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All About Day Trading

All About Day Trading

by Jake Bernstein

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Day trading might seem too complex and fast paced for you—but when you break it all down, you’ll discover that at its core is a stable, simple set of rules that anyone can learn.

All About Day Trading covers all aspects of the subject, explaining how day trading works,



Day trading might seem too complex and fast paced for you—but when you break it all down, you’ll discover that at its core is a stable, simple set of rules that anyone can learn.

All About Day Trading covers all aspects of the subject, explaining how day trading works, how it fits into the larger world of the financial markets, and how to navigate its hazards. It takes you through the fundamentals and then moves on to more advanced topics—providing a fully rounded outline that will get you going in no time.

Avoiding the complicated language and nebulous theories of other day-trading books, All About Day Trading teaches you how to:

  • Avoid common psychological pitfalls of day trading
  • Construct and test your own powerful day-trading system
  • Track news events to improve your day-in, day-out profi t potential
  • Trade successfully with moving averages, momentum, gaps, and more

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McGraw-Hill Education
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By Jake Bernstein

McGraw-Hill Education

Copyright © 2013 Jake Bernstein
All rights reserved.
ISBN: 978-0-07-177860-2


What the Day Trading Game Is All About

The day trading game is all about making money. On the surface it would seem that there isn't much more to day trading than making money. To some individuals, however, day trading is more about the challenge and the excitement than it is about the money. Every day our lives present us with many challenges. There are numerous ways in which we can put ourselves in the position of being challenged. Day trading in my view is not something we should do for the challenge. While it is true that a great deal of satisfaction can be gained from being a successful day trader, we must not enter into the day trading game for the purpose of meeting a challenge but rather for the purpose of achieving financial victory.

Given the vast increase in volatility during the 1990s and 2000s, there are more opportunities to profit from large and even small intraday changes now than ever before. At the same time, commissions, computers, and communications costs are also lower than ever before. That combination has created a win-win situation, but only for those who are able to master the game. This, of course, leads to the inevitable question, how do we master the day trading game?

There are literally hundreds of ideas out there in the trading world about how to win as a day trader. A keyword Internet search on the term day trading yields 44,800,000 results. That is truly a staggering number; were we to track down every lead, it would leave us no time to actually day trade. And so the good news is that there's a great deal of information out there about day trading. The bad news is that there is so much information, it is impossible to critically assess the accuracy and validity of all of it. Finally, we come to the worst news: I estimate that over 98 percent of the methodologies offered or purported to be successful are neither objective nor profitable.

Today, more than ever before, the aspiring day trader must be especially cautious not to throw away good money on bad methods. Today, more than ever before, the aspiring day trader must be vigilant in doing her homework and research in order to find day trading methods that will make money. While day trading has been presented to—or rather sold to, or rather hyped to—the public as a good thing to do, the fact of the matter is that for most traders, it is a bad thing to do. This is not because day trading is inherently a losing proposition; it is because day trading is not only the most difficult type of trading to execute but also the most difficult at which to succeed.

Day trading is all about taking advantage of large or even small predictable price movements in stocks, Forex, and futures. The day trading game, when played successfully, is about achieving profits using objective, operationally defined, and demonstrably profitable tools. Combined with these tools, a risk management approach is critical for success. But without a profit-maximizing strategy, the day trading game will be all about frustration and losses as opposed to profits and success. It is my intention to share with you in this book several tools that I have developed in order to win the day trading game.

I would like to emphasize the following critically important facts and factors that will facilitate your success as a day trader, whether you use my methods or other effective trading ones.

1. Begin your day trading venture with sufficient capital. By that I mean capital that will not only be purely speculative but also allow you to day trade the markets that interest you with enough money to buffer or withstand a series of losses.

2. Day trade in time frames that are consistent with what you can realistically do. If you intend to sit at the computer all day trading stock index futures using five-minute data for your signals, then make sure you really can be back at the computer every five minutes, or even more frequently, to see if there are new signals.

3. Don't trade too many markets at the same time. Most traders cannot realistically day trade more than several stocks, currencies, or commodities at the same time without either missing signals or making mistakes.

4. Use objective, rule-based entry techniques as opposed to interpretive techniques. To put it another way, don't trade on intuition or "gut feel" because that will not be profitable in the long run, even though initially you may achieve some success. Gut feel is not a trading method or system. Unfortunately, that is the approach most day traders use.

5. Employ strict, risk-based rules for managing your losses. Simply stated, do not assume more risk than your account can tolerate. I will give you some specific time-tested rules for doing so.

6. Use a profit-maximizing strategy that will, if properly implemented, extract the greatest possible profits from winning trades.

7. Be prepared financially and psychologically for a series of losing trades. It is not unusual for day traders to suffer from five to seven consecutive losses.

8. If and when you do suffer a series of consecutive losses, do not take the next profitable trade off your books quickly in order to compensate for the losses. Let your trades run their course by the rules.

9. Use a specific trading model that will help you not only generate your day trades but also determine what to do, when to do it, and how to do it. Having a trading model will also help you identify specific errors you may have made and when you made them.

10. Avoid excessive inputs to your trading strategy; having too much information is just as bad, if not worse, than having too little.

11. It is often better to trade in isolation than it is to surround yourself with news, the opinions of other traders, and a plethora of superfluous input from so-called experts.

In addition to the suggestions cited above, I will share with you in the pages that follow specific trading ideas, methods, and indicators that will give you the edge in day trading.

Finally, no book on day trading, or any type of trading for that matter, would be complete without a clear and concise statement about risk (yes, still another one). I'm certain that you have heard it all before, but I must repeat that day trading involves risk no matter what you may have been told by others. Despite the fact that when you day trade you have no overnight exposure to a loss, there is still exposure during the day. If you believe day trading is easy or that you are virtually guaranteed a profit, you are sadly mistaken. Day trading is at best demanding, time-consuming, and all too often frustrating. Day trading is not an instant cure to financial woes. Day trading is not a game, although many traders consider it to be one. Day trading is a business that, if done correctly and with discipline, can be profitable, but it is by no means easy or a sure thing.


Why Day Trade?

Success as a day trader: it's the American dream. It's the capitalist dream. It's the get-rich-quick dream. It's the entrepreneur's dream. It's the be-your-own-boss-and-work-from-anywhere dream. It's a dream that almost everyone has had at one time or another. But it's also a dream that very few get to pursue and very few get to fulfill. All markets—stock, commodity, and Forex—define volatility. In other words, they move back and forth, often rapidly, all day and all night long. The unstable economic backdrop in the United States and Europe has created an underlying sense of uncertainty that has, in turn, housed itself in a cloak of anxious trading. In order to capitalize on record price movements over small periods of time, professional traders have resorted to such techniques as flash trading, high-frequency trading, so-called dark pools, and algorithmic trading. These highly technical, computerized trading machines buy and sell stocks at a high frequency in large amounts in order to capitalize on small moves that occur during the day. The holding time for these positions is often a matter of seconds, as opposed to hours or days or weeks. It is estimated that some 60 percent of trading in stocks is now characterized by such ultra- short-term forays.

The average investor does not have the financial or technical resources to participate in this fastest of all games. The professional investor has been forced to participate in order to turn a profit in a game that has become highly competitive and highly regulated by government agencies. While professional traders and money managers have moved ahead into high-frequency trading, the day trading game, which was once their domain, has passed on to the average investor. Advances in computer technology, sophisticated software programs for technical analysis, historically low commission costs, and lightning-fast order execution using electronic entry have all combined to make day trading more accessible than ever before. We must not, however, equate accessibility with success. The mere fact that it is easier than ever to day trade does not ipso facto mean that all day traders will be successful. In fact, the reality of day trading can be quite grim. Most day traders are not successful. They have no idea what to do. Most are floundering in a sea of misinformation and disinformation within which it is difficult to obtain and implement strategies that facilitate consistent success.

Although many aspiring day traders see the stock, futures, and Forex markets as their vehicles to financial independence, much of this expectation has been shaped by ongoing promotional campaigns backed by exchanges and brokerage firms. As always, the task that awaits traders and investors is multifaceted:

1. In order to be successful as a day trader, it is critical to understand what day trading is, what it is not, and what to expect from it.

2. Specific trading strategies must be developed in advance in order to identify and isolate potentially profitable opportunities.

3. The markets in which a day trader will trade must be identified. It is not possible to successfully participate in many different markets at one time.

4. A structured procedure must be developed in order to implement objective and organized decisions.

5. Every aspiring and every practicing day trader must know in advance exactly how to determine the appropriate risk level for his account and financial capability. Without knowing the risk for each trade, the end result will most often be loss.

6. Every day trader must define and refine precise procedures to ensure that trades are not being made on the basis of emotion.

Simple as these challenges are to enumerate, they are exceedingly difficult to implement because they require numerous decisions, sufficient starting capital, and highly structured procedures and rules. Without training and education, most traders will not be able to achieve their goals.

Given the multilayered challenges that await and confront all aspiring and practicing day traders, one question naturally arises: why would someone want to day trade? Before we can address the issue of why someone wants to day trade, we need to understand the new definition of day trading. Why do I use the term new definition? Most markets now trade at least 20 hours a day continuously, while some are essentially 24-hour markets (e.g., Forex currency trading). Currency futures in Chicago are traded 23 hours a day. Stock index futures trade virtually around the clock. So, before discussing the why of day trading, we need to understand the what of day trading.

An insomniac can sit in front of her computer and literally trade 24 hours a day, six or even seven days a week. Realistically, this is not possible or palatable for most of us. On the other hand, we can implement day trades during the day session, which is more manageable and does not require attention 24 hours a day. In stocks the day session is clearly defined from the opening to the closing time of the stock market. In the futures markets, many exchanges have differentiated between the day session and the extended session.

For the purposes of this book, I will consider day trading to be entering and exiting trades during the course of the day session, as defined by the various exchanges or the particular markets or stocks that are being traded.

Within the context of this definition, there are a number of reasons I can suggest in support of day trading. Note, however, that all of these assume that day trading is approached from an objective standpoint, with specific rules for entry and exit and, moreover, specific rules for limiting losses. Now that we have defined day trading, we can look at some of the reasons for doing it.


While the primary reason to day trade is the obvious (mercenary) one—namely, to make money—that goal is unattainable unless other factors are taken care of first.

A viable reason for day trading that might not be obvious to most traders is that the day trader must exit trades by the end of the day. In so doing the day trader is forced not only to take profits but to take losses. Given that most traders blunder by carrying losses too long and exiting profits too quickly, being forced to exit by the end of the day is a great help to the trader who adheres to the requirement that the day trade must be closed out by the end of the day session.

That most obvious reason for day trading is last on my list of importance, and there are two aspects to it. The first part of this reason is, of course, to make a profit. Without a doubt today's volatile markets are conducive to this goal. As an example, I offer Figure 2.1, the Japanese yen futures, showing what can occur on an intraday basis in today's markets. This is not the exception to the rule. Consider also Figure 2.2, which shows the profit potential on an intraday basis in S&P 500 E-Mini futures. Observe that these potential profits all occurred within the course of a day. Remember also that the profits shown assume that a day trader would have been on the correct side of the market.

The second aspect of this last reason is to maximize your return on capital.

In order to take advantage of these and many more day trading opportunities I will show you how to:

1. Familiarize yourself with how the day trading game is played by professional traders

2. Give you the rules by which you must live as a day trader

3. Show you five day trading methods

4. Tell you how to select your day trades

5. Explain how to manage risk and maximize profits

6. Give you a structured daily procedure to help you focus


Given the broad scope of day trading, there are many opportunities that present themselves to the day trader. Within the course of the trading day we can implement trades in many different time frames and in many different markets. The possibilities can be, and in many cases prove to be, overwhelming. The newcomer to day trading frequently makes the mistake of either trying to do too much or being afraid and doing too little. Some day traders want to day trade stocks, futures, Forex, and cross currency spread all at the same time. On the other hand, many new day traders are attracted to either the Forex markets or S&P futures. I've heard some new traders say, "My goal is to make $500 per day trading E-Mini S&P futures. Once I have reached my goal, I'm done for the day." To me this means that the trader has arbitrarily decided to limit the profits he can make, which places a top on his potential profits. If there is to be a limit, then the trader should impose that limit on the losing side rather than on the winning one. There should be no limit to how much a trader wants to make each day.

Another problem I have seen is in quantity versus quality. The goal of many day traders is to trade as often as possible for relatively small moves. The hope or intention here is to do what has in the past been termed scalping but which recently has been given a more politically correct term: high-frequency trading. The problem for the average trader is that, although she may make a profit 15 or 20 times in a row for small money, one large loss will consume all of the previous profitable trades, or even exceed them.

The professional high-frequency trader buys and sells positions in a matter of seconds or even fractions of seconds, attempting to achieve large profits using large positions on small price moves. This is a classic issue: would you rather sell a million widgets for a dollar each or five widgets for $200,000 each? The average day trader cannot achieve success as a high-frequency trader and should not attempt to do so.

Excerpted from All About DAY TRADING by Jake Bernstein. Copyright © 2013 Jake Bernstein. Excerpted by permission of McGraw-Hill Education.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

Meet the Author

Jake Bernstein is an internationally recognized trader, author, and researcher. He has written over 27 books and studies on futures trading and has spoken at investment and trading seminars the world over. He has been a guest on numerous business radio and television programs including Wall Street Week.

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