Book Summary: How to Day Trade for a Living by Andrew Aziz

How to Day Trade for a Living Book Summary

Note: This summary is made up of my notes, thoughts and highlights of important passages while reading the book. I keep updating the summary when I revisit it, and occasionally may edit it to reduce summary length. Don’t be surprised if it has changed between visits. The author’s words are in normal font, while my interpretations are in italics.

Foreword

“Individually, we are one drop. Together, we are an ocean.” – Ryunosuke Satoro

Chapter 1: Introduction

Success in trading is not a revolution, it is an evolution.

you will not get rich quickly by day trading. Day trading is not the same as gambling or playing the lottery.

Rule 1: Day trading is not a strategy to get rich quickly.

Rule 2: Day trading is not easy. It is a serious business, and you should treat it as such.

What makes day trading attractive is the lifestyle. You can work from home, work only for a few hours each day and take days off whenever you wish to.

The most common reason that people fail in day trading is that they do not regard it as a serious business.

Losing amateurs trade for the thrill of short-term gambling in the markets.

Chapter 2: How Day Trading Works

What do you look for as a day trader? The answer is simple. First, you’re looking for stocks that are moving in a relatively predictable manner. Secondly, you are going to trade them in one day.

If you hold onto any stock overnight, it is no longer day trading, it’s called swing trading.

Swing trading is a form of trading in which you hold stocks over a period of time, generally from one day to a few weeks.

Rule 3: Day traders do not hold positions overnight. If necessary, you must sell with a loss to make sure you do not hold onto any stock overnight.

As a day trader, you profit from volatility in the stock market, which is more apt to occur in morning trading than later in the day. If the market or stock prices are not moving much, you most likely are not going to make any money; only high frequency traders make money under these circumstances as they have access to low commissions and can trade large volumes of shares with low fees. Therefore, you need to find stocks that move to the upside or to the downside.

It is extremely important to stay away from stocks that are being heavily traded by institutional traders.

HFT and computerized trading can never completely rule trading. There will always be the need for an intelligent trader who understands the market and price action in real time.

The market is simply a pattern-solving exercise. Every morning, you need to solve a new puzzle.

The majority of stocks will trend with the overall market unless they have a reason not to. So, if the market is moving up, the majority of stocks will be moving up.

You just want to ensure you are trading stocks that are moving because they have a fundamental reason to move

If there is a quick sell off because of bad news, many people will notice and start monitoring the stock for what is called a Bottom Reversal.

Rule 4: Always ask, “Is this stock moving because the overall market is moving, or is it moving because it has a unique fundamental catalyst?”

Focus where everyone else is focused: focus on the stock that is moving every single day and receiving literally a ton of action.

The stocks that are gapping significantly up or down are going to be the stocks that retail traders are watching.

There is a huge advantage to being in a community of traders, such as a chatroom, and there are many chatrooms on the Internet.

Almost every single day in the market, there’s a stock having a big day because the company has released earnings, had a newsbreak, or had something bad or good happen to it.

From when the market opens at 9:30 a.m. until around 11:30 a.m. New York time is when the market will have the most trading volume and also the most volatility. This is the best time to trade and to especially focus on momentum trading

In day trading, losing money is very easy. Once you have reached your daily profit goal, it is best to stop trading or switch to trading in your simulator.

Chapter 3: Risk and Account Management

Success in day trading comes from three important skills:

1) learning and mastering one or a few proven trading strategies;

2) proper risk management (knowing how much of a size to enter a trade with and knowing when to properly exit a trade); and,

3) controlling your emotions and having a sound psychology.

Successfully mastering a few things at the same time is in fact common to all performance-based disciplines.

“Live to play another day”.

Lose gracefully. Take the losses and walk away, and then come back and look for another trade.

If a trade goes against you, exit the trade.

Your job is not to be correct. Your job is to make money. This career is called trading, not predicting.

Rule 5: Success in day trading comes from risk management – finding low-risk entries with a high potential reward. The minimum win:lose ratio for me is 2:1.

Your stop loss should be at a reasonable technical level. Any stop loss below VWAP is meaningless

If you cannot find a setup with a good profit-to-loss ratio, then you should move on and keep looking for another trade.

Your job as a day trader is managing risk, it is not buying and selling stocks.

You must avoid stocks that (1) are heavily traded by computers and institutional traders, (2) have small relative trading volume, (3) are penny stocks and are therefore highly manipulated, and (4) don’t have any reason to move (no fundamental catalysts).

Am holding around $50,000 in my trading account and I usually choose 2,000 shares to trade. My daily goal is $500 or around $120,000/year. That is sufficient for my lifestyle. What is your trading goal?

You should never risk more than 2% of your account on any given trade.

Three-Step Risk Management

Step 1: Determine your maximum dollar risk for the trade you’re planning (never more than 2% of your account). …

Step 2: Estimate your maximum risk per share, the stop loss, in dollars, from your entry. …

Step 3: Divide “1” by “2” to find the absolute maximum number of shares you are allowed to trade each time.

A key reason why many traders fail is that they take negative events and losses in trading personally.

Successful traders are those who trade for skill and not for the money.

Rule 6: Your broker will buy and sell stocks for you at the Exchange. Your only job as a day trader is to manage risk. You cannot be a successful day trader without excellent risk management skills, even if you are the master of many effective strategies.

You should not expect to be right all of the time. It’s impossible to be.

Many traders think a good trading day is a positive day. Wrong. A good trading day is a day that you were disciplined, traded sound strategies and did not violate any trading rules.

Chapter 4: How to Find Stocks for Trades

“You are only as good as the stocks that you trade.”

Mike Bellafiore, who is the co-founder of SMB Capital (a proprietary trading firm in New York City), writes in his amazing book, One Good Trade, that trading a stock that doesn’t move is a trading day wasted.

What are Stocks in Play? I explain in detail later in this book how to find them, but they could be, in no particular order:

A stock with fresh news
A stock that is up or down more than 2% before the market Open
A stock that has unusual pre-market trading activity
A stock that develops important intraday levels which we can trade off from

The behavior of stocks that have high relative volume is independent of the overall market; they are Stocks in Play.

Rule 7: Retail traders trade only Stocks in Play, high relative volume stocks that have fundamental catalysts and are being traded regardless of the overall market.

Low float stocks under $10 are often highly manipulated and difficult to trade, and therefore only very experienced and highly equipped retail traders should trade these stocks.

Day trading can be a boring profession – most of the time you are just sitting and watching your list. In fact, if day trading is not boring for you, then you are probably overtrading.

Dr. Alexander Elder writes in his book, Trading for a Living, “Remember, your goal is to trade well, not to trade often.”

Rule 8: Experienced traders are like guerrilla soldiers. They jump out at just the right time, take their profit, and get out.

Profitable traders usually make only two or three trades each day. They then cash out and enjoy the rest of their day.

Chapter 5: Tools and Platforms

In my opinion, it is almost impossible to day trade profitably without using Hotkeys.

Chapter 6: Introduction to Candlesticks

The Japanese began using technical analysis and some early versions of candlesticks to trade rice in the 17th century.

The credit for candlestick development and charting goes to a legendary rice trader named Homma from the town of Sakata, Japan.

In order to create a candlestick chart, you must have a data set that contains (1) opening price, (2) highest price in the chosen time frame, (3) lowest price in that period, and (4) closing price values for each time period you want to display.

Rule 9: Hollow candlesticks, where the close is greater than the open, indicate buying pressure. Filled candlesticks, where the close is less than the open, indicate selling pressure.

Candlestick charts reflect this fight and mass psychology in action.

Day trading is the study of mass psychology.

if you can’t decide what that action is, if it looks like it’s a toss-up, don’t do anything. Bide your time or move on to look for another potential trade.

Spinning tops, as seen in Figures 6.6 and 6.7 below, are candles that have similarly-sized high wicks and low wicks that are usually larger than the body and will often be a little bit more indecisive.

A Doji is also an indecision candlestick that is similar to a spinning top. When you see a Doji on your chart, it means there is a strong fight occurring between the bears and the bulls. Nobody has won the fight yet.

To use indecision candles effectively, you must look for confirmation candles and ideally use them with other forms of analysis such as support or resistance levels,

Chapter 7: Important Day Trading Strategies

Two traders enter into a trade based on one strategy. The positions go their way and then pull back a bit. The first trader fears losing their gain and takes a quick, small profit. The second trader adds to the position on the pull back and books a large gain.

Trade management is referring to what you do with the position after you’ve entered it and before you’ve exited it.

Some trading opportunities are attractive enough for a “large” position. In other trades, you just want to go for a “taste” and perhaps add more later.

I rarely scale down into a losing trade. I always scale up; I add to my winning position.

Averaging down does not work for day traders.

Your job is not prediction and anticipation, but the identification of trends and then the taking of a successful ride on them.

Strategy 1: ABCD Pattern

Strategy 2: Bull Flag Momentum

Professional traders aim to enter the trade during quiet times and take their profits during the volatile times. That is the total opposite of how amateurs trade.

The Bull Flag is essentially an ABCD Pattern that will happen more often on low float stocks.

Bull Flag is more or less a Momentum and Scalping Strategy. Scalpers buy when a stock is running. They rarely like to buy during consolidation (during that waiting and holding phase).

That’s the philosophy of momentum scalpers: Get in at the breakout Take your profit Get out of the way

Strategies 3 and 4: Reversal Trading

Don’t chase the trade if it is too extended.

What goes up, must come down.

The RSI, developed initially by famous technical analyst Welles Wilder, Jr., is an indicator that compares the magnitude of recent gains and losses in price over a period of time to measure the speed and change of price movement.

RSI readings above 90 indicate overbought conditions and RSI readings below 10 indicate oversold conditions.

In Reversal Strategies, you are looking for a clear confirmation that the pattern is beginning to reverse.

You want to wait for the confirmation of the reversal. This will usually be (1) the formation of a Doji or indecision candle and (2) the first 1-minute or the first 5-minute candle to reach a new high near an important intraday support level.

Your profit-to-loss ratio is your average winners versus your average losers.

Reversal trades are certainly the most classic of the various strategies with a very good risk/reward ratio and, interestingly, virtually every trading day you will find stocks that are good candidates for reversal trades.

Strategy 5: Moving Average Trend Trading

Strategy 7: Support or Resistance Trading

Support is a price level where buying is strong enough to interrupt or reverse a downtrend.

Resistance is a price level where selling is strong enough to interrupt or reverse an uptrend.

Traders buy at support and sell at resistance, making their effectiveness a self-fulfilling prophecy.

You will usually see indecision candles in the area of support or resistance because that is where buyers and sellers are closely fighting each other.

Strategy 8: Red-to-Green Trading

Strategy 9: Opening Range Breakouts

Chapter 8: Step by Step to a Successful Trade

you need to master only a few solid setups to be consistently profitable.

Rule 10: Profitable trading does not involve emotion. If you are an emotional trader, you will lose your money.

Chapter 10: Next Steps for Beginner Traders

Successful day trading is based on three important skills. You need to constantly analyze the balance of power between buyers and sellers and bet on the winning group (discussed in Chapter 6). You need to practice excellent money and trade management (discussed in Chapter 3). And you need sufficient self-discipline to follow your trading plan, to avoid getting overexcited or depressed in the markets, and to resist the temptation to make emotional decisions.

A trading business plan can be broken down into three main areas: the trading framework (summarized in the next paragraph), activities designed to improve upon or support the trading framework, and the tasks required to be attended to outside of actual trading.

Your trading framework is the core of your trading business plan.

It consists of your money and risk management principles, the strategies and patterns you trade, your trade management rules, and an outline of how you are accountable for any actions which deviate from your framework.

Three traits inherent in both successful alpinists and successful traders.

They are process-oriented.

They take risks, but they also manage that risk.

They have passion.

Anatoli Boukreev, the late mountaineering legend, said, “Mountains are not Stadiums where I satisfy my ambition to achieve, they are the cathedrals where I practice my religion.”

Andrew’s 10 Rules of Day Trading

Rule 1: Day trading is not a strategy to get rich quickly.

Rule 2: Day trading is not easy. It is a serious business, and you should treat it as such.

Rule 3: Day traders do not hold positions overnight. If necessary, you must sell with a loss to make sure you do not hold onto any stock overnight.

Rule 4: Always ask, “Is this stock moving because the overall market is moving, or is it moving because it has a unique fundamental catalyst?”

Rule 5: Success in day trading comes from risk management – finding low-risk entries with a high potential reward. The minimum win:lose ratio for me is 2:1.

Rule 7: Retail traders trade only Stocks in Play, high relative volume stocks that have fundamental catalysts and are being traded regardless of the overall market.

Rule 8: Experienced traders are like guerrilla soldiers. They jump out at just the right time, take their profit, and get out.

Rule 9: Hollow candlesticks, where the close is greater than the open, indicate buying pressure. Filled candlesticks, where the close is less than the open, indicate selling pressure.

Rule 10: Profitable trading does not involve emotion. If you are an emotional trader, you will lose your money.

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How to Day Trade for a Living by Andrew Aziz