A Beginner's Guideto Trading Tools and Tactics, Money Management, Discipline and TradingPsychology : How To Day Trade For A Living
About Author
Andrew Aziz (Ph. D., P. Eng.) is a Canadian stock markettrader, official Forbes Council member, investor and #1 best-selling author. Hehas ranked as one of the Amazon top 100 best-selling authors in the"Business and Finance" category for over 4 consecutive years(2016-present).
Summary of Book
Have you ever considered quitting your 9 to 5 job for acareer in day trading? Well consider this: - Day trading has a steep learningcurve - Day trading is very competitive Only 16 percent of day traders areprofitable after their first six months. Day trading is a profession and not astrategy to get rich quick But!... Daytrading can be executed from anywhere in the world where there's a properinternet connection, including the beaches in Bahamas. Day trading is flexible.You can be finished by 10:00 a.m. and then do whatever you want doing the restof the day. Day trading is a license to print money, if you succeed, and it'sprobably the only one that the government won't put you in jail for...
Here I am going to summarizing the most important takeawaysfrom the book How to Day Trade for a Livingwritten by Andrew Aziz.
Takeaway # 1 Stocks InPlay:
Day traders always step out of their positions before theend of the day. That's what separates them from other traders. It's said thatthe day trader is only as good as the stocks he's trading, and the best stocksto day trade are called "stocks in play".
Stocks in play fulfill threeessential criteria: (a) They aretrading at a high relative volume. Meaning that, they are being bought and soldmore than what's typical for the stock. High volume is positive for a daytrader because it's easier to get in and out of trades. (b) They have a fundamental catalyst, such as an earnings report, amerger, a major product release, a major contract and many more. (c) They are trading independently ofthe market, and independently of the market sector that they belong to.
Andrew Aziz uses scanners to findthese stocks. He uses two different types: a pre-market scanner and a real-timeintraday scanner. Once he has established which stocks that are in play, hewill open up their stock charts and set up a plan. He will monitor these stockson three separate computer screens, and usually there are only two to threegreat stocks per day anyway, so one chart per screen. From here, it's allguerrilla warfare. The day trader wants to wait for the right opportunity, thenget in quick and get out even faster.
Takeaway #2: The 2 percent rule:
A trader’s primary objective should be to "Live to trade another day".As mentioned before - only 16% of day traders are profitable after the firstsix months. In other words - the learning curve is ruthless! But if you cansurvive it, great rewards will come.
As your primary objective issurviving, the importance of risk management can't be overstated. You mustlearn to limit your losses. If you want to reap the long-term profits of agreat trading system, you must be able to survive for the long term first!Therefore, never risk more than 2% of your total capital in any given trade.
Risking 2% only will allow foryou to be wrong a lot, and still survive because there will be times when youare wrong. Times when you need to accept defeat, and get out of the trade. Andyou might think: "but I don't want to make a thousand dollar loss"!Well, you definitely don't want to make a five thousand dollar loss! Get out ofthe trade! Look for opportunities where you are risking cents to earn dollars.You want asymmetry in this - a large potential reward but a small downside.
For example, risking a hundred bucks, buthaving the potential of gaining a thousand bucks. Your trade is then said tohave a favorable R-multiple.
Takeaway #3:Understanding the candlesticks:
A day trader’s job is to analyse the balance of the powerbetween buyers and sellers, and bet on the winning team. Day trading is thestudy of mass psychology. Price fluctuations in the market are a result of theactions of three categories of people - theBuyers, the Sellers, and the Undecisive. The best way toillustrate the price fluctuations and the underlying psychology of the marketis with candlestick charts. The candlesticks are a fight between buyers andsellers. It's an excellent indicator that tells you which group that iscurrently winning - the Buying Bulls or the Selling Bears, during thatspecific time frame. It can be hourly charts, 5-minute charts or one-minutecharts.
For instance - if the bulls arecurrently winning, it can be imagined as the height of the candle expresses howmuch the buyers are currently winning by so, in the following candle here, wesee that they win by a smaller margin than before, and the price increases by asmaller amount as a result. Positive price action is represented by a hollowcandlestick. On the other hand, if the bears are currently winning the battle,it will be represented by a filled, often red candlestick.
Sometimes, the battle isindecisive. This is then represented by an indecision candlestick, a very thinone, meaning that the price fluctuation during that time was minor. For a chartto be complete, it should also be accompanied by the trading volume for eachtime frame. The trading volume acts as a great complement to the pricemovements. A high trading volume accompanied by either a sharp movement in thestock price or an indecisive one is an interesting situation, which the daytrader can profit from as we shall see in the following two takeaways.
Takeaway #4: TheSupport and Resistance Strategy:
Many traders love to identify complicated chart patterns ifthey are accompanied by ridiculous names - all the better apparently. TryGoogle search "the abandoned baby", "the dark cloud cover"or "the three black crows". Andrew Aziz never believed in these. Ifyou make it too complicated, your risk curve-fitting and if the patterns aretoo arbitrary, they become subjective and suddenly you can see them everywhere.
Instead, Andrew Aziz prefers touse primarily two very simple trading strategies: Support or resistance trading and VWAP-trading. Support is trading terminology and means that astock is showing respect for a certain price point. If the stock has bouncedback up from such a point before, you can expect it to do so in the future aswell. Resistance is the opposite - it acts as a ceiling from which the stocksuptrend is reversed. Here's how you trade using the support strategy. 1. Each morning before the stockexchange opens, find areas of support and resistance for your stocks in play. 2. Look for indecision candles aroundthe support area accompanied by high trading volume. Set up your stop-lossslightly below the support area, on a five minute chart. 3. Keep the trade until the next support or assistance area. 4. If there's an obvious second supportor resistance area, you may sell half your position at the first level, moveyour stop-loss up to break-even, and save the other half for that second level.Mirror this and you get how to short using the resistance strategy.
Takeaway #5: The VWAPStrategy:
VWAP means volume weighted average price, and thisis the most important technical indicator in learning how to day trade for aliving, according to Andrew Aziz. For now, it will be sufficient to say thatit's a moving average, and that it takes into account the volume of shares thathave been traded. If the stock price currently is above the VWAP, it's a bullish indication. And ifthe situation is reversed, it's a bearish indication.
VWAP should be included in yourtrading platform, otherwise you should switch platform. So, How do you set up atrade with it? 1. See if the stockin play shows respect for VWAP as a support. 2. Buy slightly above the VWAP and set up a trailing stop, slightlybelow. A break on a five-minute chart should get you out of the trade. 3. Keep your position until the nextlevel of resistance. In this case, the next resistance level was expected to bethe "whole-dollar" level of $22 dollars. 4. You may sell half the position close to the resistance level,and move up your stop-loss to your buying point. If you mirror everything youcan use the VWAP short selling too.
The key for now should be tomaster just one strategy. So pick either VWAP or support and resistance, andstart trading it in a trading simulator. Not over-complicating your strategieswill allow for you to focus on what's really important - the psychologicalaspects of the game.
Day trade only stocks in play. Never risk more than 2% in any giventrade. Candlestick charts! The support and resistance strategy is simple andefficient. The VWAP strategy is simpleand efficient too. Trading is much like learning to ride a bicycle - onceyou've mastered this skill, no one can take it away from you.
