Yesterday I made a few trades in the morning that didn’t quite work out.  It was looking like it might be a pretty crappy trading day, however, I managed to catch the trend trade that formed in JDSU, and by focusing on that trade, managed to turn the day into a rather profitable day trading endeavor.

1 Minute JDSU Chart - Entires and exits marked and annotated

As I said, the early morning was pretty rough.  I had a couple quick winning scalps, but also took some losses in a couple other stocks which all added up to about .8 of my daily risk limit (R) and the day had barely started.  I got chopped up pretty bad in AIG, which was my biggest loss of the day.  I did, however, finally catch some winners that I was going to ride for a bit.  By the time I started focusing on JDSU, I was just about breaking even on the day (including my unrealized gains).

At about 10-10:15, I realized that JDSU was looking ripe for a nice trend trade, or a trade-to-hold.  My other stocks weren’t looking nearly as pretty, and I decided to really hammer this trade for maximum profits.  I entered some auto-stops on the other 2 positions, checking in, and shifting the stops as appropriate.  I then got to work on JDSU, expecting to add into strength as it went up.

After an initial late entry, followed by an auto-stop at breakeven, I jumped in at the next show of strength with a full position.  I set my stop as indicated in the pic above (behind the last support point), and let it ride.

Then, I got screwed by outside distractions, which really proves that trading is best done in a distraction-free environment.  I could have added two more full positions during this time, which would have significantly increased my gains.

I added 4 more times.  Every time this stock took a break, and then began to show strength again, I was back in, trading the trend.  I would keep the stop for the newly entered position fairly tight (last support point), while trailing the stop for the rest of the positions a bit looser.  You can see I entered the 5th position a bit later, and there appears to be an entry point if you’re only looking at the chart.  The tape wasn’t really showing strength here though, but it wasn’t showing weakness either – no reason to enter a new position, but no reason to exit the rest either.  After a few minutes of consolidation, in a nice little pendant pattern (which is a continuation pattern) it looked like some strength was reentering the stock.  That wasn’t the case though, and the price quickly broke down out of the pattern.  I exited that 5th position rather quickly.  A couple minutes later, as the tape and pattern began to look really weak, I exited the rest of the position.

Trend Trading JDSU - 5 Minute Chart

The stock ended up double-topping, and retracing a bit of the day’s gains.  I missed the double top entry because I don’t tend to enter new trades during the noon hour.  I tried to catch a piece a bit later, and took a loss.  I tried to short a second time, and grabbed a small gain.

Overall, the day turned out to be pretty profitable because I recognized how this stock was trading, and knew I could hammer it for some decent gains.  I also didn’t let my early losses get me down.  I can’t say I’m a robot, and trade entirely without emotion, but I realize that losing is part of the process, and I don’t let it affect my judgement or trading ability.  Anyway, I ended the day at about 3.8R (daily risk limit) – not too shabby.

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Day Trading for Dummies is a follow-up to my post titled “How to Read Stock Charts for Dummies.”  You see, people have a habit of overcomplicating things that are very simple and easy to understand.  I think this gives people an excuse to fail, honestly.  I mean, if you make something so complicated that you can’t understand it, then it’s not your fault that you failed, it’s because the subject matter is really difficult, or the task is impossible, right?  That’s total B.S.

I’m going to make this real easy for you, so you no longer have an excuse to fail.

First, to be successful in online day trading, you have to do research using the myriad of free tools available.  For example, throw a couple parameters into the screener at FinViz.com and see what pops out.  A useful scan is the gap scanner; gapping stocks are popular play in the day trading arena. This will give you a list of stocks that have gapped.  Tighten the results by setting a price range, volume range, market cap, etc.  You can also check out the free portion of the Wall Street journal to see what they think is going to move today, and peruse the free version of Briefing.com.  Now the trick here, instead of telling people exactly how to find stocks to trade for free, you pretend like it’s some well-guarded day trading secret.  Then, you sell this secret in the form of a subscription service that you charge $30 a month for – minimum.

Next, you sell into every gap up and buy into every gap down.  The odds are in your favor because you heard somewhere once that every gap closes.  Even if not EVERY gap closes, you’re very certain that more gaps close than not.  This is not based on any actual experience or evidence, but rather something you read one time.  You know, that one book about the gaps that close all the time.  If you’re really crafty you’ll sell this brilliant piece of information along with your stock picking service, but you’ll charge double because these are the hot tips that really make the big money.  Never give exit strategies, only entries.  If your subscribers complain that they aren’t making money, you just say it’s because they aren’t seeing the obvious exits.  It’s their fault, not yours.  They weren’t cut out for day trading online.Now, should these gaps that always fill not fill, you’re going to need an alternative plan of action.  This is where your ability to trade breakouts comes into play.  If you’ve decided a price level is important, for whatever reason (maybe it equates to your dog’s birthday), then the price crossing that level counts as a breakout.  When your subscribers inquire as to how you managed to trade these non-closing gaps so well, tell them you’ve got these set-ups that only you and the “Wall Street Pros” know and they make you tons of money.  Give them ridiculous names like “opening range breakout” and “opening gap reversal.”  If your subscribers don’t know what these are, spend 20 minutes writing an ebook, and sell it to them for $97 dollars.

There you go; day trading for dummies.  In this one post I’ve taught you everything a dummy needs to know to day trade, AND I’ve given you an entire business plan for a successful online day trading stock pick and advice service.  Like I’ve said before, we’re all just making this shit up as we go along.  Might as well at least pretend you know what you’re doing.

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For anyone wishing to learn how to trade stocks in the stock market, it is essential to become familiar with basic methods of risk management that can protect against excessive loss and enable the capture of profits if they arise.

Let’s take an example of what might happen
Without going into details of how a stock is analyzed and chosen as a trading prospect, and for that there are a whole set of criteria, let us assume that, after suitable due diligence, or for whatever reason, a particular stock issue has been chosen as a good candidate to trade. The objective is, obviously, to make a profit by selling the acquired stock some time in the future at a better price than was paid for it.

But beyond that objective, too many people venture into the stock market without a clear idea of what to do next, other than wait for the stock price to go higher.

So what happens next?
From the time of purchase, the stock can go up, as hoped for, or it can go down, or it can trade sideways, and any of those actions will take place over a yet undetermined time period during which it is subject to many influences, not all of which may be directly related to the individual stock.

For instance, in recent times almost everyone has witnessed episodes of turmoil in the stock markets where all stock issues, good and bad, were significantly depressed when the market “crashed”, as they say, because of unforeseen global economic circumstances. Unforeseen that is, by many investors.

Such catastrophic events may not be avoidable and are less likely to happen. But other day-to-day negative situations can and do occur often and that will usually result in the loss of money, situations that can be avoided to some degree, incurring a minimized loss through the adoption of some risk management practices.

Not every stock purchase will be profitable but as long as there are enough winning trade surpluses, the trader can be very successful. But it takes discipline and management.

Let us take another general example to illustrate
In a well-known stock, the pattern of trading for several years is that it almost always drops in price when the company’s quarterly earnings are announced, and then within a month or two it surges to a much higher price. In a case like this, and there are a lot of them, many traders will buy the stock on the fall in price after earning are announced, knowing the odds are good that it will repeat previous actions and soon again rise in price as it has done ten times before.

Needed, a plan at the very beginning
So what will be the plan to cope with whatever happens — whether the situation works out as usual or instead, does not and the price falls drastically. That also happens often with stocks.

1. Set Stops – There is a trading device called a Stop Loss that, as its name suggests, will automatically initiate a sell order, preventing further losses if the stock price declines by a specified amount without making any worthwhile gains. Suggested setting: 8% below purchase price.

Set a Trailing Stop to protect any gains that may be made before the inevitable correction back to a lower price. In other words, don’t stay around and watch the full decline from the high. To learn more about Stop Losses see: Exit Price and the Stop Loss over at “How To Trade Stocks Guide.”

2. Establish a selling price based on a target profit point that may be obtainable according to the reasons for entering into the stock purchase. If things go better than expected and that point is reached while still rising in price, either stay with the holding and watch very closely or sell part of the holding to recover the investment and let the balance be allowed to continue the upward move.

In any of the above events or for the following eventuality, always have a Stop Loss Order from the first day. Set the Stop Loss at about 8% to sell by that amount if the stock falls without making any gains

3. Establish a selling price to be invoked if the stock drops from the purchase price. The frequently adopted rule is if an 8 percent loss occurs it must be sold without any period of procrastination while it may fall further creating a much larger loss than necessary. See above, the Stop Price described will protect you if that happens.

4. Establish a length of time to hold a position – If the stock continues to trade sideways for too long a time, thus tying up working capital that could be put to use in other trades, it should be sold.

Those are just a few basic risk management rules that will help make a better trader. There is a great deal more to be learned in trading, for some help toward that check out this site: How To Trade Stocks Guide, its worth a visit.

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Day trading stock online allows you the freedom to trade from wherever you’d like.  A majority of day traders are doing their trading from the comfort of their own home.  Leave the process of elbowing others out of the way and shouting all over the place to the dinosaurs on the floor of the NYSE.

Day traders are better off trading stocks the NASDAQ anyway because the entire market is electronically based.  That isn’t to say you can’t day trade NYSE stocks, you certainly can, and you can catch some great moves in those stocks.  The NASDAQ, though, offers a day trader full visibility of every trade in the market (supposedly – barring dark pools and other methods of market manipulation that are seeing greater proliferation).  Considering the day trader’s best weapon in his battle to pull earnings in swift moving markets is their tape, this full visibility is vital.  You can also day trade other securities, but stocks are my strength, and I’ve dabbled in the Forex.  I’ve never day traded options, or futures (like the E-mini S&P), but as I look to gain more information about day trading in general, I might begin to trade these as well.

Most brokers you’re going to come across offer day trading online.  You do, of course, have to qualify for day trader status, and some brokers may impose additional requirements on top of that.  These online stock brokers also have different barriers of entry.  Some online brokers, like Zecco, require no minimum deposit, while TD Ameritrade requires an initial deposit of $2000.  Both require a $2000 account minimum to trade on margin.  Interactive Brokers is popular amongst day trader because they are a no-frills, no BS broker with low fees for high volume, and active traders.  Their minimum deposit (for most purposes) is $10,000.  Considering most day traders are going to qualify as pattern day traders ($25,000 k minimum, etc), then none of these minimum deposit amounts should be an issue.

Day trading online doesn’t necessarily have to take place at home.  Anyone who is not actively trading on the floor of a stock market could be considered as someone who is trading online, I suppose.  Even traders for major brokers, and prop shops are day trading stocks online, but I prefer to do so at home.  It’s nice to be able to sift through stocks while eating a bowl of cereal without having to worry about morning strategy meetings.  When you’re doing your online trading from home, you’re only accountable to yourself (and your wife, of course.  You know she’s the real boss anyway.).  This is a situation that some people may enjoy and thrive in, while others may find that they do better in a team environment that is full of open competition and accountability.

Day trading stock online is a great way to make a living untethered to any particular location.  As long as you have internet access, you can trade.  The only tether you have is the market hours; which makes me feel a bit sorry for those suckers in California who are waking up at 5-6 am to being researching their trades for the day.

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Intraday trading, or day trading, is trading that occurs during one trading day.  That means your intraday positions are entered and exited during the 6 1/2 hour time period that the stock market is open.

Intraday trading is considered one of the riskiest form of trading due to how quickly you can accumulate losses.  I think the only risk in day trading comes from the user, much in the same way that swing trading, or long-term investing does.  The only difference is that where a stubborn investor might have day or weeks to admit that he’s wrong, a stubborn day trader has minutes or seconds.  The basic concepts are the same though; lock in profits and reduce losses.  It’s that simple, and your personality will dictate how you trade.  I’m willing to admit that I’m wrong seconds after making a trading decision.  I don’t ever “feel that this stock could take off” or “don’t think there’s a reason this stock should be this price.”  There is a reason, and I’m probably not seeing it, but either way, if a stock isn’t doing what I need it to, I’m out in a matter of moments; not days or weeks.

Intraday Trading Tips

Here’s a tip that helps me on my previous point; assume you are wrong.  Day traders fail because they think they’ve really figured out the stock market.  This causes them to think they are right, when in all likelihood, they are dead wrong.  By entering a trade with a solid idea and plan in place, but the assumption that I’m likelier wrong than right, it makes ejecting from the trade much easier.  Instead of hoping that the market proves I’m right, I simply wait for mother market to show me why I was wrong.  I take the lesson, and move on.  If I was right, I take the profit.  And move on.  If you are having trouble with the psychology of exiting losing trades, try using a bracket order when you enter a trade.  This order will automatically set up both your target and your stop loss.  When one is triggered, the other order will automatically cancel.

Here’s a hackneyed tip that you’ve heard a million times, and still don’t do – keep a trading journal.  Use an actual pad and paper, and keep a written record of your trades as they happen.  Scribble down the stock, reason for entry and exit, prices involved, and quick thoughts as they happen.  After the market closes, write a more detailed account of the trade.  Sometimes I even write about trades I didn’t take, especially if they worked out the way I expected, and it was simply fear, or slow reflexes that kept me out of the trade.  It helps me visualize the results, and what they would have been had I pulled the trigger; this speeds up the reflexes and reduces trepidation next time a similar set-up occurs.

Intraday trading is not a pursuit for the stubborn, slow, or feint of heart.  If you’ve got the right personality to handle it though, it can be fun and rewarding.  If you don’t, but you still want to trade the stock market, there is another form of trading out there for you.  Give swing trading, position trading, or long-term trading a try.

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In order to day trade, you need to have reliable intraday charts.  Without this crucial source of information, you’re dead in the water.

What is an intraday chart?  An intraday stock chart is simply a chart that displays information for time-frames shorter than a day.  For most traders this includes 1, 5, 15 and 60 minute charts.  Also, if you’re trading a market that trades 24 hours a day, like the Forex, a frequently used intraday chart is the 240 minute (or 4 hours, for the mathematically challenged).  Using these charts, day traders are able to make decisions based on where the price has been.  It is common for traders to use intraday charts in multiple time-frames when trading.  You should stick to 1 minute or 5 minute charts, and only trade off of one of them, depending on the time of day.   When not actively trading you can scan through 1, 5 and 60 minute charts to keep an eye on the whole picture.

Perhaps you’ve noticed this, but free online stock charts are usually delayed 15 minutes.  This information is not useable for the purpose of day trading.  I wouldn’t even recommend swing trading off of this information, and even entering long term positions on delayed info is a bit shaky.  Your broker is a great source for free intraday charts that are real-time and actually useable for trading.  Broker’s typically have charts you can analyze directly on their site, or they’ll have a stand-alone product that allows for proper chart and technical analysis.  Often, you can trade directly off of these charts using multiple order types.  Another option you have, if you have a compatible broker, is to use your broker’s data feed combined with NinjaTrader.  I find them to be the best for free intraday stock charts.  Their charts are highly customizable to your trading style, with many indicators available, including time/sales (the tape).  The only issue is that you can’t trade directly from these charts unless you pay a monthly fee.  It’s up to you whether or not you think that convenience is worth the cost.  Other than that, the charts are fully functional.

As I said above, having reliable intraday charts is crucial to your success as a day trader.  Finding the right time-frame and indicators to fit your style will require a bit of trial and error, but once you find a set you’re comfortable with, you’ll notice that your day trading will improve over time.

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The easiest of the all the technical indicators to follow is the moving average.  There are two types of commonly used moving averages when you first begin to learn stocks.  The first is the simple moving average (SMA) which “simply” averages all of the closing prices for the last number of days.  The other option is the exponential moving average (EMA) which averages over a given number of days but gives more weight to the recent prices versus the older prices.  For most cases either moving average will work fine, but play with both of them to determine which style works best for your trading style.

How To Use Moving Averages

Moving averages are used for levels of support and resistance on the price movement of any equity.  Generally you track a short, medium, and long term moving average.  The most common timeframes for these averages is 20 day for the short, 50 day for the medium, and 200 day for the long.  If you are listening to a stock market 101 show on the radio they will generally refer to these moving averages.  However, your trading strategy and stocks that you like to follow may tend to land on slightly different moving averages so tweak with the number of days averaged to find what works best for you.  Then use these points to determine where to set your stop losses and buy in points on the stocks you are following.

Crossovers

If a short term moving average crosses a longer term moving average than you can expect a change in the general direction of the stock.  I generally wouldn’t bet against a cross over, but simply not trade at all or wait until the moving averages cross over each other again in the direction you want to trade.  The 50 day crossing the 200 day is a very powerful sign that the current price trend has ended.

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There are several variations of the opening range breakout, and one of the most common is the opening gap reversal.  Like any open range breakout, this online day trading pattern consists of a breakout from a range that has been set up in the first hours of trading.

There are two variations of the opening gap reversal; the first is a gap followed by a failed attempt to close the gap resulting in the reversal and breakout.  The second consists of a gap, followed by a failed attempt to continue in the direction of the gap which results in the reversal and consequent breakout.

The first variation is essentially the failure of the common perception that all gaps close.  Many people play opening gaps due to their volatility and added volume.  It is the common belief that gaps close more often than not, though I think this claim is dubious, and I have never noticed a huge bias of closing gaps to support that claim.  Though, because this is the belief, a lot of people enter trades hoping the gap closes.  As the price gets deeper and deeper into the gap, more tension builds.  You see, there was a reason why the stock gapped up or down, and that strength or weakness is often continued into typical trading hours despite the belief of those who think the gap should close.  Sometimes this tension and strength/weakness is enough to pull the stock away from the direction of the close, back to the opening price, and this is where things really erupt.  Due to the fact that so many have bet on that gap closing, if that opening price fails, a lot of stocks start exchanging hands as people realize their assumptions were incorrect.  This volume will shoot the price in the direction of the gap, either in a breakout or breakdown, and you can generally expect it to move at least the height of the gap before things stabilize.  The target for this one will be the equivalent of the height of the gap beyond the opening price.  For example, if the gap was 1 point, and the price reverses for a breakout, you should expect the price to rise at least 1 point above the opening price.

The second variation is due to the continued strength or weakness of a stock continuing for a few moments into the trading day. Sometimes a stock pulls a reversal like this if some news comes out in the morning that causes a jump in the price, but people realize how inconsequential the news actually is during the first few moments of trading.  This causes the initial run followed by the inevitable breakdown of that momentum as the price corrects itself to the previous day’s close.  This is the cause of many traders jumping on the bandwagon of momentum, and then bailing when their trading idea has been proven wrong.  The “proof” that their trading idea is invalid occurs as the stock crosses that day’s opening price.  When they realize they were wrong, volume increases, and the breakout or breakdown is on.  The momentum bandwagon will typically carry the price to the previous day’s open- this is your first target.  This is the only situation where the gap closes more frequently than not, making it a great day trading pattern.

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You might be wondering about how to read an OHLC chart (or bar chart), and that’s understandable.  Next to the candlestick chart, this is one of the most widely used day trading charts.

Let’s start simple.  What is an ohlc chart?  Well, it’s also called an open high low close chart, and that name just about explains it.  Each piece of the bar in a bar chart represents one of those 4 elements.  The open, high, low, or close for that time frame.

Before I discuss that further, what do I mean by time frame?  Well for OHLC charts, each bar represents a period of time set by you, the user.  This can be days, weeks, months or, for day trading, hours and minutes.  The most commonly used time frames for day trading are the 5 minute chart and the 1 minute chart.

Okay, back to dissecting the bars in an ohlc chart; so each piece of the bar represents one of the four elements mentioned. In the illustration here, you can see those elements and how they pertain thepieces of a bar chart.  The left horizontal tick always represents the opening price.  This is the first price the stock trades at within the chosen time frame.  The highs and lows are the shown as the tips of the vertical line.  These are the highest prices traded within the chosen time frame.  The closing bar is the right horizontal tick represents the closing price, or the last price the stock traded at within the chosen time frame.

This one bar is only a piece of the chart though, stock charts are actually made up of many of these charts in series to give you a picture of where the stock is.  Technical analysts also use this information to attempt to predict which direction has the highest probability of going.  Below are examples of a single color ohlc chart, and a two color chart.

As you can see they’re both fairly easy to read, though sometimes it’s difficult to make out exactly where those opening and closing prices are.  It’s for that reason that I prefer to trade using candlestick charts, but to each their own, I suppose.  Anyway, that’s the OHLC chart in a nutshell.

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There are many places you can go for day trading information.  Many of them aren’t worth much, as they are simply a shell of a site designed to sell you some sort of miracle trading software that will supposedly make you rich.

The first place I point any newbie looking for online stock trading information is Investopedia.  As the name implies, it’s an online encyclopedia full of investing and trading information.  It’s definitely the best place to start if you have questions like

• What is a stop loss?
• What is an opening range breakout?
• What is a stock?
• What is an option?
• How do I trade stocks online?
• Where can I learn how to read stock charts?

Etc. Investopedia will answer many of the basic “definition” type questions you might have.  All their posts are interconnected so you could spend days there browsing the trading information, clicking from one entry to the next.

Here’s a novel concept; try your local library, or bookstore.  They have stacks and stacks of these things our ancestors called “books” with pages and pages of information that has been verified and copyright protected.  There are so many day trading books, and books for whatever type of trading you do, that to list them all would be a futile effort.

However there are some books that I can recommend for any type of trading or investing.  One is Mark Douglas’ “Trading in the Zone.”  You will find this book on any trader’s list of favorites because it’s a classic about trading psychology that never gets old.  You can read it 100 times and gain a deeper understanding and respect for the information every time.

I also recommend anything written by Dr. Steenbarger. He is the man when it comes to trading psychology, and like “Trading in the Zone,” it is the type of information that will make you a better trader, no matter what type of trading you engage in.  And getting back to online trading information, Dr. Steenbarger has a free trading psychology blog that he writes on at least once a day, and it contains more useful information than any other place I have ever found.

You are also going to need stock trading news, and I use Briefing.com for real-time trading news.  Briefing.com is a live news ticker that shows quick bites of information related to specific stocks as well as the market as a whole.  It cuts out all the garbage you might find on news sites, because they are not simply trying to generate lots of content, they are providing you with laser targeted information so you can make the split-second decisions required for intraday trading.  You can also scan large news sites, like The Wall Street Journal.  In addition to news related to specific stocks, they will also have broader and more general information that you may be able to use.

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