return, 32 emotions, managing exchange-traded notes (ETNs), 61 risk-reward tradeoff, 32 anger, 255 anxiety, 256 boredom, 256 depression, 256 doubt, 254 fear, 254–255 greed, 255 overview, 253–254 Endicott v Commissioner (2013), 294 execution, trade See trade execution exercise, role in work-life balance, 257 expected returns, 96–97 expert advisor See program trading F time value of your money, 32 risk business risk, 37 defined, 28 limited liability, 29–30 personal risk, 38 probability of loss, 28–29 volatility, 30–31 zero-sum market, 30 false breakouts, 142–143 spread, 23 eOption, 271 FCMs (futures commission merchants), 72, 282 supply and demand, 20–21 estimated taxes, 309 fear, managing, 254–255 zero-sum market, 23–24 enrolled agents, 295–296 346 Day Trading For Dummies trading, 35–36 FINRA (Financial Industry Regulatory Authority) margin rules, 45 pattern day traders, 84 regulation, 279 Rule 4210, 286–287 FINRA BrokerCheck service, 219, 279 Firstrade, 269 fixed income investments, 52 See also bonds fixed-fractional trading, 102, 333 fixed-income arbitrage, 188–189 fixed-ratio trading, 102–103, 333 gamma, volatility, 100 inflation, defined, 32 Gann, William, 150 information resources Gann system, 150, 332–333 books garbitrage, 191 basic trading guides, 337–338 ghost trading See simulation trading history, 340–341 price theory, 339 golden ratio, 148–149 technical analysis guides, 338–339 gaps, technical analysis, 146–147 greed, managing, 255 Greeks, volatility, 100 H trading psychology, 340 mainstream media, 342 online, 341–342 initial coin offerings (ICOs), 66 half Kelly trade, 104, 334 insider trading, 33, 287–288 force index, 159 head and shoulders formation, technical analysis, 144–145 Institute for Financial Markets, 207 forex (foreign exchange) hedge funds, 63, 290 Interactive Brokers, 269 hedging, 8–9 IntercontinentalExchange, 207 currency, 55 High Yield Investment Program (HYIP), 116 interest defined, 25–26 high-frequency trading, 41–42, 77 leverage in, 25, 90 hobby flags, technical analysis, 143–144 brokers with day trader services for, 272–273 day trading as, 12–13 regulation, 283–284 role in work-life balance, 258 FOREX.com, 273 forks, defined, 66 free riding, 92–93 Freedom app, 256 frequency, liquidity, 41–42 Friedman, Milton, 20 fundamental research, 133, 320 futures commission merchants (FCMs), 72, 282 futures contracts defined, 25 leverage and, 88–89 overview, 71–72 taxes, 292 G gain per day, 116 gain per trade, 116 gambling day trading versus, 16, 323 defined, 36–37 HYIP (High Yield Investment Program), 116 compound interest, 108 margin interest, 46 open interest, 160–161 taxes and, 306 Internet service, choosing, 250–251 inverse ETFs, 62 investing I closing out position, 123 ICOs (initial coin offerings), 66 implied volatility, 163 Inbox When Ready app, 256 income returns, 234 See also returns index arbitrage, 189 IndexArb.com, 341 indicators defined, 138 momentum indicators, 141–142, 156–157 moving averages, 139–140 pivot points, 139 price indicators, 156–159, 166–167 Infinity Futures, 271 day trading versus, 15 defined, 35 investors learning from day traders, 193–204 taxes on investment income, 299 Investing.com, 217 investment expenses, tracking at-risk rules, 306 deductible, 302–304 interest expenses, 306 non-deductible, 304–305 passive activity, 306 two percent limit, 306 Investopedia, 210–211 Investor/RT software, 228 Index 347 J January effect, 171 Japanese candlestick charting, 149–150 Just2Trade, 269 M main (continuation) phase, trends, 141 mainstream media, as information resource, 342 margin brokerage firm’s policies, 45–46 K costs and fees of, 82–83 Kapitall, 211 excess margin, 44 Kelly Criterion formula, 103–104, 334 leverage, 80 margin agreements, 81 margin calls, 83 L overview, 43–44 law of one price (one-price rule), 74, 76, 180 leverage borrowing for trading capital, 91–92 defined, 16, 87, 247 in Forex, 25, 90 free riding, 92–93 in futures trading, 88–89 leverage strategies, 286 margin loans, 91 in options market, 88 risk, 93–94 risk arbitrage, 185 in stocks and bonds, 87 leveraged ETFs, 62 Libor, 82 for pattern day traders, 45, 83–84 margin loans, 91 market capitalization, 47 market efficiency, 32–34, 74–75, 135, 180–181 market makers, Nasdaq, 49 MarketDelta software, 215 Lightspeed Trading, 269–270 limit orders, 118, 196, 255 limited liability, 29–30 accumulation/distribution index, 164 money-flow index, 165 money-flow ratio, 165 overview, 163–164 short interest ratio, 165–166 money laundering, 284–286 money management earnings expectations, 96–99 fixed-fractional trading, 102, 333 fixed-ratio trading, 102–103, 333 Gann system, 332–333 Kelly Criterion formula, 103–104, 334 market volatility and, 99–100 martingale system, 104–105, 335 Monte Carlo simulation, 105, 335 mark-to-market election, 296 opportunity cost, 101 martingale system, 104–105, 335 Optimal F system, 106, 334 maturity, bonds, 52 overview, 95, 331 MB Trading, 271–272 profits meditation, role in work-life balance, 257–258 account withdrawals, 109–110 merger arbitrage, 189–190 compound interest, 108 MetaStock software, 215, 228 pyramiding, 109 saving, 332 miscellaneous income, 301–302 returns, 106–108 mobile trading, 252–253 stop orders, 332 Modified Dietz method, 236 momentum investing liquidity dark pools, 52, 167, 262 frequency, 41–42 volume, 41 listed bonds, 54 Litecoin, 66 loss limits, 117 348 money flow mark-to-market accounting, 307 MetaTrader software, 273 liens, 82 Monday effect, 171 Day Trading For Dummies 10-percent strategy, 103 Money Show, 209 earnings momentum, 200 money-flow index, 165 momentum indicators, 141–142 money-flow ratio, 165 momentum oscillators, 156–157 money-weighted (dollar-weighted) return, 238 overview, 199 price momentum, 200–201 Value Line research service, 201 William O’Neil research service, 202–203 monitors, choosing, 250 Monte Carlo simulation, 105, 335 moving averages, 139–140 N Nakamoto, Satoshi, 65 Nasdaq, 48–49 Nasdaq Capital Market, 49 Nasdaq Global Market, 49 Nasdaq Global Select Market, 49 Nasdaq/OMX, 208 National Association of Securities Dealers, 279 National Best Bid or Offer, 198 National Futures Association (NFA) Background Affiliation Status Information Center, 220 Investor Learning Center, 208 regulation, 281–282 need-to-make number, 255 negative-sum game, 23 Reddit, 342 Trade2Win, 342 Trader Mike blog, 342 TraderInterviews.com, 342 Traders Laboratory, 342 Treasury bonds, 54 Online Trading Academy, 211 open interest, 160–161 opportunity cost, 31, 101 Optimal F system, 106, 334 option arbitrage, 190–191 options, 70–71 brokers with day trader services for, 271–272 defined, 25 leverage in, 88 options expiration, 41 taxes, 293–294 New York Stock Exchange (NYSE), 48, 208 OptionVue service, 229 news flows, 168–169 order book, 167 news trading, 179 order cancels other (OCO), 118 NFA See National Futures Association order sends order (OSO), 119 NinjaTrader service, 215, 229 OTC BB (Over-the-Counter Bulletin Board), 50–51 non-deductible expenses, taxes, 304–305 OTC Link, 51 notes, 52 See also bonds overconfidence, danger of, 126 NYSE (New York Stock Exchange), 48, 208 O OANDA broker, 273 OCO (order cancels other), 118 October effect, 172 OmniTrader service, 215 on-balance volume, 160 1-2-3-4 criterion, securities, 158 one-price rule (law of one price), 74, 76, 180 online resources overanalyzing data, 151 Over-the-Counter Bulletin Board (OTC BB), 50–51 over-the-counter exchanges, 22 bonds, 54 OTC Link, 51 Over-the-Counter Bulletin Board, 50–51 penny stocks, 51 P pair trading, 179 paper trading, 177 See also simulation trading margin for, 45, 83–84 regulation, 286–287 patterns, technical analysis cup and handle formation, 145–146 flags, 143–144 gaps, 146–147 head and shoulders formation, 144–145 pennants, 143–144 pitchforks, 147 pennants, technical analysis, 143–144 pennies, 116 penny stocks, 51 People in Profit (PIP), 116 performance, measuring backtesting overview, 224–226 software for, 228–229 benchmarks, 241–242 overview, 223 returns analyzing, 234 calculating, 234–239 determining risk to return, 239–241 simulation trading backtesting and, 227–229 overview, 226–227 tracking trades profit and loss statement, 230–231 on spreadsheet, 230 trading diary, 232–233 performance bonds, 44 See also margin personal risk, 38 personality traits of successful day traders, 13–15 PIP (People in Profit), 116 Elite Trader, 341 part-time trading, 11–12 pips, 116 IndexArb.com, 341 passive activity, investments, 306 pitchforks, technical analysis, 147 IRS website, 297 pattern day traders pivot points, 139 Index 349 TotalView quotes, 263 plain vanilla bonds, 52 pump and dump, 51, 67 price theory, 339 Pure Investor, 116 bear market, 124 prime rates, interest, 82 put options, 71, 75, 88 bull market, 124 probability of loss, 28–29 pyramid scheme, 109 buy orders, 119 probability of ruin, 97–99 pyramiding, 109 closing out position profit and loss statement, 230–231 planning trades investing, 123 profits position trading, 122 account withdrawals, 109–110 swing trading, 122 compound interest, 108 cutting losses, 125–126 profit goals, 115–116 knowing when to move on, 123–124 pyramiding, 109 limit orders, 118 program trading adding trading platform, 176 loss limits, 117 arbitrage trading morning review, 114 law of one price, 180 order cancels other, 118 market efficiency and, 180–181 order sends order, 119 overview, 179–180 overconfidence and, 126 price discrepancies, 181–182 overview, 111 backtesting, 177 profit goals, 115–116 brokerage firms, 176 rumors, 125 contrarian trading, 178 sample order, 114–115 convertible arbitrage, 187 sample trading plan, 120–121 ETF arbitrage, 187–188 sell orders, 119 fixed-income arbitrage, 188–189 stop orders, 117–118 index arbitrage, 189 survival bias, 127 limitations of, 175 technical analysis, 115 merger arbitrage, 189–190 trends, 124–125 news trading, 179 what to trade, 112–113 option arbitrage, 190–191 when to trade, 113 overview, 173–174 points, defined, 116 pair trading, 179 position trading, 26–27, 122 range trading, 178 positive-sum game, 23 risk arbitrage price changes derivatives, 184 arbitrage, 181–182 leverage, 185 technical analysis, 135 overview, 183–184 price discovery, 68 short selling, 185 price indicators, 156–159, 166–167 synthetic securities, 185–186 price momentum, 200–201 scalping, 182–183 price quotes Level I quotes, 263 Level II quotes, 263 overview, 262–263 350 qualified purchasers, hedge fund, 290 quote stuffing, 168 quote-rate pirates, 168 R range trading (channel trading), 178 Reddit, 342 regulation break trades, 289–290 brokers, 284–287 business partners, 290 circuit breakers, 289 derivatives, 281–282 exchanges, 279–280 Federal Reserve, 280 FINRA, 279 Forex, 283–284 history of, 276–277 insider trading, 287–288 overview, 275 SEC, 278 Securities Investor Protection Corporation, 280 short-selling restrictions, 289 stock and corporate bond market, 278–280 Treasury bond market, 280 research resources Briefing.com, 216 trading modules, 176 Chicago Board Options Exchange Education Center, 207 transaction costs, 191–192 CME Group, 207 pullbacks (retracements), 137, 141, 143 Day Trading For Dummies Q Coinbase, 217 conferences, 208–209 due diligence on, 218–221 training classes personal risk, 38 Commodity Futures Trading Commission, 219 Day Trading Academy, 210 probability of loss, 28–29 FINRA BrokerCheck service, 219 Investopedia, 210–211 short selling, 93–94 Kapitall, 211 uncertainty versus, 169 Online Trading Academy, 211 uncorrelated risk, 63 overview, 209–210 volatility, 30–31 TopstepTrader, 211 zero-sum market, 30 National Futures Association BASIC, 220 overview, 218–219 questions to ask, 220–221 SEC, 220 Elliott Wave website, 217 information resources books, 337–338 mainstream media, 342 online, 341–342 Institute for Financial Markets, 207 IntercontinentalExchange, 207 Investing.com, 217 Money Show, 209 Nasdaq/OMX, 208 National Futures Association Investor Learning Center, 208 New York Stock Exchange, 208 overview, 205–206 prices, 212–214 CQG, 213 DTN, 213–214 eSignal, 214 Trading Advantage, 212 derivatives, 184 William O’Neil research service, 202–203 leverage, 185 retracements, 137, 141, 143 returns analyzing, 234 calculating compound average rate of return, 235 deposits/withdrawals, 235–239 dollar-weighted return, 238 Modified Dietz method, 236 overview, 234–235 time-weighted rate of return, 237 capital gains, 234 determining risk to return standard deviation, 239–241 win-loss percentage, 239 Oanda, 214 effect of money management on, 106–108 overview, 212–213 income returns, 234 School of Gann website, 217 opportunity cost, 31 Trader and Investor Summit, 209 risk-free rate of return, 32 TradeTheNews.com, 218 risk-reward tradeoff, 32 Trading Show Chicago, 209 time value of your money, 32 trading strategies MarketDelta software, 215 risk arbitrage Value Line research service, 201 reversals, 141 risk overview, 183–184 short selling, 185 synthetic securities, 185–186 risk capital, 16, 284 risk to return standard deviation, 239–241 win-loss percentage, 239 risk-free rate of return, 32 risk-reward tradeoff, 32 round lots, 43 rumors, 125 S School of Gann website, 217 ScottradeELITE, 270 SEC (Securities and Exchange Commission) investigating research services, 220 National Best Bid or Offer, 198 regulation, 278 securities See also assets defined, 40 1-2-3-4 criterion, 158 Securities Investor Protection Corporation (SIPC), 280 Metastock software, 215 business risk, 37 NinjaTrader service, 215 cryptocurrency, 69 OmniTrader service, 215 defined, 28 overview, 214 exchange-traded funds, 64 self-directed IRAs, 309–310 StockTwits service, 216 leverage, 93–94 sell orders, 119 Trade-Ideas software, 216 limited liability, 29–30 sell rule, 194 security brokerage scams, 273–274 virus protection, 251 Index 351 semi-strong market efficiency, 75, 180 short selling, 204 setting up business backing up systems, 252 behavioral finance, 253 business plan choosing trade market and assets, 247–248 investing in business, 248 revising, 249 when to trade, 248 computers, 250 Internet service, 250–251 managing emotions anger, 255 anxiety, 256 straddles, 306 choosing shorts, 85–86 strategy ETFs, 62 overview, 84–85 strike price, 88 risk, 93–94 strong market efficiency, 74, 180 risk arbitrage, 185 subpennying, 76, 182 short squeeze, 86 substantial activity, trading, 294 short-selling restrictions, 289 supply and demand, 20–21 simulation trading setting goals, 246 stop-limit orders, 26, 118 calling back stock, 86 support level, trendlines, 137 backtesting and, 227–229 support systems, setting up, 259 defined, 177 survival bias, 127 overview, 226–227 swing trading, 8, 122, 133 SIPC (Securities Investor Protection Corporation), 280 synthetic securities, 185–186 60/40 rule, 292 T smart money, 160 Smith, Adam, 20 tastyworks website, 272 social media, 168–169, 256 tax attorneys, 296 taxes doubt, 254 software-based trading platforms, 264 fear, 254–255 SogoTrade, 270 capital gains/losses, 299–300 greed, 255 speculating, 8–9, 36 commodities, 292 overview, 253–254 spread, 23, 47, 267 currency trading, 292–293 mobile trading, 252–253 squawk box, 218 earned income, 298–299 monitors, 250 standard deviation, 30, 42–43, 100, 239–241 estimated taxes, 309 boredom, 256 depression, 256 overview, 245 security, 251 stocks, 26 ask price, 46–47 support systems bid price, 46–47 books, 259 brokers with day trader services for, 267–271 coaching, 259 counseling, 259 exchanges, 47–52 other traders, 259 dark pools, 52, 167, 262 walk-away money, 260 electronic communications networks, 49–50 work-life balance exercise, 257 Nasdaq, 48–49 friends and family, 258 hobbies, 258 meditation, 257–258 shareholders, ETF, 187 short interest ratio, money flow, 165–166 352 information resources, 297 investment expenses at-risk rules, 306 deductible, 302–304 interest expenses, 306 non-deductible, 304–305 passive activity, 306 two percent limit, 306 over-the-counter, 50–51 mark-to-market accounting, 307 taxes, 294–295 StockTwits service, 216 stop orders, 117–118, 196, 332 Day Trading For Dummies futures contacts, 292 investment income, 299 leverage in, 87 workspace, 249–250 forms, 308–309 NYSE, 48 overview, 47–48 overview, 256–257 business expenses, 308 miscellaneous income, 301–302 options, 293–294 overview, 291 regulation, 287 self-directed IRAs, 309–310 stock trading, 294–295 tax experts, 295–297 tax-preparation software, 298 technical analysis, 115 bottom-up research, 133 charting, 134–135 Dow Theory, 148 Elliott Wave system, 149 Fibonacci numbers, 148–149 fundamental research, 133 Gann system, 150 information resources, 338–339 Japanese candlestick charting, 149–150 overanalyzing data, 151 overview, 131 patterns thinkOnDemand backtesting, 270 thinkorswim, 270 calendar effects, 170–172 ticks, 116, 158 defined, 169 time value of your money, 32 accumulation, 164 tokens, cryptocurrency, 66 money-flow index, 165 top-down analysis, 132–133 TopstepTrader, 211 tracking error, ETFs, 64 tracking trades profit and loss statement, 230–231 on spreadsheet, 230 trading diary, 232–233 trade execution costs, 197–198 improving, 198–199 flags, 143–144 Trade2Win website, 342 gaps, 146–147 Tradecision service, 229 head and shoulders formation, 144–145 Trade-Ideas software, 216 pennants, 143–144 Trader and Investor Summit, 209 TradeMONSTER, 272 price changes, 135 Trader Mike blog, 342 top-down research, 132–133 TraderInterviews.com, 342 trends Traders Laboratory, 342 breakouts, 142–143 TradeStation service, 229, 271 indicators, 138 TradeTheNews.com, 218 momentum indicators, 141–142 trading, defined, 35–36 moving averages, 139–140 Trading Blox service, 229 phases of, 140–141 pivot points, 139 Trading Advantage website, 212 trading diary, 232–233 trading in the spot market, 56 trendlines, 137–138 trading indicator (trin), 158–159 upward bias, 151–152 trading modules, 176 volume changes, 135 trading psychology, 340 teenies, 116 10-percent strategy, 103 theta, volatility, 100 money flow time-weighted rate of return, 237 trade on margin, 24 overview, 136–137 anomalies Thorpe, Edward O., 104 cup and handle formation, 145–146 pitchforks, 147 trading strategies See also planning trades trading robot See program trading Trading Show Chicago, 209 distribution, 164 money-flow ratio, 165 overview, 163–164 short interest ratio, 165–166 news flows, 168–169 order book, 167 overview, 153–154 price indicators, 156–159, 166–167 psychology and, 154–155 quote stuffing, 168 traps chart traps, 170 contrarian traps, 170 overview, 169–170 volatility and, 161–163 volume changes, 159–161 traditional ETFs, 61 trailing stops, 117–118 training classes Day Trading Academy, 210 Investopedia, 210–211 Kapitall, 211 Online Trading Academy, 211 overview, 209–210 TopstepTrader, 211 Trading Advantage, 212 transaction costs, program trading, 191–192 traps chart traps, 170 contrarian traps, 170 defined, 169 Treasury bond market, 280 Treasury dealers, 54 trendlines, 137–138 Index 353 trends, 124–125 virus protection, 251 accumulation phase, 141 VIX, 162–163 breakouts, 142–143 volatility wash-sale rule, 293, 296, 300–301 Watergate scandal, 286 weak-form market efficiency, 75, 180 consolidation phase, 141 assets, 42–43 distribution phase, 141 average true range, 161–162 indicators, 138 beta, 30–31, 162 main phase, 141 delta, 100 momentum indicators, 141–142 gamma, 100 moving averages, 139–140 implied, 163 William O’Neil research service, 202–203 overview, 136–137 money management and, 99–100 win-loss percentage (win ratio), 239 theta, 100 work-life balance pivot points, 139 retracements, 137, 141, 143 reversals, 141 trendlines, 137–138 trin (trading indicator), 158–159 exercise, 257 vega, 100 hobbies, 258 volatility ratio, 163 volume U liquidity, 41 uncertainty, defined, 169 technical analysis, 135 uncorrelated risk, 63 trading strategies, 159–161 unit investment trusts, 69 unlimited liability, 29 upward bias, 151–152, 247 V Value Line research service, 201 friends and family, 258 meditation, 257–258 overview, 256–257 workspace, 249–250 Y yips, 245 W walk-away money, 260 Z wallet, cryptocurrency, 68 zero-coupon bonds, 52 want-to-make number, 255 zero-sum market, 9–10, 23–24, 30, 247 warrants, 72 vega, volatility, 100 354 web-based trading platforms, 264–266 trading strategies and, 161–163 VIX, 162–163 two percent limit, 306 Wealth of Nations, The (Smith), 20 Day Trading For Dummies About the Author Ann C. Logue, MBA, is the author of Hedge Funds For Dummies, Socially Responsible Investing For Dummies, and Emerging Markets For Dummies (all published by John Wiley & Sons, Inc.) She has written for Barron’s, The New York Times, Newsweek Japan, USAToday, and the International Monetary Fund She is a lecturer at the Liautaud Graduate School of Business at the University of Illinois at Chicago Her current career follows 12 years of experience as an investment analyst She has a BA from Northwestern University and an MBA from the University of Chicago, and she holds the Chartered Financial Analyst (CFA) designation Dedication Once again to Rik and Andrew, for their love and support Author’s Acknowledgments So many wonderful people helped me on the different editions of this book I talked to many day traders, brokers, and others in the investment business, including Jack Alogna and Beth Cotner; Michael Browne of DTN Inc.; Nihar Dalil, Glenda Dowie, Greg Gocek, and Robert Cohen of the CFA Society of Chicago; Mary Haffenberg and Curt Zuckert at the Chicago Mercantile Exchange; John T Hoagland, Conor Meegan, and Michael Patak at TopstepTrader; Anil Joshi of NuFact; Karen H at Gamblers Anonymous; James Kupfer of Waterston Financial; James Lee of TradersLaboratory.com; Wayne Lee of Nasdaq; Michael Lindsay, Khurram Naik, and James Cagnina at Infinity Brokerage Services; Kristy Gercken, Casey Nicholson, Erika Olson, Don Padou, Karina Rubel, Mario Sant Singh, Chris Tabaka, Elizabeth Tabaka, and Allen Ward I also talked to several other traders who asked to remain anonymous; they know who they are, and I hope they also know how much I appreciate their help As for the mechanics of putting together the book, Chad Sievers and Tracy Boggier of Wiley were great to work with this time around Finally, my agent, Marilyn Allen, made it all happen Thanks, everyone! Publisher’s Acknowledgments Senior Acquisitions Editor: Tracy Boggier Production Editor: Mohammed Zafar Ali Project Editor: Chad R. Sievers Cover Image: © ahlobystov/E+ / Getty Images Technical Editor: Rick Stambaugh WILEY END USER LICENSE AGREEMENT Go to www.wiley.com/go/eula to access Wiley’s ebook EULA ... Day Trading 4th Edition by Ann C. Logue, MBA Author of Hedge Funds For Dummies Day Trading For Dummies? ?, 4th Edition Published by: John Wiley & Sons,... 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... you’ll find interesting and useful information Day Trading For Dummies Getting Started with Day Trading IN THIS PART . Get comfortable with the basic idea of day trading: the process of making a