Day Trading 101, 2nd Edition: From Understanding Risk Management and Creating Trade Plans to Recognizing Market Patterns and Using Automated Software, an Essential Primer in Modern Day Trading

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For my wonderful wife, Lourdes, who always puts up with me while I write books. And to all the readers and traders, without whose support I wouldn’t be able to keep doing what I love. You’re the music. I’m just the band.

INTRODUCTION

If you’ve ever wanted to know how to make more money in the lucrative world of day trading, this book sets you up for success. From learning your current competition in the market to understanding how COVID-19 impacted commodities to realizing what it takes to get higher returns in today’s economic world, there’s no doubt that day trading is a complicated but rewarding way to make some additional income. Each day, more and more people are curious about how they can succeed with this exciting side hustle.

In Day Trading 101, 2nd Edition, you get access to the most up-to-date information regarding how to invest in the stock market at peak times so you can earn money quickly. You’ll learn that day traders buy and sell stocks many times in a single day and how to capture gains and book profits on your trades during the hours the markets are open. Throughout this book, you’ll learn more about what’s involved in the world of investment opportunities, including:

How AI, algorithms, and high frequency trading are impacting market pricing

What cryptocurrency means for day trading

How you can use the Federal Reserve as an indicator to plan your day

The differences in trading seasonally (and what that means for the gold market)

How to use interest rates and liquidity to understand the big picture

And more!

This book will walk you through the basic concepts of how to start day trading, from opening and funding your trading account, looking for profitable trades, knowing when to exit a trade for a good amount of profit, and steering clear of bad trades. You will learn the differences between day trading, short-term trading, and investing, and you will see what you’ll need to get up and running in your day trading account to make your trading manageable, enjoyable, and profitable. All it takes is a bit of knowledge, insight, discipline, and flexibility. With a little time and practice, you’ll be able to read the market’s signals, determine the good trades from the bad trades, and start booking profits.

Whichever stocks you focus on, or where you start your day trading journey, Day Trading 101, 2nd Edition, will assist you in your goal to learn more about this fast-paced, fun economic opportunity. So, let’s begin.

Chapter 1

Introduction to Markets and Trading

Trading, day trading, and investing are terms that are used to describe the buying and selling of financial products, which for all intents and purposes are traded electronically. Whether they’re trading stocks, commodities such as oil or gold, or foreign currency, day traders and traders use computers to buy and sell in the financial markets. Most people are familiar with the US markets such as the stock market, but the financial markets are worldwide, and it is possible to trade stocks issued by European companies, gold warehoused in Asia, or the currencies of developing nations. What ties them all together is that the trading is done electronically and can be done from your home computer or, in many cases, from your tablet or smartphone.

WHAT IS DAY TRADING?

Your New Side Hustle and Many Options for Day Trading

The COVID-19 pandemic changed everything. And after the dust began to settle, it became evident that many people needed a second job, a side hustle, or sometimes both. Day trading can fill those needs by providing extra income while potentially becoming the primary way to pay bills and lead the best life possible.

When people hear the word trading, they usually think of the stock market and 401(k) plans (or other retirement accounts). But that’s not really stock trading; it’s investing. People who trade stocks don’t deposit money into a 401(k) or brokerage account with each payroll check. Instead, they buy and sell stocks to make a profit.

Many traders think long term and buy and hold stocks for a certain length of time—sometimes years. But there’s another kind of trading: day trading. Day traders buy and sell stock within a twenty-four-hour period. Sometimes they hold the stock for only minutes, sometimes for a few hours. Day trading is the process of starting a trading session at the beginning of the day in 100% cash, buying and selling securities during the day for profits, and making sure to sell off all the account holdings by the end of the day, thereby returning to all cash at the end of the trading session.

Day traders buy and sell stocks many times in a single day. Their goal is to capture gains and book profits on their trades during the hours the markets are open. They repeat the process of starting in cash, trading, booking profits, and ending the day in cash every day. Although the profit on each trade is often relatively small, the volume of their trades allows day traders to book huge profits on average-sized accounts over the year. As the profits come in, the trader’s account grows in value, allowing larger trades.

Another distinguishing feature of day trading is the use of leverage to amplify purchasing power. When day traders use leverage (also called margin accounts) in their trading strategies, they are essentially buying stock or securities with credit. This is much like purchasing a house with only a 10% or 20% down payment and a mortgage for the balance. In the case of day trading, the trader puts up cash or other securities for the down payment, and the brokerage account lends him money to buy more stock or other securities. This means that with the right management, relatively small accounts can book sizable profits.

Finally, day trading is enhanced via the availability of twenty-four-hour markets. Day trading can be done whenever the markets are open: for stocks, this usually means 9:30 a.m. to 4:00 p.m. Eastern US time, as well as during the pre-market and after hours sessions, which run from 4:00 a.m. to 9:30 a.m. and 4:00 p.m. to 8:00 p.m. But while the US stock market is only open during the day, other markets are open twenty-four hours a day, six days a week. This means you can keep your day job while building up your skills at trading during your off hours. You can trade on your own time. You can even trade on a smartphone or a tablet; brokerage houses offer sophisticated trading platforms for both.

Trading can be done anywhere with Internet access and it doesn’t need to take a lot of time. You might spend only an hour a day looking for trades and only trade two to four times a week. It’s up to you how you want to build your trading business.

Start a Process Checklist

Write down the needed steps in a checklist to develop your day trading career and check them off one by one as you master each step. The easy way is to follow the guidelines set in this book. First, learn about the markets, and the rest will follow.

FUNCTIONS OF THE MARKETS

Market Makers and Market Pricing

The market is a complex entity because of the interactions that take place between financial traders and investors, who use products and platforms to buy and sell assets. The traders’ actions are facilitated by intermediaries (exchanges and market makers), and these traders’ actions are guided by rules crafted and enforced by governments and independent agencies. Through these interconnected means, professional and personal traders and investors carry out both short-term and long-term trades and investments in financial products such as stocks, foreign monies, and commodities such as gold and oil. Together, traders, investors, exchanges, and rule crafters and enforcers come together to form the market, a term which refers to both the industry and the collective mechanism as a whole, not just stocks, bonds, or other traded instruments.

Say the word markets, and most people think of the tumultuous pits that we often see on television and in pictures of the New York Stock Exchange (NYSE). Dozens of traders are closely gathered, waving their hands wildly while yelling out buy and sell orders. These pits are on the floor of the stock exchanges, and are highly symbolic in the days of electronic trading. In the past, the trading pits were places where you could find independent traders and market makers. In the twenty-first century, you’re most likely to trade against a machine because the market’s backbone now is mostly composed of servers housed in climate-controlled data centers.

MARKET MAKERS

Market makers are intermediaries, traders who match buyers with sellers. They make money by buying and selling all available stock in which they are dealers. They are the first to buy and sell all orders coming through the exchange floor for that stock, and they earn a commission on each trade. The downside of this is that if the market has a bad day, they still have to buy all shares of their specialty stock, whatever the price. This is true even if their order book is full and they have very few buyers. Market makers facilitate the efficient and orderly operation of the investment markets in good times and bad.

Because market makers (the middle men who connect buyers and sellers) have access to the market’s trend before anyone else, they legally buy or sell shares for their own account before anyone else does. This gives them an advantage in making profits, while being perfectly legal and preserving their ability to remain solvent. Without market makers the financial markets would likely be chaotic.

Many market makers work for large firms such as Morgan Stanley or Merrill Lynch; others are employed by private account holders who own a seat on the exchange. Having a seat allows them to put a person on the floor of the exchange to get in on the trading action.

Trades are often made in bulk orders of one thousand shares or more, but floor traders and machine traders can handle smaller trades (hundred-share lots or even smaller). Human and mechanical traders trade for their own account or for firms that buy shares for their client’s accounts. In either case, the motivation of market makers is the access to all trades that come through the floor and a commission on each trade that they handle for clients, as well as profiting for their own account. Market makers are strictly regulated by the Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), and the National Futures Association (NFA). The SEC is the government body that polices, investigates, and prosecutes financial and market fraud in the United States. FINRA and NFA are self-governing industry watchdogs that monitor and regulate all US-based stock, foreign exchange market, and futures professionals.

Fiduciary Care

While market makers are a form of broker, only FINRA/NFA brokers registered to provide care of custodial control of client accounts are required to provide a fiduciary service: meaning only these registered brokers are required to put their client’s financial needs above their own.

Determining Price

In addition to providing a physical or electronic gathering place for buyers and sellers of financial products such as stocks, foreign currency, and futures, the world’s marketplaces help buyers and sellers determine the current price of what’s being traded. Trading screens scattered throughout the trading floor of the exchanges show a buy and a sell price for each stock. This price data is transferred to the data feed you see on your computer screen. The prices are updated constantly so that traders can see what a trade is worth moment to moment, allowing them what is called price discovery. The buy prices are a bit higher than the sell prices; the difference between the buy/sell is called bid/ask spread.

If you are selling a stock, you’ll get the bid price; if you are buying a stock, you’ll get the ask price. If you’re buying a stock, it will cost more than you would get if you had the same stock and you were selling. The difference between the two prices, the spread, is pocketed by the dealers and floor brokers as their profit for the service of being market makers. Financial products that are traded in massive quantities daily usually have a tight spread: the difference between the buying and selling price is very small, or tight.

For example, if you were to buy one hundred shares of Apple stock (AAPL) at $101.50 per share and instantly sold all one hundred of those AAPL shares, your sales price would be about $101.40. You would instantly lose ten cents per share, for a total loss of $10 on the trade. This difference in price is the amount that the dealer or floor broker makes on the trade. Remember, the floor brokers make money with every buy and sell order that comes across their order book—it doesn’t matter if you lost money on the trade. Each trading day, there are thousands of buy and sell orders, and the floor brokers earn a small sliver of profit on each trade they handle for their clients.

The volume at which shares or other financial products are traded is referred to as their liquidity. The more liquid a product is (i.e., the more often it is traded), the smaller the spread. The more illiquid a product is (i.e., the less it is traded), the wider the spread.

Bid/Ask Spreads Vary Widely

Spreads can vary widely between traded products: the spread of an electronically traded futures contract for 100 ounces of gold could be as little as $10. At the same time, the spread of 100 ounces of actual gold bullion from a reputable precious metals dealer could be as high as $30 per ounce, or $3,000.

PRIMARY AND SECONDARY MARKETS

Two other terms you’ll hear as you learn more about trading are primary market and secondary market. The primary market is where new stocks and bonds are first made available for public purchase. When a company is raising cash for operations for the first time, investors can pay cash for an equity ownership stake in the company, which is embodied in shares of stock. In return, the owners of the company give up a percentage of control of their company to the investors. The company then takes the cash and uses the money to grow further. This initial sale of stock is called an initial public offering, or IPO.

Once the stock has been sold, it becomes a part of the secondary market, where it can be traded among investors and day traders. Most times this is done through a brokerage account or an online trading platform. As a day trader, the financial products you will be trading will all be offered on the secondary market—you will be day trading by buying and selling on the exchanges through your brokerage trading platform. Your trading platform will differ depending upon the product you trade, whether it’s stocks, foreign exchange, or futures. Not only are these different products, but each brokerage firm will offer its own. The basics will all be the same though: order entry, notations as to available purchasing limits, and each gain and/or loss of every trade. The displays range from the very simple to the complex.

The money paid for a trade is given to the previous owner of the stock, and the purchasing trader receives the stock. The company that originally issued the stock never receives any money from the secondary market. The only time the company receives the money from the sale of stock is when it’s initially sold on the primary market. From then on, traders and investors buy and sell stock from their own accounts, and only to each other.

WHO’S WHO IN THE MARKETPLACE

Banks, Hedge Funds, CTAs, HFTs, and Trading Houses

Before you start searching the market, looking for trades, and living the often thrilling life of a day trader, it’s best to know a little about the institutions that are integral to the world’s stock, currency, and commodities markets. Aside from brokerage and market making services, all of the institutions within this chapter also trade for their own accounts and rely on one characteristic when they trade: algorithmic/mechanical trading programs (algos).

INVESTMENT BANKS

Within the world’s marketplace of stocks, bonds, mutual funds, futures, and currency, there are a few key players. The first of these is the investment banks. These are at the top of the food chain in the trading business (think Goldman Sachs, Morgan Stanley, UBS, and J.P. Morgan). This is because when companies are raising capital for the first time, it is the investment banks that write and prepare the documents, provide advice, and help place the initial run of stock that the company will offer. (Place in this context means the very first listing of the stock on the stock exchange ever, thereafter available to the public to buy in their trading accounts for investment or trading.) As discussed earlier, if the company is raising capital on the stock exchange for the first time, the first shares of stock sold to the public are called an IPO, or initial public offering. These IPOs are very complex. The company will hire an investment bank to determine how many shares will be sold, at what price they sell, and if any other legal contracts will be tied to the shares. The bank will then use its vast connections in the investment world to find buyers of the stock at the initial price. This is the price it will sell at when the company goes public.

Investment banks have first dibs on the stock and will sell large blocks to their best customers. Regular traders can own shares of the new stock after it has debuted on the exchange and is therefore trading live.

HEDGE FUNDS

The second group of players in the markets is hedge funds. These are privately owned trading houses that invest both their owners’ monies and their customers’ monies at highly leveraged amounts. Not only are hedge funds highly leveraged pools of investment money, but they also use several trading styles. These styles range from higher-level views of the world’s trading environments (such as Global Macro funds), which trade any financial