Keep Your Eye On The Ball - Part I:
Contents:
A - Attain The Proper Psychology
Components Of Intuitive Day Trading
Judging The Mood Of The Market - Trading In The Moment
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 The Different Types Of Potential Day Trades:
-Identifying Gap Trades
-Identifying News Trades
-Identifying Anticipation Trades
-Identifying Market Trades
-Identifying Sector Trades
Using #Daytraders Chatroom To Identify Potential 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 In Several Times Frames To Determine Whether To Momentum Day Trade or Technical Day Trade
Using Charts To Determine Support And Resistance Zones
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
Trading Day Procedures
- Before the Open
- During The Day
- After The Close
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A - Attain The Proper Psychology (Trader's state of mind)
Short Term trading is very intense fast paced information game that requires a great deal of discipline and experience in which to succeed. You MUST evaluate your own stengths and weakness to determine if you have the proper minset and experience to trade effectively within this most difficult of time frames.
Components Of Intuitive Day Trading:
Intuition plays a key role in effectively processing the large amount of information that a Day Trader is subjected to be able to "Judge The Mood Of The Market" and trade "In The Moment". What follows are the components needed to develop that intuitve faculty:
1) Desire
2) Faith
3) Visualization
4) Specialized Knowledge
5) Organized Planning
6) Decision
7) Persistence
8) Network
9) Sixth Sense
Judging The Mood Of The Market - Trading In The Moment:
Your intuitive 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. If you do not feel in tune with the market is best to pull back and not trade until you do.
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).
When you have truly developed the belief that you have the ability to Judge The Mood Of The Market you will begin to act on your intuition without hesitation and ......Trade In The Moment
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 can 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 can 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.
Technical Analysis can take many forms including classical chart patterns, mathematical indicators, and sequential patterns.
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
Linda Bradford Raschke - Swing Trading
mrci.com
Momentum Day Trading
Momentum Day Trading involves many basic elements of technical analysis and fundamental analysis to determine whether to go short or long initially, 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 The Different Types Of Potential Day Trades:
As a Daytrader you thrive on volatility. Volatile stocks,sectors, and markets are typically set off by a specific event such as news, potential news, or movement in related stocks/sectors/markets. Day Trades can be defined by this triggering event. The 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)
Often such triggering events can have impact over fairly long time periods and can lead to consistently volatile markets that a Day Trader can take advantage over weeks and even months.
Knowing how to identify and trade the different types of potential Day Trades will help you to focus on the task of trading effectively.
I post my thoughts on triggering events on the Final Frontier Watchlist:
exchange2000.com
Identifying Gap Trades:
This requires doing some analysis of pre market news, previous day 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 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 News Trades in tandem with market reversals. Or the market directly thru the DIA, SPY, or potentially equivalent futures vehicle if you so wish.
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 Trade. This is what makes #daytraders worthwhile. This phenomena seems to occur regularly . The potential News Trade can be anything from micro cap to large cap stock. The key is to recognize the News Trade as having:
1) good potential to move the stock.
2) see a lot 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 a lot 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 warrants 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 In Several Times Frames To Determine Whether To Momentum Day Trade or Technical Day Trade:
I use 10 and 60 minute intraday charts as well as daily charts to determine support and resistance zones and to confirm whether a trade is a potential Momentum or Technnical Day Trade. If the potential trade is confirmed by 2 or 3 time frames I will consider it a Technical Day Trade. If it is only confirmed in the shortest time frame I will consider it a potential Momentum Day Trade.
Using Charts To Determine Support And Resistance Zones:
I visualize and draw trendlines, areas of congestion, and insert moving averages on charts to come to some conclusions as too where support and resistance zones exist.
Using Tape Reading To Time Exit/Entry Points :
Once a Day Trade has been Identified and the potential has been determined I will use Tape Reading to time entry and exit points.
I Use the following indicators to read the tape:
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 jockeying 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 tendantcy 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 a lot of the data from Level 1 Data but in addition it displays all the information on who is bidding and offering 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.
3) Update your watchlist to reflect any potential day trade candidates.
4) Review charts of markets and potential day trade candidates.
I try to posts my watchlist on:
The Final Frontier Watchlist:
exchange2000.com
During The Day:
1)Follow your watchlist and watch the open for potential Gap Trades.
2)Follow your watchlist and add any potential NEWS Trades as you observe the intraday news and judge the mood of the market.
3)Use charts in several times frames to determine support/resistance zones to determine potential Momentum Day Trades or Technical Day Trades.
4)Use tape reading to time exit/entry points.
After The Close:
1) Review your trades.What did you do right or wrong? what can you you learn from each trade?
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