Keep Your Eye On The Ball:(updated - Judging The Mood Of The Market - Trading In The Moment)
Contents:
A - Attain The Proper Psychology
Components Of Intuitive Day Trading
Learning How To Win, Learning How To Lose
Don't Isolate Yourself
Further Reading On Trading Psychology
B - Begin With Goals
What Motivates The Successful Day Trader
C - Constructing A Trading Method
Basic Approaches To Day Trading:
- Technical Trading
- Further Reading On Technical Trading
- Momentum Day Trading
- Further Reading On Momentum Day Trading
Identifying Basic Types Of Day Trades:
-Identifying Gap Trades
-Identifying News Trades
-Identifying Anticipation Trades
-Identifying Market Trades
-Identifying Sector Trades
Using #Daytraders Chatroom To Identify Basic Day Trades
- Introduction
- One Good Play A Day
- Avoid The Open Madness
- Do Your Own Homework
- Holding Overnight - Don't Believe The Hype!
Using Charts To Determine Support And Resistance Points
Using Tape Reading To Time Exit/Entry Points
- Previous Trades
- Bid/Ask
- Previous/Today's High/Low/Open
- Time
- Trade Size
- Level 2 Data(Market Depth)
- Further Reading On Level 2 Data
Judging The Mood Of The Market - Trading In The Moment
Trading Day Procedures
- Before the Open
- During The Day
- After The Close
D - Define Your Risk & Money Management Method
Adequate Capitalization
Diversification
Margin/Bet Size
Stop Losses
Averaging Down
Holding Winners Overnight
Trade Liquid Markets Only
Know When Not To Trade
E - Evaluate Your Execution System
Broker
Data
Software
Real Time News Sources
Remote Execution System Failure - Contingency Plan
More On Execution Systems
F - Further Help On Setting Up A Trading Plan
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A - Attain The Proper Psychology (Trader's state of mind)
Components Of Intuitive Day Trading:
1) Desire
2) Faith
3) Visualization
4) Specialized Knowledge
5) Organized Planning
6) Decision
7) Persistence
8) Network
9) Sixth Sense
Learning How To Win, Learning How To Lose:
How to win?.....DON'T GET EXCITED about a big win. Just take it as a normal part of trading. Always close a winning trade and move on.As a Day Trader you can lose as quickly as you win.
How to lose?..DON'T GET DEPRESSED about a big lose. Just take it as a normal part of trading. Always use stop loss orders. Always close a losing trade and move on. As a Day Trader you can win as quickly as you lose.
You must learn to take all your trades in stride and focus on you trading plan. Getting excited or depressed just clouds your judgement and prevents you from take the right action at the right time.
This is the biggest difference between successful traders and losers!
Don't Isolate Yourself:
One of the biggest risks of remote online trading is the isolation that can occur and lack of networking intraday. For the trader this can cause problems with keeping their mind on the task at hand, as well as losing their perspective on what is happening with the markets.
To alleviate this problem the Final Frontier Chatroom was created:
The Final Frontier Real Time Trading Room:
exchange2000.com
Further Reading On Trading Psychology:
Trading For A Living - Alexander Elder
Market Wizards - Jack Schwager
New Market Wizards - Jack Schwager
Think And Grow Rich - Napoleon Hill
The Winning Edge - Adrienne Laris Toghraie
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B - Begin With Goals (short/mid/long term)
What Motivates The Successful Day Trader:
1) Money
2) Freedom
3) The desire to maintain control of his/her own mind towards external events, and observe/react correctly to the short term emotional actions of others in the market.
Once you have determined what motives you, you can draw up written goals to review and visualize daily. Visualization is they key to developing the proper mind set needed to react correctly throughout the trading day.
Your goals should be broken down into the short,medium and long term. A good idea is to create financial projections including revenues, expenses and profitability objectives - much like any business plan.
When projecting your annualized revenues remember that to achieve higher rates of return on capital will require assuming more risk. Be realistic in setting goals that are line with your trading method.
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C - Constructing A Trading Method
Basic Approaches To Day Trading:
Technical Day Trading
Technical Day Trading is based on strict technical signals which confirm entry points along with tight stops that signal exit points.These are trades which you tend to hold longer(30 minute to several hours)and therefore are looking to make 1/2 to several points.
For Technical Trades I have been experienting with using charts with longer time frames to confirm the direction of the trend. Much like that found in Elder's Triple Screen System.
Further Reading On Technical Day Trading
Technical Analysis - Beginners:
exchange2000.com
Recommended Books On technical Analysis
exchange2000.com
Day Trader's Manual - William Eng
Hit And Run Trading - Jeff Cooper
Street Smarts - Larry Connors & Linda Bradford Raschke
Momentum Day Trading
Momentum Day Trading involves many basic elements of technical analysis and fundamental analysis to determine whether to go short or long initally, yet the focus is on reading the tape to determine the timing of entry/exit points.
You do not hold Momentum trades long (1 minute to 30 minutes)and therefore you are only willing to take what the market gives you(1/16 to a point) You may make several trades on the stocks but are unwilling to hold the position unless the momentum continues.
Further Reading On Momentum Day Trading
Summary Of Ken Wolff's Trading Method:
Message 4571285
Identifying Basic types of Day Trades:
Knowing how to identify and trade the basic types of day trades will help you to maximize gains and avoid unnecessary losses. The basic types of Day Trades are:
- Gap Trades(trading off opening gaps)
- News Trades(trading off recent news)
- Anticipation Trades(trading off anticipated events)
- Market Trades(trading off volatile markets)
- Sector Trades(trading off moves in stocks within sectors)
Identifying Gap Trades:
This requires doing some analysis of pre market news, previous day Momentum News Trades and opening statistics. Keep an eye on the largest point movers for ideas at the open.
Identifying News Trades:
I rely heavily on #DAYTRADERS chatroom to provide me with Intraday Momentum News Trades. You MUST read and evaluate the news AND the company BEFORE you take a position.
Instead you may prefer to scan news yourself using one of the various news feeds(Reuters,Dow Jones,Bloomberg,Briefing.com,etc) and make calls independent of others.
Identifying Anticipation Trades:
This involves analyzing what stocks have upcoming earnings, news announcements, etc. coming in the near term. Generally stocks will pickup momentum has the timing of the anticipated event grows close.
Identifying Market Trades:
This involves tracking the Dow 10 minute intraday chart and watching for reversals after large intraday selloffs or runups. Generally I will play the largest point movers or Momentum News Trades in tandem with market reversals.
Identifying Sector Trades:
This involves tracking sectors or sub sectors of stocks for a news maker. The idea is to watch companies in the same sector and trade the laggards in the group on the assumption that the market will move the group as a whole not just the news maker.
Further Reading On Sector Day Trading:
exchange2000.com
Using #Daytraders Chatroom To Identify Basic Day Trades:
Introduction:
For those not familiar with #daytraders it is simply an online chat which is open to anyone. #daytraders attracts all types of traders.
#daytraders is growing all the time and the influence it exerts becomes more evident everyday as you follow the ebb and flow of the room. Typically there are 600 people in the chatroom. The main thrust of the room centers around the identification of stocks which are poised to make large intraday moves (up or down)
Traders' posts revolve primarily around breaking news from Briefing.com's INPLAY section, Reuters, Dow Jones, CNBC, Yahoo, and other news services. Often the basic fundamentals of the company will be posted from Marketguide( Shares outstanding,float,revenues,etc.)
In addition there is a tremendous volume of post by traders commenting on these stocks once the room has began trading them. This is where the danger exists for the uninitiated. The pace of the room is very quick and many traders get caught up the energy surrounding a hot stock which has been identified and is being accumulated very quickly.
The way to use the room is to use your own tools to identify those plays which meet your own criteria for good trades and to take the appropriate action at the appropriate time.
One Good Play A Day:
Typically each day #daytraders will have one good NEWS PLAY. This is what makes #daytraders worthwhile.
Typically each day #daytraders will have one good NEWS PLAY. This is what makes #daytraders worthwhile. This phenomena seems to occur regularly . The potential NEWS PLAY can be anything from microcap to largecap stock. The key is to recognize the NEWS PLAY as having:
1) good potential to move the stock.
2) see alot of buying on the offer.
3) good follow up buying from traders in the room.
4) good follow up buying in the market.
Typically you should sit on your hands for awhile until you can see the breakout occurring. Many traders rush into false breakouts and end up dumping the stock at a loss. Take your time and really look for the momentum to build behind the stock. Even if you miss a 1/2 point it will be worth it too know that it is a REAL breakout.
Avoid The Open Madness:
Whatever you do don't listen to people talk up/down stocks pre-open!
Watching the manipulation of market makers on level 2 screens is bad enough without listening to alot of people with they're own agenda try to sway the room in one direction or another.Make you own calls!
Do Your Own Homework:
Anyone who has spent time in #Daytraders will tell you the fastest way to go broke is to act on every trade that is hot in the room.
Every traders has his/her own agenda. Due your own due diligence before leaping into a trade. Here are some things to help you determine if a trade has good potential.
News
- Do you understand what the company does?
- Is the news significant enough to move the stock and attract sustained interest so that you can exit with your targeted profit?
- Is the news recent or is it several hours/days old?
- Is it a repeat of a previous news release?
- Is the news being picked up by major news wires?
( Briefing.com,Reuters,Dow Jones,CNBC )
Volume
- Is it real volume or just one or two large block trades?
- Is the volume increasing quickly?
Price Action
- Are the market makers simply moving the stock up briefly so that they can distribute stock to you at a pumped price?
- Who is in control? retail or market makers?
- Are traders buying on the ask?
- What does the chart look like? is the daily trend down?
Other
- Are you late to the party? have traders in the room already loaded up before you? are they looking to unload for 1/4 or 1/2 to you?
- Is the overall market an active market for traders? or are there very few plays making big runs?
- What is the float? is it small enough that a significant run won't be diluted?
- What is the insider ownership? are there any outstanding warrrants or options?
- Who are the major market makers?
There are many more factors to consider and you should be able to determine the majority of them as a matter habit - you better! because you know the OTHER traders will!
Holding Overnight - Don't Believe The Hype!
Okay you've identified a good story stock with good momentum and the room is as bullish as you've seen it. You trade it several times and now the stock is going into the close and you are long/short with no end to the momentum insight . Know What do you do?
1) Hold overnight for the gap up?
2) Blow it out at the close?
The thing to remember when Day Trading is that you believe in momentum - not hype!
If you answered number 2 you are probably on the right track. If you answered number one you better re-think why you are Day Trading. Holding overnight means that you feel confident in the hype and that you think that once traders view the news/fundamentals they will continue to buy the next day.Wrong!
Using Charts To Determine Support And Resistance Points:
I use 10 and 60 minute intraday charts as well as daily charts to determine support and resistance points. Visualizing several time frames intially will help you to gain the perspective necessary
to Momentum Day Trade efectively.
Using Tape Reading To Time Exit/Entry Points :
I Use the following indicators to read the tape and time entry/exit points:
Previous Trades:
For me there is no better indicator for trading than previous trades. Trades literally define the leading edge of the trend.
By watching a scrolling summary of trades I am able to determine
whether demand is slowing down or picking up for the stock.
The volume of each trade helps me to determine if there are any serious buyers in the market and how badly they want to buy the stock.
You can get a real feel for the market of a stock by watching the velocity of the trades. As momentum gains the speed of trades intensifies. Whether or not the price can break through on this higher volume is a key in determining support or resistance points.
Knowing these support and resistance levels is a key to knowing when to enter or exit trades.
Often traders or market makers can fool you by jockying around on the bid/ask, but previous trades denote the true sentiment of the market.
Bid/Ask:
After Previous Trades watching the bid/ask is the next best thing.
There are several components of the bid/ask:
price - the price offered at the bid, and the price offered at the ask
spread - the difference in price between the bid and ask
size - the number of shares at the bid, and the number shares at the ask
For NASDAQ stocks it is possible to get a Level 2 screen of the bid and ask for individual stocks. This gives you additional information such as the size and price of bids and offers behind the current best
bid/ask.
For example if the best current bid for Intel was 1000 shares bid @ $100...Level 2 would show bids below this, such as 1000 shares bid @ 99 15/16.
Additionally Level 2 will give you what brokerage house is bidding/asking, how many shares each is bidding/asking for, at each price differential.
Bid/Ask is a good trading indicator of the strength of the demand/supply because you can see new orders for stock being added or deleted from the market. This information can help you to determine whether prices are likely to move. For example if the size of stock bid is much higher than the size of stock offered it is likely that prices will trend higher. This is not always the case though and that is why previous trades tend to be a better indicator of trends.
The spread is a reasonable trading indicator as well, but it is much better in non-liquid stocks. In liquid markets stocks tend to maintain tight spreads. In non-liquid markets a wide spread can mean that a price movement is eminent. The tendancy of traders to not tighten the
spread means that the market must change the bid/ask up or down to attract more traders to the market.
Once again previous trades tend to be a better indicator than the spread because of opportunity for traders to manipulate the spread, especially in non-liquid stocks. Unfortunately in non-liquid stocks there may not be enough previous trading to get a good feel for the trend...and that is one big reason why I rarely trade non-liquid stocks.
Previous/Today's High/Low/Open:
Keeping an eye on the daily price range of a stock gives me perspective of where the stock is trading with relation to it's longer term (such as hourly, daily of weekly) trends.
Knowing when a stock is approaching or breaking through a new day high/low is critical to helping me visualize that daily range.
Paying particular attention to trades as they happen as the stock is approaching a new daily high/low gives me a good insight as to the momentum of the market and it's willingness to establish new ground.
If a stock trades around new daily high/lows early in the day it helps me throughout the day in establishing Entry and Exit points for that stock.
Time:
The time between trades, as well as the time spent at a particular price level tends to indicate resistance/support levels.
For example - Often when I am watching a stock in an uptrend the pace of trading slows down at a particular level. If there is an increase in the size of trades during this time I will take this as an indicator that resistance has been met.
Often this will mean that a large order has been filled and is being
crossed to an institution before the market makers pullback off their bids.
I see the same thing happen on downtrends, but in this case the market makers are buying from the institution.
Trade Size:
As I referred to in my last post, the size of previous trades can indicate a lot about what is happening with behavior of a stock.
for example - While watching a stock trade in a tight range a series of trades of large size will indicate a struggle that the market makers are having is about to be won by one side, and that the beginning of a breakout is near.
Level 2 Data(Market Depth)
An additional tool for Momentum Trading is Level 2 Data or Market Depth. This replicates alot of the data from Level 1 Data but in addition it displays all the information on who is bidding and offerring and at what price.
Further Reading On Level 2:
Elite Trader
elitetrader.com
From The Trading Desk
Subject 15612
Trading Day Procedures:
Before the Open:
1) Review your Trading Plan to get into the proper state of mind for trading.
2) Review overnight markets and news to judge the mood of the market. Knowing the mood of the overall market will help you to determine how aggressive or defensive you will be with your trading.
3) Update your watchlist to reflect any potential Momentum trades.
I try to posts my watchlist on:
The Final Frontier Watchlist:
exchange2000.com
During The Day:
1)Follow your watchlist and add any potential Momentum trades as you observe the intraday news and judge the mood of the market.
2)Follow your risk and money management method.
3 Read the tape to time your entry/exit points on those Momentum Trades that you have identified.
After The Close:
1) Review your trades.What did you do right or wrong? what can you you learn from each trade?
Judging The Mood Of The Market - Trading In The Moment:
Your ability to determine if the market is in a good, bad or indifferent mood will be the key determinant of your trading success. The longer you are in the market the more aware of this you will become. You should concentrate on identifying the key events and how traders are reacting to them. It is crucial to be trading with the flow of the market to be successful.
Ideally you should be able to observe and judge the mood of the market from different time perspectives such as the near term(hourly or by the minute), mid term(daily), and longer term(weekly or monthly).
I try to posts my thoughts on the market on:
The Final Frontier Watchlist:
exchange2000.com
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D - Define Your Risk & Money Management Method
Adequate Capitalization:
For the experienced trader an adequate level of starting capital is in the 75,000 - 150,000 dollar range. The inexperienced trader will most likely start with less which will limit his available opportunites within the market.
Diversification:
My belief is that if you are Momentum Day Trading you should not hold more than one or two positions at the same time. Trading more than or 1 or 2 positions will make it difficult to spot the small nuances in the tape that signal exit points. Although this increases theoretical risk I feel that using other ways to reduce risk are more effective for the Day Trader. In addition trading concentrated positions can result in MUCH higher rates of returns.
Technical Trading offers you the ability to diversify because of it's rigid entry and exit signals.
Margin/Bet Size:
Be careful not to overextend yourself by betting too much on one trade, or using margin to increase your leverage more than you usually would. A good strategy is to determine the bet size you are comfortable with and NEVER increase it. If you feel less confident about a trade REDUCE the bet size until you feel more confident about your trades. The less margin you use the better. Trading on margin is a double edge sword which can cut deeply if a trade runs away from you.
Stop Losses:
You MUST keep your stops! There is no faster way to go broke than to hold on to a trade after it has violated your stop loss target.
When Technical Trading Keep stop targets to a maximum of 5% of the trade capital. Some prefer tighter stops of 1% or 2%.
When Momentum Day Trading I will kick out any stock when it fails to do what I think it should( in other words - because the momentum has stopped) The trick is to limit losses to 1/8 or at the most 1/2. Larger losses mean that you are not kicking your losers out soon enough or your executions skills need work.
Averaging Down:
You MUST NOT average down! This only increases the size of the loss you will take from not holding your stop target.
Holding Winners Overnight:
Often many Day Traders hold overnight if the trade is closing strongly in their favor. What if the market or sector the stock is trading in, gaps dramatically in the opposite direction of your trade the next day at the opening? Are you willing to assume the risk of a gap down on a concentrated position?
Trade Liquid Markets Only:
Consider trading only markets such as the NASDAQ or NYSE where you can find stocks that have volume of 100,000 to 25 million shares trading daily. Liquidity means you can get in and out easily. The more liquidity also means the less likely the security is being manipulated by insiders,brokers, or promoters.
Know When Not To Trade:
Often times the market is flat, or you do not have the proper state of mind to trade. If this is the case take the day off and relax! The market will be there tomorrow.
Days to Trade, Beware and Avoid:
adtrading.com
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E - Evaluate Your Execution System (software/news/research/quotes/broker)
Ultimately there is no perfect execution system for everyone. Because each person has a different approach and trading method what is perfect for me, may be terrible for you. Generally speaking, here are some guidelines:
Broker:
Make sure know what you want from your broker. Fast executions, immediate confirmations, reliable data and software, great client service, competitive fees, good website, excellent reporting. Make sure the broker is reputable and has a good capital base behind it.
Software:
Make sure you know your needs before looking at software. Currently Real Tick III dominates the landscape and is very flexible. Also CyberTrader and Tradecast are as flexible yet not as widely used. A step down from this is a browser based systems offered by Castle Online(a.k.a Market Link). A step below this are the other browser based systems such as those offered by Datek, Etrade, Dreyfus, Discover, etc. Ask around the online trading rooms for opinions on what systems are good, bad and why.
Data:
Will most likely come packaged with the software. If not consider S&P Comstock or PC Quote or DBC.
Real Time News Sources:
Reuters, Dow Jones, Bridge, and Bloomberg set the standard for news sources. All are excellent.
Remote Execution System System Failure - Contingency Plan:
1)Know how to contact your broker in case of problems. Have several backup numbers in case the lines are busy.
2)Know what your broker's procedures are concerning phone in orders/questions.
3)Discuss your broker's liabilty with regards to missed trades/opportunites. What will he take responsibilty for and under what conditions.
4)Be sure to follow through on orders regardless of execution problems. Hesitation to follow through on trades could cause many headaches including missed opportunities and larger losses. You may not take a loss at the time but a change in your strategy may lead to larger losses down the road if you hold the trade longer because of execution problems.
5) Be sure you now how to reboot your system as quickly as possible. Always find out what the problem is before you waste valuable time trying to reboot. Sometimes the system may be down for lengthy periods of time.
More On Execution Systems:
From The Trading Desk
Subject 15612
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F - Further Help On Setting Up A Trading Plan
For background information on "Keep Your Eye On The Ball" including books, magazines, articles, software vendors, brokers, quote vendors, news sites, research sites, and various educational sources of information useful to Day Traders check out:
The Final Frontier Links
exchange2000.com
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