Table of Contents
Introduction 1 About This Book 2
Foolish Assumptions 2
Icons Used in This Book 3
Beyond the Book 3
Where to Go from Here 4
Part 1: Day Trading Fundamentals 5
Chapter 1: All You Need to know about Day Trading 7
It’s All in a Day’s Work 8
Speculating, not hedging 9
Understanding zero-sum markets 9
Keeping the discipline: 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
Working with a Small Number of Assets 13
Managing your positions 14
Focusing your attention 14
Working with risk capital 15
Personality Traits of Successful Day Traders 15
Independence 16
Quick-wittedness 17
Decisiveness 17
The Difference between Trading, Investing, and Gambling 18
Investing is slow and steady 18
Trading works fast 19
Gambling is nothing more than luck 19
Busting Some Day Trading Myths 20
Myth #1: I can make millions 20
Myth #2: Profits are guaranteed 21
Myth #3: Day trading is dangerous 21
Myth #4: It’s easy 21
A lot of other worthwhile activities are stressful too 22
Chapter 2: The Business of Day Trading 25
A Day in the Life of a Trader 26
Setting Up Your Trading Laboratory 29
Where to sit, where to work 30
Count on your computer 30
See it on the big screen 30
Connect to the Internet 31
Fix hours, vacation, and sick leave 31
Stay virus- and hacker-free 32
The department of redundancy department: Back up your systems 33
Planning Your Trading Business 33
Setting your goals 34
Finding volatility 34
Investing in your business 36
Evaluating and revising your plan 36
Getting Mobile with the Markets 37
Controlling Your Emotions 37
Dealing with destructive emotions 38
Having an outlet 41
Setting up support systems 42
Watching your walk-away money 43
Managing the Risks of Day Trading 44
It’s your business 44
It’s your life 44
Chapter 3: Introducing the Financial Markets 45
Having a Firm Grasp How Markets Work 46
Supply and demand 46
Exchanges versus over the counter 47
Commissions, fees, and spreads 48
Understanding zero-sum games 49
Opening an Account and Placing an Order 50
Opening a brokerage account 50
Placing your initial order 50
Closing out your order 50
Taking your cash 50
Defining the Principles of Successful Day Trading 51
Working with a small number of assets 51
Managing your positions 52
Focusing your attention 53
Understanding Risk and Return 53
Recognizing what risk is 54
Getting rewarded for the risk you take 57
Market efficiency in the real world 58
Chapter 4: Assets 101: Stocks, Bonds, Currency, and Commodities 61
Grasping the Different Things to Trade 61
Defining a Good Day Trading Asset 62
Looking for liquidity 62
Homing in on high volatility 64
Staying within your budget 65
Making sure you can use margin 65
Taking a Closer Look at Stocks 67
How Canadian and U.S stocks trade 68
Where Canadian stocks trade 69
Where U.S stocks trade 72
The high-risk over-the-counter exchanges 74
Dark pools 75
Examining Bonds 75
How bonds trade 76
Listed bonds 77
Over-the-counter trading 77
Treasury dealers 77
Cashing In with Currency 78
How currency trades 78
How the Canadian dollar is traded 79
Where currency trades 79
Considering Commodities and How They Trade 80
Chapter 5: Assets 102: ETFs, Cryptocurrency, Options, and Derivatives 81
Explaining Exchange-Traded Funds (ETFs) in Plain English 82
Traditional ETFs 83
Strategy ETFs 84
How ETFs trade 85
ETF risks 86
Getting Familiar with Cryptocurrency 86
Bitcoin and blockchain 87
Other cryptocurrencies 88
Understanding how cryptocurrencies trade 89
Avoiding the risks of cryptocurrencies 91
Dealing in Derivatives 91
Getting to know types of derivatives 92
Buying and selling derivatives 94
Comprehending Arbitrage and the Law of One Price 96
Understanding how arbitrage and market efficiency interact 96
Creating synthetic securities 97
Taking advantage of price discrepancies 98
Reducing arbitrage opportunities: High-frequency trading 99
Chapter 6: Increasing Risk and Potential Return with Short Selling and Leverage 101
Understanding the Magic of Margin 102
Making margin agreements 103
Understanding the costs and fees of margin 104
Managing margin calls 105
Enjoying margin bargains for day traders 105
The Switch-Up of Short Selling 105
Selling short 106
Short selling in Canada 107
Choosing shorts 108
Losing your shorts? 108
Leveraging All Kinds of Accounts 109
In stock and bond markets 109
In options markets 110
In futures trading 111
In foreign exchange 112
Borrowing in Your Trading Business 113
Taking margin loans for cash flow 113
Borrowing for trading capital 114
Assessing Risks and Returns from Short Selling and Leverage 115
Losing your money 115
Losing your nerve 115
Chapter 7: Managing Your Money and Positions 117
Setting Your Earnings Expectations 118
Finding your expected return 118
Determining your probability of ruin 119
Gaining Advantage with a Money-Management Plan 121
Minimizing damage while increasing opportunity 121
Staying in the market longer 122
Getting out before you lose everything 123
Accounting for opportunity costs 123
Examining Styles of Money Management 124
Limiting portions: Fixed fractional 124
Protecting profits: Fixed ratio 125
Sticking to 10 percent: Gann 126
Finding the ideal percentage: Kelly criterion 126
Doubling down: Martingale 127
Letting a program guide you: Monte Carlo simulation 127
Considering past performance: Optimal F 128
How Money Management Affects Your Return 129
Planning for Your Profits 130
Compounding interest 131
Pyramiding power 131
Making regular withdrawals 133
Chapter 8: Planning Your Trades and Trading Your Plans 135
Starting to Plan Your Trades: Just the Basics, Please 136
What do you want to trade? 136
When will you be trading? 137
How do you want to trade? 137
Figuring out when to buy and when to sell 139
Setting profit goals 139
Setting limits on your trades 141
What if the trade goes wrong? 144
Closing Out Your Position 146
Swing trading: Holding for days 146
Position trading: Holding for weeks 147
Investing: Holding for months or years 147
Maxims and Clichés That Guide and Mislead Traders 147
Pigs get fat, hogs get slaughtered 148
In a bear market, the money returns to its rightful owners 148
The trend is your friend 149
Buy the rumour, sell the news 149
Cut your losses and ride your winners 150
You’re only as good as your last trade 150
If you don’t know who you are, Wall Street is an expensive place to find out 151
There are old traders and bold traders, but no old, bold traders 151
Part 2: Developing Your Strategy 153
Chapter 9: Picture This: Technical Analysis 155
Comparing Research Techniques Used in Day Trading 156
Knowing what direction your research is 156
Examining fundamental research 157
Looking closer at technical analysis 158
Using Technical Analysis 160
First things first: Should you follow a trend or deviate from it? 160
Finding trends 161
Those ever-changing trends 165
Reading the Charts 167
Wave your pennants and flags 167
Not just for the shower: Head and shoulders 169
Drink from a cup and handle 169
Mind the gap 170
Grab your pitchforks! 171
Considering Different Approaches to Technical Analysis 172
Dow Theory 172
Fibonacci numbers and the Elliott Wave 172
Japanese candlestick charting 173
The Gann system 174
Avoiding Technical Analysis Pitfalls 174
If it’s obvious, there’s no opportunity 175
Overanalyzing the data 175
Success may be the result of an upward bias 175
Chapter 10: Following Market Indicators and Tried-and-True Day Trading Strategies 177
Psyching Out the Markets 178
Betting on the buy side 179
Avoiding the projection trap 179
Taking the Temperature of the Market 180
Pinpointing with price indicators 180
Volume 183
Volatility, crisis, and opportunity 185
Measuring Money Flows 187
Accumulation/distribution index 188
Money-flow ratio and money-flow index 189
Short interest ratios 189
Considering Information That Crops Up during the Trading Day 190
Price, time, and sales 191
Order book 191
Quote stuffing 192
News flows 192
Identifying Anomalies and Traps 193
Bear traps and bull traps 194
Calendar effects 195
Chapter 11: Eliminating Emotion with Program Trading 197
Creating Your Own Trading Program 198
Recognizing what you want to automate 198
Knowing the limitations of robots 199
Programming, the Day Trading Way 199
Looking at basic brokerage offerings 200
Adding a trading platform 200
Finding trading modules 200
Backtesting Once, Backtesting Twice 201
Building on Some Standard Strategies 201
Range trading 202
Contrarian trading 202
News trading 203
Pairs trading 203
Arbitraging for Fun and Profit 203
Understanding how arbitrage and market efficiency interact 204
Taking advantages of price discrepancies 205
Scalping, the Dangerous Game 206
Understanding Risk Arbitrage and Its Tools 207
Arbitrating derivatives 208
Levering with leverage 209
Short selling 209
Creating synthetic securities 209
Examining Arbitrage Strategies 210
Convertible arbitrage 211
ETF arbitrage 211
Fixed income and interest-rate arbitrage 212
Index arbitrage 213
Merger arbitrage 213
Option arbitrage 215
Watching Out for Those Pesky Transaction Costs 215
Chapter 12: Day Trading for Investors 217
Recognizing What Investors Can Glean from Traders 217
Being disciplined 218
Dealing with breaking news and breaking markets 219
Setting targets and limits 220
Judging execution quality 221
Applying Momentum 223
Earnings momentum 224
Price momentum 224
For investors only: Momentum-research systems 225
When an Investor Considers Trading 227
The idea has a short shelf life 227
Your research shows you some trading opportunities 227
You see some great short opportunities 228
Chapter 13: Researching Research Services 229
Understanding the Trade of Trading 230
Enjoying freebies from the exchanges and the regulators 230
Hitting the (virtual) road for conferences 233
Taking training classes 234
Getting the Research You Need 236
(Price) Quote me on that 237
Charting your strategy 238
News, newsletters, gurus, and strategic advice 240
Doing Your Due Diligence 243
Where to start your research 243
Questions to ask 244
Chapter 14: Testing, Tracking, and Evaluating Performance 247
Before You Trade: Testing Your System 247
Backtesting 248
Simulation trading 250
Backtesting and simulation software 251
During the Day: Tracking Your Trades 254
Setting up your spreadsheet 254
Pulling everything into a profit and loss statement 255
Keeping a trading diary 256
After You Trade: Calculating Overall Performance 257
Reviewing types of return 258
Calculating returns 258
Determining the risk to your return 263
Using benchmarks to evaluate your performance 265
Part 3: Day Trading, Incorporated 267
Chapter 15: Your Key Vendor: Your Broker 269
Choosing a Brokerage 270
Getting proper pricing 270
Evaluating types of platform 272
Opening an account 274
Exploring Brokers for Day Traders 275
Brokers for stocks and a bit of the rest 275
Brokers for foreign exchange 278
Watching Out for Brokerage Scams 279
Chapter 16: Regulation Right Now 281
How Regulations Created Day Trading 282
Who Regulates What? 283
Provincial securities commissions 284
Investment Industry Regulatory Organization of Canada (IIROC) 285
Mutual Fund Dealers Association of Canada (MFDA) 286
The exchanges 286
Brokerage Basics for Firm and Customer 286
Are you suitable for day trading? 286
Staying out of the money laundromat 287
Rules for day traders 288
Tax reporting 289
Hot Tips and Insider Trading 289
Taking on Partners 290
Chapter 17: Choosing the Right Accounts 291
Understanding Investment Accounts 292
RRSP 292
TFSA 293
RRIF 294
Non-registered accounts 295
Deciding on an Account to Use for Day Trading 295
Chapter 18: Taxes for Traders 297
Are You a Trader or an Investor? 298
Claiming Business Expenses 298
Hiring a Tax Adviser 299
The many flavours of tax experts 299
Questions to ask a prospective adviser 300
You still want to do it yourself? 301
What is Income, Anyway? 302
Earned income 302
Capital gains and losses 303
Tracking Your Investment Expenses 305
Qualified and deductible expenses 306
Paying Taxes All Year 308
Using Your RRSP 308
Trading within a Tax-Free Savings Account 309
Part 4: The Part of Tens 311
Chapter 19: Ten Good Reasons to Day Trade 313
You Love Being Independent 313
You Want to Work Anywhere You Like 314
You’re Comfortable with Technology 314
You Want to Eat What You Kill 315
You Love the Markets 315
You Have Market Experience 315
You’ve Studied Trading Systems and Know What Works for You 316
You’re Decisive and Persistent 316
You Can Afford to Lose Money 317
You Have a Support System 318
Chapter 20: Ten Common Day Trading Mistakes 319
Starting with Unrealistic Expectations 319
Beginning without a Business and Trading Plan 320
Ignoring Cash Management 321
Failing to Manage Risk 321
Not Committing the Time and Money to Do It Right 322
Chasing the Herd 322
Switching between Research Systems 323
Overtrading 323
Sticking Too Long with Losing Trades 324
Getting Too Emotionally Involved 324
Chapter 21: Almost Ten Alternatives to Day Trading 325
Proprietary Trading for an Investment Company or Hedge Fund 325
Trading for an Agricultural, Energy, or Commodities Company 326
Joining a Market Making Firm 326
Traditional Investing for Your Own Account 327
Taking a Swing at Swing Trading 327
Gambling for the Fun of It 327
Playing Day Trading Video Games 328
Trading in Demo Accounts 328
Participating in a Trading Contest 329
Chapter 22: Ten Tested Money-Management Techniques 331
Taking Money off the Table 332
Using Stops 332
Applying Gann’s 10 Percent Rule 332
Limiting Your Losses with the Fixed Fractional System 333
Increasing Returns with the Fixed-Ratio System 333
Following the Kelly Criterion Formula 334
Figuring the Amount to Trade with Optimal F 334
Measuring Risk and Sizing Trades with Monte Carlo Simulation 335
Taking a Risk with the Martingale System 335
Throwing It to the Fates 336
Appendix: Additional Resources For Day Traders 337
Index 345
