Educating today's
Stock Traders:
Daytrade, Swing Trade,
and Position Trade
| Swing Trading | Daytrading | Scalp Trading | Stock Trading |
Swing Trading - A style of trading that attempts to capture gains in a stock within one to four days. To find situations in which a stock has this extraordinary potential to move in such a short time frame, the trader must act quickly. This is mainly used by at-home and day traders. Large institutions trade in sizes too big to move in and out of stocks quickly. The individual trader is able to exploit the short-term stock movements without the competition of major traders. Swing traders use technical analysis to look for stocks with short-term price momentum. These traders aren't interested in the fundamental or intrinsic value of stocks but rather in their price trends and patterns. Introduction
To Types Of Trading: Swing
Traders But this description of swing trading is a simplification. In reality, swing trading sits in the middle of the continuum between day trading to trend trading. A day trader will hold a stock anywhere from a few seconds to a few hours but never more than a day; a trend trader examines the long-term fundamental trends of a stock or index and may hold the stock for a few weeks or months. Swing traders hold a particular stock for a period of time, generally a few days or two or three weeks, which is between those extremes, and they will trade the stock on the basis of its intra-week or intra-month oscillations between optimism and pessimism. Reviewing
Different Types of Traders
Scalping
- The scalper is an individual who makes
dozens or hundreds of trades per day, trying to "scalp"
a small profit from each trade by exploiting the bid-ask spread. (You
can read about scalping in Introduction to Types of Trading: Scalpers)
The
Right Market The swing trader, therefore, is best positioned when markets are going nowhere - when indexes rise for a couple of days and then decline for the next few days only to repeat the same general pattern again and again. A couple of months might pass with major stocks and indexes roughly the same as their original levels, but the swing trader has had many opportunities to catch the short-term movements up and down (sometimes within a channel). Of course, the problem with both swing trading and long-term trend trading is that success is based on correctly identifying what type of market is currently being experienced. Trend trading would have been the ideal strategy for the raging bull market of the last half of the 1990s, while swing trading probably would have been best for 2000 and 2001. With the 2002 bear market, the best strategy would have been to follow the trend and short everything in sight. As economists and traders would agree, the most accurate insight into trends is viewed in retrospect. The
Baseline So swing traders are not looking to hit the home run with a single trade - they are not concerned about perfect timing to buy a stock exactly at its bottom and sell exactly at its top (or vice versa). In a perfect trading environment, they wait for the stock to hit its baseline and confirm its direction before they make their moves. The story gets more complicated when a stronger uptrend or downtrend is at play: the trader may paradoxically go long when the stock jumps below its EMA and wait for the stock to go back up in an uptrend, or he or she may short a stock that has stabbed above the EMA and wait for it to drop if the longer trend is down.
Conclusion
For more detailed information on swing trading, I recommend another highly-rated book called "The Master Swing Trader: Tools And Techniques To Profit From Outstanding Short-Term Trading Opportunities" (2000) by Alan Farley. Farley's 'pattern cycles' provide intricate methodology and easy-to-understand examples that will enable you to quickly get into the swing of things. By Jason Van Bergen
The
Dual Reality There is a true reality and a reality that traders create for themselves from such misinformation that is accepted blindly. Unfortunately, these two realities are never the same. However, the more a trader is a detached and objective observer rather than an opinionated and emotional follower, the closer his reality to real market reality becomes. The
RealityTrader Tape Reading Philosophy Furthermore, we can not possibly know all the circumstances surrounding stock movements, all the shares accumulated or distributed, and what owners plan to do with them. They might want to sell for reasons that have nothing to do with current company situation. For instance, a fund needs free money for another operation and we see selling when nobody expected it by trading from straight fundamentals. That's why a seasoned trader will only look at what is going on in a stock, from a price/volume action view, in a form he chooses, that lets him be closer to reality. Our preferred way to read stock market is tape reading. This is also why only a detached and unemotional state of mind allows us to make our decisions objectively, with no emotions distorting the picture. The link from your mechanical approach to the enhancement of your mental approach will develop your winning and confident attitude each trading day. Reality defines what is happening before you as you read it. There are no predictions or false expectations for what a market or stock will do. There is just what you see that demands the response to enter and exit a trade with as much profit or as little loss as the trade allows. There is no ego to block that response nor is there a lack of accountability when the trade moves against you. Trading resides within you and develops from a reality learned. The
RealityTrader Tape Reading Method Pure T&S/Level 2 reading narrows this method to very small time frame and tiny profit objectives. While this style is valid, this understanding is just too narrow and gives tape reading bad name among those that try to work for more than several cents. RT stands for Read and Trade. READ means two things: 1. Forget the Aristotle logic, which in essence is trying to establish a firm link between a reason and an outcome. Obviously this does not work in the market. Learn to see what is hidden under the surface. Ignore what is being offered to you by those that want you to see things at face value. Look at what is shown to you as bait for you to go in a certain direction. Then ask who wants you there and for what reason. 2. Learn to read what is really going on. We will provide you with the method to this reading. Being truly universal, this method will serve you no matter what kind of data presentation of choice you use: chart, technical analysis, particular set of technical indicators or something else. You will see how tape reading helps you to understand what the majority of market participants fails to comprehend. You will learn how to weigh market action in terms of price and volume. Then you will realize how to read the emotions that drive the market. TRADE means: 1. Be in the right state of mind that successful trading requires. Be ready to execute your decision flawlessly, in an automated unemotional manner when the moment demands the response. Learn to control yourself and become the master of your emotions. Only when you are in full control of yourself will problems like keeping stops or hesitation to enter the trade cease to exist. From this, no external influences can impact your performance. We will train you to reach this wonderful inner state when trading becomes the source of joy as well as income. 2. Learn to execute your trading decisions in a manner that maximizes the probability of your orders to get filled. It's really frustrating to see great opportunities pass by just because your execution skill was not refined enough to get the amount of shares desired or to route your sell order incorrectly. We will provide unique real-time execution classes that will put a solid foundation under your trading. When your training is done, R and T are being put together. That's when you become a RealityTrader. A RealityTrader is one that is able to see what lies beneath the surface and to execute his decisions without hesitation. They are traders that trade the reality of the market, not their opinion that is impacted by his position in the market or from a neighbor's hot stock tip. They are traders that trade what they see, not what they thinks. Reaching this state of trading is our ultimate desire for you and will make us most proud of the hard work devoted. We want traders who are in control.
Read
and Trade. Tape
Reading 101 We prefer Tape Reading as our major method. There are plenty of technical indicators used by traders in different combinations. Many of them are very sophisticated and computers make it easy to watch them in real time. However, Tape Reading is a truly universal method that can be combined with any technical study, and we suggest it as a base for any other method traders like. Sophisticated indicators based on complicated calculations tend to somewhat mask the reality of a scenario happening. Tape Reading goes right to the roots of the stock’s action. This is necessary for newer traders. Like no other method, Tape Reading deals with reality itself allowing traders to see market moving forces in action and to judge which one prevails at that moment. It provides us with a look into what other players try to hide and then allows us to separate reality from our perception. The best example of this is as old as the Wall Street situation of “selling on news”. There are numerous examples of “XYZ is selling on such a great news.” Tape Reading shows why and how it happens. This tells you when you should expect non-conventional action on the stock and how to exploit it. Tape Reading deals with two major categories of market players. They are the Smart Money and the Public. You can replace these old terms with any pair you like (big guys and small time traders, insiders and online traders, institutions and retail traders, etc). However, the core of market events is the same. Tape Reading is a method of analyzing which side is doing what at that moment. Analysis is done by observing the only, and ultimately, truthful indicators of Price and Volume Action. Tape Reading does not always answer all our questions. In the stock market, nothing does. The stock market has no single ultimate answer. Otherwise this answer would already have been discovered and the market would have ceased to exist. There is no way price would ever change if traders knew the exact situation. Furthermore, any absolute method, once discovered by someone, could not be kept a secret for others. What Tape Reading does is: 1. It puts probability on your side as it allows you to read the truth to the extent it can be read, putting as few "interpreters" between you and reality as possible. 2. It allows you to develop a detached state of mind that a side observer possesses. The state of mind that traders want to experience is when they look at market action with no emotions, seeing clearly what happens. This is in direct conflict with cloudy judgement of emotionally involved traders with formed opinions that could be right or wrong, but in any case has nothing to do with reality. Mental
State One of the most difficult shifts in thinking that a trader has to develop is the switch from “Prediction" to “Response". Instead of a trader always trying to predict or expect an event to happen, they simply respond to the event that is before them. The wrong assumption that is made by a trader is that he knows what the market will do at a certain moment. No one ever knows with 100% accuracy what will happen. The trader needs to shift his thinking in a manner that he will not try to predict, but rather respond, to whatever the market decides to do. This type of thinking requires that a trader develop a sense of absolute self-reliance. To achieve this state, a trader must take full responsibility for any outcome of his actions (or lack of actions). Any loss has to become a learning point. This is only possible if the trader is willing to take undivided responsibility. In order to read undistorted reality, the trader needs to read the market with no emotions, as a detached observer. It's not easy to get rid of emotions but it's doable. Accepting the fact that nobody can be always right, willingness to admit mistake fast and thinking of trading capital as of tool rather than money are some of steps in right direction. The trader can't progress unemotionally if every uptick puts him in a euphoric state and every downtick scares him. A trader that experiences strong emotions loses the ability to see the reality of the trade. From this, the trader goes from hope to fear. These emotions dictate his actions and leads to almost certain failure over time. A seasoned trader lets only one entity dictate his actions, the market. Self-confidence, self-reliance, cold blooded reading of reality and keeping emotions in check are the traits of successful trader. Our room provides a powerful educational program devoted to development of a correct state of mind that members can build their confidence upon everyday.
Morning
Preparation Guide If you are watching stocks from the day before, determine support and resistance levels that you may be able to derive and "IF/THEN" scenario. If the stock holds "x" support, then I will enter long with a stop on the break of support. Determine market sentiment or pre-market mood, mainly using futures figures. However, do not feel that what the futures show, will be necessarily how the morning or afternoon trading session continues. Read news stories. Do not try to assess value to the news as we are not experts in this field. We are traders that are simply interested in possible interest derived from the news stories. Look for a gap up or down and volume. If stories are negative to an extreme, use caution as the stock may become dangerous for trading. When a stock receives interest shown in the gap or volume or both, place this stock on the Level 1 screen for monitoring. If you have access to a stock scanner or list of pre-market movers, place ones of interest onto your Level 1 screen for monitoring. Together with news stories, try to have 10 to 15 stocks during the pre-market session on the screen. Remember that you don’t need to try and monitor "all" the stocks with activity. Try to narrow your focus for the open. Near 9:00 EST, begin to take stocks from the Level 1 screen and place them on the Level 2 screen for risk evaluation. On the Level 2 screen, look for levels between prices to be tight, preferably 1/16 to 1/8. Also begin to look for larger sizes from participants at each level. Showing 100 shares each doesn’t show big sizes. Showing 500 to 1000 shares is better. The idea is to find stocks that will not be hard to execute and read when the market opens. Also, near 9:20 EST, stocks become more clear on risk evaluation. In the last 10 minutes of pre-market, narrow your focus for the open to 3 to 5 stocks. Place 3 to 5 stocks on a Level 2 screen that have moderate risk and looks readable from the open. During the last 10 minutes of the pre-market session, try to develop possible if/then scenarios on those stocks. If you do not have any developed for the open, wait for the stock to define a range and trade from that. Make sure volume is good enough and there is no risk for halt candidates. Often we see stocks gapping up or down excessively on no news. Use caution on these activity stocks as they are more apt to halt. Calm yourself. Prepare for the open with a clear mind and readiness to trade. Do not pressure yourself to trade however. Instead, let a trade setup occur and be ready to take it if it shows. Even if a ½ hour goes by and you haven’t made a trade, do not feel like you need to force a trade. Many times I’ve waited hours for my first trade. Don’t feel as if you ‘have’ to trade. But be prepared to do so if a trade setup presents itself. Some use meditation, breathing techniques or other "tricks" to keep the clear mind for the open.
DAY TRADING Some of the more commonly day-traded financial instruments are stocks, stock options, currencies, and a host of futures contracts such as equity index futures, interest rate futures, and commodity futures. Day trading used to be the preserve of financial firms and professional investors and speculators. Many day traders are bank or investment firms employees working as specialists in equity investment and fund management. However, day trading has become increasingly popular among casual traders due to advances in technology, changes in legislation, and the popularity of the Internet. TRADE FREQUENCE Some day traders focus on very short or short-term trading, in which a trade may last seconds to a few minutes. They buy and sell many times in a day, trading very high volumes daily and therefore receiving big discounts from the brokerage. Some day traders focus only on momentum or trends. They are more patient and wait for a ride on the strong move which may occur on that day. They make far fewer trades than the aforementioned traders. OVERNIGHT POSITION Day traders often borrow money to trade. Since margin interests are typically only charged on overnight balances, the extra costs discourage them from holding positions overnight. PROFIT AND RISKS Because of the high profits (and losses) that day trading makes possible, these traders are sometimes portrayed as "bandits" or "gamblers" by other investors. Some individuals, however, make a consistent living day trading. Nevertheless day trading can become very risky, especially if one has poor discipline, risk or money management.[4] The common use of buying on margin (using borrowed funds) amplifies gains and losses, such that substantial losses or gains can occur in a very short period of time. In addition, brokers usually allow bigger margins for daytraders. Where overnight margins required to hold a stock position are normally 50% of the stock's value, many brokers allow pattern day trader accounts to use levels as low as 25% for intraday purchases. This means a day trader with the legal minimum $25,000 in his account can buy $100,000 worth of stock during the day, as long as half of those positions are exited before the market close. Because of the high risk of margin use, and of other day trading practices, a day trader will often have to exit a losing position very quickly, in order to prevent a greater, unacceptable loss, or even a disastrous loss, much larger than his original investment, or even larger than his total assets. Even when a position has made a profit, the trader has to offset the transaction costs and the interest on the margin. It is commonly stated that 80-90% of day traders lose money. An analysis of the Taiwanese stock market suggests that "less than 20% of day traders earn profits net of transaction costs". HISTORY One of the first steps to make day trading of shares potentially profitable was the change in the commission scheme. In 1975, the United States Securities and Exchange Commission (SEC) made fixed commissions illegal, giving rise to discount brokers offering much reduced commission rates. Electronic Communication Networks The next important step in facilitating day trading was the founding in 1971 of NASDAQ -- a virtual stock exchange on which orders were transmitted electronically. Moving from paper share certificates and written share registers to "dematerialized" shares, computerized trading and registration required not only extensive changes to legislation but also the development of the necessary technology: online and real time systems rather than batch; electronic communications rather than the postal service, telex or the physical shipment of computer tapes, and the development of secure cryptographic algorithms. These developments heralded the appearance of "market makers": the NASDAQ equivalent of a NYSE specialist. A market maker has an inventory of stocks to buy and sell, and simultaneously offers to buy and sell the same stock. Obviously, it will offer to sell stock at a higher price than the price at which it offers to buy. This difference is known as the "spread". It is of no importance to the market-maker whether the price of a stock goes up or down, as it has enough stock and capital to constantly buy for less than it sells. Today there are about 500 firms who participate as market-makers on ECNs, each generally making a market in four to forty different stocks. Without any legal obligations, market-makers were free to offer smaller spreads on ECNs than on the NASDAQ. A small investor might have to pay a $0.25 spread (e.g. he might have to pay $10.50 to buy a share of stock but could only get $10.25 for selling it), while an institution would only pay a $0.05 spread (buying at $10.40 and selling at $10.35). Technology Bubble (1997–2000) ECNs are in constant flux. New ones are formed, while existing ones are bought or merge. As of the end of 2006, the most important ECNs to the individual trader are Instinet (which bought Island in 2005), Archipelago (although technically it is now an exchange rather than an ECN), and The Brass Utility ("brut"), as well as the SuperDot electronic system now used by the NYSE. The ability for individuals to day trade coincided with the extreme bull market in technical issues from 1997 to early 2000, known as the Dot-com bubble. From 1997 to 2000, the NASDAQ rose from 1200 to 5000. Many naive investors with little market experience made huge profits buying these stocks in the morning and selling them in the afternoon, at 400% margin rates. Adding to the day-trading frenzy were the enormous profits made by the "SOES bandits". (Unlike the new day traders, these individuals were highly-experienced professional traders able to exploit the arbitrage opportunity created by SOES.) In March, 2000, this bubble burst, and a large number of less-experienced day traders began to lose money as fast, or faster, than they had made during the buying frenzy. The NASDAQ crashed from 5000 back to 1200; many of the less-experienced traders went broke, although a small minority of traders made fortunes shorting the market all the way down TECHNIQUES Some of these approaches require shorting stocks instead of buying them normally: the trader borrows stock from his broker and sells the borrowed stock, hoping that the price will fall and he will be able to purchase the shares at a lower price. There are several technical problems with short sales - the broker may not have shares to lend in a specific issue, some short sales can only be made if the stock price or bid has just risen (known as an "uptick"), and the broker can call for the return of its shares at any time. Some of these restrictions (in particular the uptick rule) don't apply to trades of stocks that are actually shares of an exchange-traded fund (ETF). TREND FOLLOWING RANGE TRADING REBATE TRADING NEWS PLAYING NEWS PLAYING COST TRADING EQUIPMENT A fast Internet connection, such as broadband, is essential
for day trading. BROKERAGE COMMISION As for the calculation method, some use pro-rata to calculate commissions and charges, where each tier of volumes charge different commissions. Other brokers use a flat-rate, where all commissions charges are based on which volume threshold one reaches. SPREAD The ask prices are immediate execution (market) prices for quick buyers (ask takers); bid prices for quick sellers (bid takers). If a trade is executed at market prices, closing that trade immediately without queuing would not get you back the amount paid because of the bid/ask difference. Spread is 2 sides of the same coin. The spread can be viewed as trading bonuses or costs according to different parties and different strategies. On one hand, traders who do NOT wish to queue their order, instead paying the market price, pay the spreads (costs). On the other hand, traders who wish to queue and wait for execution receive the spreads (bonuses). Some day trading strategies attempt to capture the spread as additional, or even the only, profits for successful trades. MARKET DATA In addition to the raw market data, some traders purchase more advanced data feeds that include historical data and features such as scanning large numbers of stocks in the live market for unusual activity. Complicated analysis and charting software are other popular additions. These types of systems can cost from tens to hundreds of dollars per month to access. PATTERN DAY TRADER
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