How to Day Trade for a Living: A Beginner's Guide to Trading Tools and Tactics, Money Management, Discipline and Trading Psychology

How to Day Trade for a Living: A Beginner's Guide to Trading Tools and Tactics, Money Management, Discipline and Trading Psychology

by Andrew Aziz

Trading doesn't truly begin when you invest your first dollar; it starts the moment you power up your mental machinery. Understanding the trade game is crucial to minimizing losses and maximizing gains.

How to Day Trade for a Living will guide you on mastering the essentials of trading. This book equips you with the crucial tools and strategies necessary for trading success. You'll grasp the importance of technical analysis and the power of real-time data interpretation, alongside mastering the psychological elements of trading—like maintaining discipline and managing stress. Moreover, it offers valuable insights into risk management, helping you safeguard your capital and enhance your profit potential.

Summary Notes

Day Trading as a Career

Day trading can be an attractive career choice due to its flexibility. Traders can work from their homes, choose their hours, and take days off at will. But it demands a significant amount of dedication and skill, similar to demanding careers like medicine or law, where extensive training and practice are essential for success.

Day trading is precisely what it sounds like: buying and selling stocks within the same trading day, without holding any positions overnight. As a day trader, the primary focus is on stocks that are likely to move significantly during the trading day. This might include stocks from companies that are experiencing volatility due to recent news or market events. Day traders thrive on this volatility and use it to make profits from short-term price movements.

Day trading involves specific strategies such as "going long" where traders buy stocks expecting the price to rise or "short selling," where traders sell stocks they expect to drop in price. Short selling involves borrowing stocks to sell at a current price before buying them back at a lower price later to get profits. But this strategy is not without risks, as prices could rise instead, which could lead to losses.

For those new to day trading, the market's busiest times, typically just after opening and before closing, offer the most opportunities. This is when the highest volume of trading occurs, providing liquidity and enabling traders to enter and exit positions easily. Trading outside these peak times can be challenging due to lower liquidity, making it difficult to execute large trades efficiently.

Day traders need to be well-prepared each day, starting early with pre-market scans to identify potential stocks based on volume and news that could influence stock prices. A well-thought-out trading plan and a watchlist are essential for navigating the day's trading session effectively.

Actions to take

Risk Management in Trading

To do well in day trading, you need to focus on three important areas: keeping a clear head, using smart trading strategies, and managing your risks well. Think of these as the three legs of a stool—if one leg is missing, the stool won't stand up. Often, beginners pay too much attention to just trading strategies and forget about the other parts. They’re important too!

A good trading strategy should help you win more money than you lose over time. But remember, no strategy is perfect. You will sometimes lose money on trades, which is why knowing how to manage risk is so important. Managing your risks helps prevent big losses that can seriously hurt your trading account.

When trading, it’s important that you know how to handle losses. Part of this is having a clear rule on when to enter and exit trades and how much you’re willing to lose on a bad trade. It’s important to stick to these rules and not let emotions make you hold onto losing trades, hoping things will turn around. This can lead to even bigger losses!

If you want to avoid losing so much money, you need to find trading opportunities that have low risk but high potential for profit. A helpful way to think about this is to look for situations where the possible reward is at least twice as much as the risk. For example, if you might lose $100 on a trade, the potential gain should be at least $200.

Picking the right stocks to trade is also vital. You should avoid stocks that are mostly traded by big institutions or that don’t move much in price. The stocks you choose should match your trading strategy and how much risk you’re comfortable taking. Also, think about how many shares to buy based on how much money you have and how much you’re willing to risk on each trade. A common rule is to never risk more than 2% of your trading account on any single trade.

Actions to take

Finding Alpha Predators

If you're new to day trading, finding the right stocks to trade in real-time can be difficult. It's often easier to recognize good trading setups in hindsight, when reviewing charts after the market has closed, than it is to spot them in real time.

To successfully identify these opportunities, you need to focus on stocks with high relative volume—stocks like Apple Inc. (ticker: AAPL), which might trade millions of shares daily. But of course, it’s not just about high volume; it's about volume that is unusually high compared to the stock’s normal activity.

Stocks that typically exhibit this high relative volume are what’s called "Alpha Predators." These stocks operate independently of the general market trends and sector movements, meaning they can provide good trading opportunities even when the broader market is weak or strong.

To find these Alpha Predators, you should use specific criteria such as stocks that have gapped up or down in pre-market trading, those that have traded significant volumes before the market opens, or those with a high Average True Range (ATR), indicating they move substantially on a typical day.

For finding trades, day traders can build a morning watchlist in the pre-market to identify stocks meeting their criteria or use real-time intraday scans to capture movements as they happen. Tools like a trading scanner programmed with specific criteria such as pre-market gaps, trading volume, and ATR can help streamline this process, identifying potential Alpha Predators before the market opens.

Finally, day trading requires patience and discipline. It's about quality, not quantity. Successful traders often make only a few trades each day, focusing on the best setups and avoiding the noise created by high-frequency trading. Remember, the goal is to trade well, not often, thereby maximizing your chances of success while minimizing unnecessary risk and costs.

Actions to take

Equipping Your Trading Arsenal

Starting a career in day trading requires access to several essential tools and platforms, much like initiating any other business. At the very basics, you need a broker and a platform for executing your trades. These are crucial because they help you actually make your trades happen.

When choosing a broker, think of it as picking a car for a race. You don’t just need any car—you need a fast, reliable one. An effective broker not only facilitates timely and well-priced order executions but also significantly influences profitability and efficiency. Brokers vary widely in terms of cost, service quality, and features offered. It’s important to identify the broker that’s right for your needs.

Similarly, you should also be in a good trading platform. It needs to be fast because, in day trading, timing is everything. The quicker you can enter and exit trades, the better your chances of making a profit. While some brokers may provide integrated trading platforms, it's often beneficial to use specialized software that aligns with your trading strategy and style.

Aside from these two, it’s also helpful to have a stock scanner in your toolkit. A stock scanner helps you find potential trades by showing you stocks that are moving in real-time. But since these scanners are often paid at a cost, another approach would be to join trading communities and ask them to share screens and tools live.

When you join trading communities, you just don’t get these benefits. You also get to reap other benefits, too. As we all know, trading can be stressful and confusing, especially when you're starting. Being part of a community allows you to learn from others and share strategies with each other while mitigating some of the emotional challenges associated with trading alone. Communities can offer real-time support and facilitate the exchange of ideas, though it's important for traders to maintain independence and critical thinking rather than blindly following trends.

Actions to take

Reading Candlestick Charts

As a trader, you'll frequently encounter "candlesticks." These are essential tools that help you understand what's happening in the market. Candlesticks can show you the direction prices are moving, how the mood of the market is changing, the level of price fluctuation (or volatility), and even when traders are unsure about the direction of the market.

A candlestick is made up of a body and usually two lines that stick out from the top and bottom, known as wicks or shadows. The body of the candlestick shows the opening and closing prices for the time period you are looking at, which could be anything from a minute to a day. If the body is filled in, usually with a dark color like red, it means the price ended lower than it started. If the body is empty or a light color, it means the price ended higher.

The wicks or shadows show the highest and lowest prices during that time period. Long wicks mean there was a lot of price movement during the trading period, which tells you the market was very active.

Aside from these, candlesticks can also give you a snapshot of the battle between the buyers who push prices up, and sellers who push prices down. A group of rising candlesticks, where the bodies are not filled in, suggests that buyers are in control and prices are likely to keep going up. On the other hand, a group of falling candlesticks with filled bodies indicates that sellers are in control and prices might continue to drop.

Some specific shapes, like 'Dojis' and 'Spinning Tops,' are particularly important because they suggest that neither the buyers nor the sellers could gain the upper hand, hinting that a change in price direction might be coming. These shapes have small bodies, which means the opening and closing prices were very close to each other, and potentially long wicks, which show that prices moved up and down significantly within the period but ended near where they started.

Now, while candlesticks can offer a lot of insight, they are most effective when used with other tools such as trend lines or support and resistance levels, which help determine where prices might start to stall or reverse. By combining these tools, you can make more informed decisions, manage risks better, and potentially increase your chances of making profitable trades.

Actions to take

Essential Trading Strategies

By now, you're probably familiar with what day trading is. It's a fast-paced style of trading where you buy and sell stocks within the same day. As a day trader, your main goal is to make profits from small price changes in stocks. To succeed, there are several key strategies you should keep in mind.

First, focus on price movements rather than the details about the companies whose stocks you are trading. Unlike long-term investors who might spend time researching a company's performance and industry position, as a day trader, you should concentrate on how stock prices fluctuate throughout the day. This approach allows you to react quickly to changes without getting bogged down by the company's fundamentals.

Second, you must become proficient in reading charts and understanding technical indicators. Learn how to use tools like Moving Averages and VWAP (Volume Weighted Average Price), which can help you predict future price movements. For example, a Moving Average can indicate whether a stock is currently trading higher or lower than its usual price, which might suggest a good time to buy or sell.

Since speed is important in trading, you need to also be able to work on your decision-making skills. Learn to decide and execute trades at the right moments, often within seconds or minutes. This requires not only quick thinking but also a good technical setup that allows you to enter and exit trades efficiently.

Managing your trades effectively is also vital. You should know exactly when to enter a trade and when to exit to maximize your profits or minimize losses. Setting clear entry and exit points based on the information you get from charts and indicators can guide these decisions.

Lastly, always be on the lookout for patterns and catalysts that might cause sudden price changes, such as economic announcements or unexpected company news. Understanding these factors can help you better predict stock movements and make smarter trading choices.

By focusing on these strategies and continually practicing, you can improve your ability to make profitable trades in the fast-moving world of day trading.

Actions to take

Don’t just read. Act.
Read comprehensive summaries and discover carefully compiled action lists for active learning