HOW TO DAY TRADE - Warrior Trading

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HOW TO DAY TRADEA Detailed Guide to Day Trading Strategies,Risk Management, and Trader PsychologyROSS CAMERON

AuthorHouse 1663 Liberty DriveBloomington, IN 47403www.authorhouse.comPhone: 1 (800) 839-8640 2015 Ross Cameron. All rights reserved.No part of this book may be reproduced, stored in a retrieval system, ortransmitted by any means without the written permission of the author.Published by AuthorHouse 05/03/2018ISBN: 978-1-5049-5772-4 (sc)ISBN: 978-1-5049-5773-1 (e)Library of Congress Control Number: 2015917812Print information available on the last page.This book is printed on acid-free paper.Because of the dynamic nature of the Internet, any web addresses or links contained in this book may have changedsince publication and may no longer be valid. The views expressed in this work are solely those of the author and do

CONTENTSIntroduction. viiChapter 1Why do most traders fail? . 1Chapter 2Risk Management . 6Chapter 3Stock Selection - Choosing the right stocks to trade .12Chapter 4Introduction to Candlesticks .23Chapter 5Setting Up Your Charts - Technical Indicators.29Chapter 6Support and Resistance .43Chapter 7Order Types, Level2, Time & Sales, Hotkeys .53Chapter 8Trend (momentum) Trading Strategies .64Chapter 9Counter Trend (reversal) Trading Strategies .95Chapter 10 Stock Scanning & Building a Watch List . 104Chapter 11 Three Step Day Trading Plan .111Conclusion .115Biography .117

Dedication to Mom, Dad, Lisa and Lauren. Thank you for your love, support,and understanding. You keep me focused, driven, and happy.

INTRODUCTIONSuccess as a day trader will only come to 10% of those who try. It’s important to understandwhy most traders fail so that you can avoid those mistakes. The day traders who lose moneyin the market are losing because of a failure to either choose the right stocks, manage risk,nd proper entries, or follow the rules of a proven strategy. In this book I will teach youtrading techniques that I personally use to pro t from the market. Before diving into thetrading strategies we will rst build your foundation for success as a trader by discussingthe two most important skills you can possess. I like to say that a day trader is two things,a hunter of volatility and a manager of risk. I’ll explain how to nd predictable volatility andhow to manage your risk so you can make money and be right only 50% of the time. Weturn the tables by putting the odds for success in your favor. By picking up this book youshow dedication to improve your trading. This by itself sets you apart from the majority ofbeginner traders.The act of day trading is simply buying shares of a stock with the intention of selling thoseshares for a pro t, within minutes or hours. In order to pro t in such a short window of time,we trade shares of companies that have just released breaking news, made a big earningsannouncement or have any type of fundamental catalyst that results in above average interestfrom retail traders and investors. The type of stocks a day trader will focus on are typicallymuch different from what a long term investor would look for. Day traders acknowledge thehigh levels of risk associated with trading volatile markets, and they mitigate those risks byholding positions for very short periods of time.While investors typically look for 5-10% annual returns, day traders look for trades thathave the potential to make 5-10% intraday returns. However, in order to pro t from intradaymoves, most day traders will take large positions which can result in a high level of singlestock exposure. Some will even engage in the high risk practice of trading on margin (moneyborrowed from your broker). For example, a day trader with a 25k trading account may usemargin (buying power is 4x the cash balance) and trade as if he had 100k in equity. Thisis considered leveraging your account. By aggressively trading on margin, if the trader canproduce 5% daily returns on the 100k buying power, the trader will grow the 25k initialequity at a rate of 20% per day. The risk of course is that the trader will make a mistake thatcan cost him everything. Unfortunately, this is the fate for 9 out of 10 traders. The cause ofthese career ending mistakes result from a failure to manage risk.Imagine a trader who has just taken 9 successful trades. In each trade there was a 50 riskand 100 pro t potential. This means each trade had the potential to double the risk for a2:1 pro t loss ratio. The rst 9 successful trades produce 900 in pro t. On the 10th trade,when the position is down 50, instead of accepting the loss, the untrained trader purchasesmore shares at a lower price to reduce his cost basis. Once he is down 100, he continuesto hold and is unsure of whether to hold or sell. The trader nally takes the loss when he isdown 1k. This is a trader who has a 90% success rate, but is still a losing trader because hevii

ROSS CAMERONfailed to manage his risk. We will discuss in detail how to identify stocks and nd good tradeopportunities, but rst we will focus on developing your understanding of risk management.Traders that don’t utilize risk management techniques stand a good chance of being amongthe 90% of retail traders who lose money in the market.Over my years as a trader and as a trading coach, I have worked with thousands of students.The majority of those students experienced a devastating loss at some point due to avoidablemistakes. It is easy to understand how a trader can fall into the position of a margin call (adebt to your broker). The money to trade on margin is easily available, and the allure ofquick pro ts can lead both new and seasoned traders to ignore commonly accepted rulesof risk management. The 10% of traders who consistently pro t from the market share onecommon skill. They cap their losses. They accept that each trade has a predetermined level ofrisk and they adhere to the rules they set for that trade. This is part of a well-de ned tradingstrategy. It’s common for an untrained trader to adjust their risk parameters mid-trade toaccommodate a losing position. For instance, if they said their stop loss is at - 50, and thetrade goes down to - 60, they might say they’ll hold for just a few more minutes to see if itcomes back up. Before you know it, they are looking at an 80-100 loss, or worse, and theyare wondering how it happened. I’ll admit that it’s extremely dif cult to achieve the levelof discipline to sell when you hit your max loss on a trade. Nobody wants to lose, but thebest traders are great losers. They accept their losses with grace and move on to the nexttrade. They never allow one trade the ability to destroy their account or their career. Thischaracteristic will keep them in business as a day trader for a long time.The skill to take losses and not allow them to cause you to lose focus is an act of mindfulness.Our human emotions often work against us while we are in trades. The emotions of fearand greed are present in every trader. The successful traders are able to experience thoseemotions without acting on them. When you allow emotions to overtake your rationalthought process, you run the risk of over trading, exposing yourself to unnecessary risk, andunplanned losses. It takes years of emotional conditioning to be able to sit for eight hourswatching the computer screens while maintaining composure the whole time. For new traders,we encourage starting with shorter blocks of time and maintaining a constant focus on theidea of thinking like a risk manager.Buying Long or Selling ShortIf you are new to trading you may not be familiar with the concept of selling short. Traderswho sell short are borrowing shares from their broker to sell those shares at a high price, withthe intention of buying the shares back at a lower price, and pro ting from the drop. Whenyou sell short, your account will show in your open positions window, a negative position(e.g. -1000 shares). You have borrowed 1000 shares from your broker and sold them. Thebroker expects that you will buy back those shares. When you buy back those shares, it iscalled covering your position. Some traders have a short bias and prefer to trade as stocksdrop. One of the risks with short selling is that if the stock goes up, you will eventually beviii

H O W T O DAY T R A D Eforced to cover your position. Since theoretically prices can climb in nitely, a trader couldexperience an in nite loss if they do not cover their open short position.Conversely, when you buy stock to the long side, your maximum loss is capped to the amountof shares you purchased. The worst case scenario is the stock goes to 0. With a shortposition, if you short 1000 shares of a stock at 5.00, and it goes up to 100.00, your 5kposition becomes a 95k loss. Throughout this book, we will discuss examples of momentumtrades that involve buying stock to the long side, but these patterns could be equally appliedto the inverse pattern in order to short stocks.Whether you are a short seller or a long biased trader, it is important to know about the ShortSale Restriction (SSR). This was designed to reduce downward volatility and help preventpotential stock crashes. When Short Sale Restriction has been activated on a stock, you canonly short the stock when the price is moving up. This prevents people fueling a crash byshorting as the price is dropping. SSR is turned on when a stock drops more than 10% inprice versus the previous days close. The SSR is an example of an indicator that tells us themarkets have a built in bias for trading to the long side. There is no such thing as a long buyrestriction. A stock can surge up 100% and you can continue to buy as it surges. This is oneof the reasons I prefer to be a long biased trader.It’s also important to note that shorting is not available for all stocks. The ability to short astock requires your broker to have shares available to borrow. If they have a small inventory,you may not be able to short that stock.What you will learnIf you have tried day trading or watched somebody else day trade, you already know theconcepts are simple, but being successful at day trading is like walking a tightrope. If you watchsomebody doing it they make it look easy, but when you try it, it seems nearly impossible.This is the experience most new day traders will go through. In fact, it’s the same experienceI went through when I was learning to trade. I have found that the best trades are the onesthat have the most obvious setups and start to work in our favor almost immediately. If I ndmyself in the position of holding trades that aren’t performing or I start trying to force tradesto work under less than ideal setups, I usually get into trouble. I’d encourage traders to focuson the obvious setups we teach rather than overcomplicating things.In this book we will teach you the fundamental concepts required for day trading. You willlearn how to manage risk, how to choose stocks worth trading, how to identify potentialsetups, how to enter and exit trades, and how to manage your emotions while you aretrading. By taking the time to educate yourself, you are already proving a willingness tolearn, and that puts you ahead of the majority of new traders. Most new traders will tradeunproven strategies and then wonder why they are losing money. While you are in training,it is important that you only trade in a simulated account. You have to practice the strategieswe teach and work on building your skills before ever trading in a live account. In our livetrading courses, we review the performance of all our students to ensure they are meeting theix

ROSS CAMERONmetrics and statistics of a pro table trader. This means we evaluate accuracy rates, averagelosses versus average winners, how much risk they take in their trades and how they behaveunder stress of dif cult markets or losing positions. Once students have proven they can bepro table in a simulated environment, they will be ready to switch to live trading with strictsize and risk restrictions. Students in our live day trading chat room bene t from being ableto trade side by side with me, and hundreds of other professional traders. We have trainedthe students in our community to be the best possible traders, thus increasing the overallskill of our trading group.x

CH A P T E R 1WHY DO MOST TRADERS FAIL?If you are considering a career as a day trader, you cannot ignore the statistics that show only1 in 10 traders will be able to make a living at it. I am not saying this to discourage you fromtrading. We are going to talk about the reasons why most traders fail so you can avoid makingthose same mistakes. I believe failure is an option, one that is often chosen without the traderrealizing it. Just as failure is an option, so is success, if you make the right decisions. Most tradersthat I have seen fail were unable to follow simple rules of risk management. We will be discussingthe rules of risk management in the next chapter, but let us rst talk about the reason why it isso dif cult to follow the rules. Trading becomes extremely emotional when we are faced withlosses and even wins. Being a day trader puts you in the unique position of having to experiencea nancial loss every single day. On a good day, you will win more than you lose and end the daywith a net pro t. But, even on the best days there will still typically be at least a few losing trades.There is no such thing as a strategy or a trader who is 100% successful on every trade they take.The best traders may be pro table every month out of the year, but it would be unreasonableand statistically improbable to expect 100% accuracy. Even investors who make billions of dollarshave losing investments. This means you will have to face loss and become comfortable with it.The traders I have known who have failed were never able to cope with loss. They allowed thefear of loss to guide their trading decisions.The hunt for the Holy GrailIf you are a trader who is constantly jumping from strategy to strategy or technical indicator totechnical indicator, you may be suffering from the Holy Grail syndrome. These traders will spendtremendous amounts of time and energy searching for the perfect combination of indicatorsand strategies that will always give them winning trades. On the surface, it makes sense to searchfor the best strategy, but that’s not the motivation of these traders. Just below the surface is adeep fear of loss. It is a fear so strong that it motivates these traders to search endlessly for thatperfect strategy in hopes of preventing them from having to experience any more losses. Thesetraders sometimes work to create automated trading systems, search out other traders they canmirror trade (following trade for trade), or simply jump from strategy to strategy until they haveexhausted their nancial resources and give up. If you are in the group of traders hunting for theHoly Grail, I would encourage you to read this carefully: you can lose 50% of the time and stillmake money just as easily as you can be right 90% of the time and still lose money. You have tofocus not on your percentage of success, but on your pro t loss ratios.1

ROSS CAMERONPro t Loss RatiosPro t loss ratios are often overlooked by novice traders. We have our students trading with aminimum 2:1 pro t loss ratio (every trade has the pro t potential of 2x the risk). With a 2:1 pro tloss ratio, our students can make money and be pro table with only 50% success rate. WhenI work with students, the rst thing I look at is their trade history. I want to know their pro tloss ratios and their average percentage of success. These numbers will tell me if they have asustainable strategy. If you can trade with a 2:1 pro t loss ratio, it becomes much easier for youto succeed. Most traders who fail will be trading with negative pro t loss ratios. Meaning theylose more on average than they win. Regardless of their percentage of success, they will have setthe bar so high, it becomes almost impossible to succeed. The odds are stacked against them.From a purely statistical standpoint, a negative pro t loss ratio of 1:2 (you lose 2x what youwin on average) is an unsustainable strategy unless you maintain 75% success rate. After yearsof trading, I can assure you that maintaining a 75% success is not easy. Often times the failedtraders will exit the market having never realized they were destined for failure because they didnot learn about the pro t loss ratios required in order to be pro table.Pro t Loss Ratio Statistics2:1 Pro t Loss Ratio 33% is your Break Even before commissions1:1 Pro t Loss Ratio 50% is your Break Even before commissions1:2 Pro t Loss Ratio 66% is your Break Even before commissionsFear of Loss in TradingFear is a natural emotion, but it’s dif cult when your job requires you to experience fear on aregular basis. Many traders will experience fear in a number of ways. The most obvious is thefear of nancial loss. We acknowledge that investing in the market and day trading in particularis high risk, but when we are faced with the decision to take a trade and expose ourselves to apotential loss, fear can begin to guide our decisions. A less obvious form of fear is the fear ofmissing a big move in the markets. If you suddenly see a stock start to jump up on what mightappear to be breaking news, or you see a reversal begin to take shape, you may feel inclinedto jump into the market out of fear of missing a potential winner. The fear has guided yourdecision and led you into an unplanned trade. You may have purchased at a price too far awayfrom your stop or taken more shares than your risk tolerance allows. In a split second you madea decision and broke your rules. The result when these trades go badly will be a larger loss thanyour strategy and rules allow for. When I speak with a trader about a massive loss, they often say“it happened so fast.” They made a quick decision and it was the wrong decision. In reviewingmy own trading performance, my biggest losses were spontaneous trades I jumped into on animpulse. I see the markets starting to move and jump into a stock without fully analyzing myrisk. Unfortunately, when emotions are guiding a trader’s decisions, big mistakes are common.2

H O W T O DAY T R A D EWe will discuss techniques for managing emotions while trading, but rst let’s review a few otherexamples of erratic trading brought on by emotions.Holding Losers Too LongAs you can see, our fear of loss in trading can manifest itself in some unusual and outrightcounterproductive ways. Many beginner traders and most failed traders will experience thetendency to hold their losers too long and sell their winners too soon. The driving emotion thatleads to this behavior is a fear of loss. Why does a trader hold losers too long? It is because atrade is not a loss until you have hit the sell button. There is always the chance that the pricecould pop back up until you hit the sell button. The fear of making the loss real keeps you in thetrade because it makes you think about nding a way to turn the trade around instead of justtaking the loss and moving on to a different trade. The reality is that small losses are not a bigdeal, but a trader in an emotional state does not think that way. Sometimes traders will make abad trade worse by averaging down, adding shares at a lower price to reduce their cost basis.This typically results in bigger losses when it is not part of a proven strategy that involves scalingin and out of trades by averaging. I have worked with traders who set 200 max losses, and on atrade when they were down 200, instead of simply cutting the loss, they decided to add moreshares so they could trade out of the loss. These trades would often end in losses of - 1000 ormore. In hindsight, it is easy to say the right thing to do was simply cut the loss at - 200 andfollow the rules you made for yourself. Unfortunately, in the heat of the moment, emotions takecontrol and your rational thought processes get thrown out the window. In those cases, the fearof loss actually resulted in the trader taking bigger losses than the rules of trading would allowfor. This is the exact opposite of what you want! The most important skill for a new trader tounderstand and adopt is the ability to cap their losses.Selling Winners Too SoonIf you enter a trade that had a good pro t potential and it t into your trading strategy, the lastthing you want to do is sell the trade before it has had a chance to work. If you are up 10 centson a trade that has the potential to make 50 cents, there is no reason to sell it. Why do so manytraders sell their winners too soon? It is because the fear of loss has guided their decisions. Itis the fear of the small winner turning into a loser that convinces us to sell the trade too soon.Just as a loser isn’t real until you hit the sell button, a winner isn’t real until you’ve hit the sellbutton and locked it up. In the short term we feel happy to have locked up some pro t, evenif only a small one, but the big picture is that you are forming a habit of capping your winners.To be a successful trader you have to cap your losers and let your winners run. You will wantthat occasional big winner, because those will tide you over during periods of slow trading. Atrader that sells winners too soon and holds losers too long has the habits of a failing trader.To avoid failure these traders must address how their emotions are in uencing their trading.Instead of selling the full position when sitting on a small pro t, I combat that urge by sellinga partial position and adjusting my stop. This means I will walk away with a small pro t (not aloss), but still have a position in the trade to let it realize its full potential. This is called scalingout. Scaling out is a great trade management method of keeping partial positions with a good3

ROSS CAMERONcost average. To maintain discipline, I refuse to sell my nal position until I get stopped out bya valid exit indicator.Embrace Loss as a Part of the BusinessInstead trying to search for the Holy Grail, or give in to the urge to hold losers and sell winners,we must simply accept loss as part of the business of day trading. We cannot ght it. Every daytrader will experience losses. Becoming a good day trader means being a good loser. The trickto being a good loser is learning to cap your losses at a set dollar amount and sticking withit. The hard part is holding yourself to the rules. Day trading requires a tremendous amountof discipline and self-control. It is a job that will challenge you in more ways than you wouldimagine. In the example of the trader with a 90% success rate that was still losing money, hefailed to cap his losses. Being that type of trader is a choice. By teaching you about pro t lossratios and the importance of capping your loses, we are empowering you to make the choiceto be a successful trader.Discipline as a PracticeIn our trading courses, we spend a great deal of time working with students to help them improvetheir discipline. Many of our students found us after taking other trading courses and ndingthemselves still stuck in a cycle of poor trading habits, trading losses, and disappointment. Werealized that textbook concepts of trading, which are important and will be covered later on,are not enough. Understanding fundamental concepts of trading on their own are not enoughto be a successful trader. You must also think and act like a successful trader. This means sellinglosers quickly and holding partial positions in your winners as long as possible. In order to helpour students improve their ability to be disciplined, we require a min of 30 minutes of exerciseand 15 minutes of meditation every day. I use exercise and meditation to help train my mind tocope with stress. By forcing myself to do these two things every day, I am practicing discipline. Inthe moment when I am in a trade and need to make a hard decision, I need to be able to ghtthe urge to sell the winners too soon and hold the losers too long. By practicing discipline inothers areas of our life, we strengthen that muscle memory and improve our ability to maintaincomposure while trading. Practicing discipline is a way of conditioning our minds to becomeaccustomed to a feeling of discomfort. Rather than taking steps to alleviate the feeling, we cantrain ourselves to withstand it. When we sell a winner too soon or hold a loser too long, we areallowing the uncomfortable emotion of fear to guide our decision. Most of the successful tradersI know have strict exercise regimens because it helps improve their trading performance. Weknow it is impossible to block out the emotions such as fear, they will still surface within everytrader. However, the difference between winning traders and losing traders is that winningtraders will not subject their strategy to the emotion. They recognize the emotion and allow itto exist without acting on those feelings. This is a critical step in the emotional developmentof any trader. I would encourage you to begin journaling your emotions while trading. The rststep to changing your behavior is becoming aware of your emotional patterns and their impacton your trading performance. As we discussed earlier, you can have a deep understanding ofall the textbook concepts of trading, but still fail to succeed because you have not achieved4

H O W T O DAY T R A D Ethe emotional training to be a trader. We focus on providing our students with a well-roundededucation that includes both textbook and emotional development.It is important to remember that discipline is not like learning to ride a bike or learning to swim.Discipline is very much like a muscle that can be strengthened when exercised or atrophy whenignored. Even after years of trading, I still nd myself occasionally giving in to my instinct tochase a stock for fear of missing the move, to sell a winner too soon, or hold a loser a little toolong. Every day when I trade I have to ght against my natural instincts. Unfortunately manyof our natural human instincts do not encourage healthy trading patterns. If I had to guess Iwould say almost all successful traders have spent thousands of hours training their minds toght against counterproductive impulses. I am sure there are some traders that have a naturalaptitude for the mindset required to be pro table, but I believe the majority of us have toreally work at it. It took me years to become successful, and looking back I have realized it wasbecause of the emotional obstacles that stood in my way. I had a great concept of stocks, chartpatterns, basic strategies, but I kept falling into the cycle of big losers and small winners. It tooka long time before I developed the self-awareness to realize what was causing those actions.My hope is that by reading this, you will avoid the years of trial and error it took me to learnthese important lessons.5

CH A P TER 2RISK MANAGEMENTOne of the rst things I told you was that day traders are hunters of volume and managers of risk.In this chapter we are going to discuss risk management. As an aspiring day trader, you alreadyunderstand that day trading is one of the riskiest investment techniques. The reason traderschoose to day trade instead of make more traditional, longer term investments is because daytrading can produce much larger gains in a faster time frame. Day trading is one of the fastestways to grow a small account, when it is done properly. The problem is most people will nottrade properly. Successful traders can utilize 25k accounts to produce over 50k per year, or200% in returns. It would not be realistic, however, for a trader to utilize a 250 million accountto produce 500 million per year. The markets typically do not have the liquidity to support atrader entering or exiting a multi-million dollar position within minutes, but positions of tens ofthousands or even hundreds of thousands of dollars can be executed almost immediately. Thisallows day traders with accounts under 1 million and as low as 25,000, to utilize leverage andhigh speed trading techniques to produce large percentage gains. When a trader reaches a pointwhere they are managing more money than they can ef ciently day trade, they would typicallybegin to branch out by adding longer term investments to diversify the portfolio.While understanding that day trading is one of the highest risk trading techniques, the potentialfor a big reward captures our interest. We can acknow

trading techniques that I personally use to proÀ t from the market. Before diving into the trading strategies we will À rst build your foundation for success as a trader by discussing the two most important skills you can possess. I like to say that a day trader is two things, a hunter of volatility and a File Size: 1MBPage Count: 52Explore further(PDF) Intraday Trading Techniques vikranth reddy .www.academia.eduStock Market Technical Trading - The Day Trader’s Biblewyckoffsmi.comHow to Day Trade Based on the VWAP - Bear Bull Tradersbearbulltraders.comTrading for a Living 2014 Study Guide - droppdf.com1.droppdf.comGuide to Effective Daytrading - Precision Trading Systemwww.precisiontradingsystem.comRecommended to you b