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Author(s): Ann C. Logue

Publisher: For Dummies, Year: 2019

ISBN: 111955408X,9781119554080

iv Day Trading For Dummies Understanding Risk and Return 27 Recognizing what risk is 28 Getting rewarded for the risk you take 31 Market efficiency in the real world 32 Differentiating Trading, Investing, and Gambling 34 Investing is slow and steady 35 Trading works fast 35 Gambling is nothing more than luck 36 Managing the Risks of Day Trading 37 It’s your business 37 It’s your life 38 CHAPTER 3: Assets 101: Stocks, Bonds, Currencies, and Commodities 39 Grasping the Different Things to Trade 39 Defining a Good Day Trading Asset 40 Looking for liquidity 40 Homing in on high volatility 42 Staying within your budget 43 Making sure you can use margin 43 Taking a Closer Look at Stocks 46 How U.S. stocks trade 46 Where U.S. stocks trade 47 Alternative exchanges 49 The high-risk over-the-counter exchanges 50 Dark pools 52 Examining Bonds 52 How bonds trade 53 Listed bonds 54 Over-the-counter trading 54 Treasury dealers 54 Cashing In with Currency 55 How currency trades 55 Where currency trades 56 Considering Commodities and How They Trade 56 CHAPTER 4: Assets 102: ETFs, Cryptocurrency, Options, and Derivatives 59 Explaining Exchange-Traded Funds (ETFs) in Plain English 60 Traditional ETFs 61 Strategy ETFs 62 How U.S. ETFs trade 63 Being aware of risks of ETFs 64 Table of Contents v Getting Familiar with Cryptocurrency 64 Bitcoin and blockchain 65 Other cryptocurrencies 66 Understanding how cryptocurrencies trade 66 Watching out for the risks of cryptocurrencies 69 Dealing in Derivatives 69 Getting to know types of derivatives 70 Buying and selling derivatives 72 Comprehending Arbitrage and the Law of One Price 74 Understanding how arbitrage and market efficiency interact 74 Creating synthetic securities 75 Taking advantage of price discrepancies 76 Reducing arbitrage opportunities: High-frequency trading 77 CHAPTER 5: Increasing Risk and Potential Return with Short Selling and Leverage 79 Understanding the Magic of Margin 80 Making margin agreements 81 Understanding the costs and fees of margin 82 Managing margin calls 83 Enjoying margin bargains for day traders 83 The Switch-Up of Short Selling 84 Selling short 84 Choosing shorts 85 Losing your shorts? 86 Leveraging All Kinds of Accounts 87 In stock and bond markets 87 In options markets 88 In futures trading 88 In foreign exchange 90 Borrowing in Your Trading Business 91 Taking margin loans for cash flow 91 Borrowing for trading capital 91 The costs of free riding 92 Assessing Risks and Returns from Short Selling and Leverage 93 Losing your money 93 Losing your nerve 93 CHAPTER 6: Managing Your Money and Positions 95 Setting Your Earnings Expectations 96 Finding your expected return 96 Determining your probability of ruin 97 vi Day Trading For Dummies Gaining Advantage with a Money-Management Plan 99 Minimizing damage while increasing opportunity 99 Staying in the market longer 99 Getting out before you lose everything 100 Accounting for opportunity costs 101 Examining Styles of Money Management 101 Limiting portions: Fixed fractional 102 Protecting profits: Fixed ratio 102 Sticking to 10 percent: Gann 103 Finding the ideal percentage: Kelly criterion 103 Doubling down: Martingale 104 Letting a program guide you: Monte Carlo simulation 105 Considering past performance: Optimal F 106 Seeing How Money Management Affects Your Return 106 Planning for Your Profits 108 Compounding interest 108 Pyramiding power 109 Making regular withdrawals 109 CHAPTER 7: Planning Your Trades and Trading Your Plans 111 Starting to Plan Your Trades: Just the Basics, Please 112 What do you want to trade? 112 When will you be trading? 113 How do you want to trade? 113 Figuring out when to buy and when to sell 115 Setting profit goals 115 Setting limits on your trades 117 What if the trade goes wrong? 120 Closing Out Your Position 122 Swing trading: Holding for days 122 Position trading: Holding for weeks 122 Investing: Holding for months or years 123 Maxims and Clichés That Guide and Mislead Traders 123 Pigs get fat, hogs get slaughtered 123 In a bear market, the money returns to its rightful owners 124 The trend is your friend 124 Buy the rumor, sell the news 125 Cut your losses and ride your winners 125 You’re only as good as your last trade 126 If you don’t know who you are, Wall Street is an expensive place to find out 126 There are old traders and bold traders, but no old, bold traders 127 Table of Contents vii PART 2: DEVELOPING YOUR TRADING STRATEGY 129 CHAPTER 8: Picture This: Technical Analysis 131 Comparing Research Techniques Used in Day Trading 132 Knowing what direction your research is 132 Examining fundamental research 133 Looking closer at technical analysis 134 Using Technical Analysis 136 First things first: Should you follow a trend or deviate from it? 136 Finding trends 137 Those ever-changing trends 141 Reading the Charts 143 Wave your pennants and flags 143 Not just for the shower: Head and shoulders 144 Drink from a cup and handle 145 Mind the gap 146 Grab your pitchforks! 147 Considering Different Approaches to Technical Analysis 148 Dow Theory 148 Fibonacci numbers and the Elliott Wave 148 Japanese candlestick charting 149 The Gann system 150 Avoiding Technical-Analysis Pitfalls 150 If it’s obvious, there’s no opportunity 151 Overanalyzing the data 151 Success may be the result of an upward bias 151 CHAPTER 9: Following Market Indicators and Tried-and- True Day Trading Strategies 153 Psyching Out the Markets 154 Betting on the buy side 155 Avoiding the projection trap 155 Taking the Temperature of the Market 156 Pinpointing with price indicators 156 Volume 159 Volatility, crisis, and opportunity 161 Measuring Money Flows 163 Accumulation/distribution index 164 Money-flow ratio and money-flow index 164 Short interest ratios 165 Considering Information That Crops Up during the Trading Day 166 Price, time, and sales 166 Order book 167 Quote stuffing 168 News flows 168 viii Day Trading For Dummies Identifying Anomalies and Traps 169 Bear traps and bull traps 169 Calendar effects 170 CHAPTER 10: Eliminating Emotion with Program Trading 173 Creating Your Own Trading Program 174 Recognizing what you want to automate 174 Knowing the limitations of robots 175 Programming, the Day Trading Way 175 Looking at basic brokerage offerings 176 Adding a trading platform 176 Finding trading modules 176 Backtesting Once, Backtesting Twice 177 Building on Some Standard Strategies 177 Range trading 178 Contrarian trading 178 News trading 179 Pairs trading 179 Arbitraging for Fun . . . and Profit 179 Understanding how arbitrage and market efficiency interact 180 Taking advantages of price discrepancies 181 Scalping, the Dangerous Game 182 Understanding Risk Arbitrage and Its Tools 183 Arbitrating derivatives 184 Levering with leverage 185 Short selling 185 Creating synthetic securities 185 Examining Arbitrage Strategies 186 Convertible arbitrage 187 ETF arbitrage 187 Fixed income and interest-rate arbitrage 188 Index arbitrage 189 Merger arbitrage 189 Option arbitrage 190 Being Aware of Those Pesky Transaction Costs 191 CHAPTER 11: Day Trading for Investors 193 Recognizing What Investors Can Glean from Traders 193 Being disciplined 194 Dealing with breaking news and breaking markets 195 Setting targets and limits 196 Judging execution quality 197 Applying Momentum 199 Earnings momentum 200 Price momentum 200 For investors only: Momentum-research systems 201 Table of Contents ix When an Investor Considers Trading 203 The idea has a short shelf life 203 Your research shows you some trading opportunities 203 You see some great short opportunities 204 CHAPTER 12: Researching Research Services 205 Understanding the Trade of Trading 206 Enjoying freebies from the exchanges and the regulators 206 Hitting the road for conferences 208 Taking training classes 209 Getting the Research You Need 212 (Price) Quote me on that 213 Charting your strategy 214 News, newsletters, gurus, and strategic advice 216 Doing Your Due Diligence 218 Where to start your research 218 Questions to ask 220 CHAPTER 13: Determining Your Profit and Your Profit Potential 223 Before You Trade: Testing Your System 223 Backtesting 224 Simulation trading 226 Backtesting and simulation software 227 During the Day: Tracking Your Trades 230 Setting up your spreadsheet 230 Pulling everything into a profit and loss statement 230 Keeping a trading diary 232 After You Trade: Calculating Overall Performance 233 Reviewing types of return 234 Calculating returns 234 Determining the risk to your return 239 Using benchmarks to evaluate your performance 241 PART 3: DAY TRADING, INCORPORATED 243 CHAPTER 14: Setting Up Your Day Trading Like a Business 245 Planning Your Trading Business 246 Setting your goals 246 Finding volatility 247 Fixing hours, vacation, and sick leave 248 Investing in your business 248 Evaluating and revising your plan 249 Setting Up Your Trading Laboratory 249 Where to sit, where to work 249 Counting on your computer 250 x Day Trading For Dummies Seeing it on the big screen 250 Connecting to the Internet 250 Staying virus- and hacker-free 251 The department of redundancy department: Backing up your systems 252 Getting Mobile with the Markets 252 Controlling Your Emotions 253 Dealing with destructive emotions 254 Having an outlet 256 Setting up support systems 258 Watching your walk-away money 260 CHAPTER 15: Your Key Vendor: Your Broker 261 Choosing a Brokerage 261 Getting proper pricing 262 Evaluating types of platform 263 Opening an account 266 Discussing Brokers for Day Traders 266 Brokers for stocks and a bit of the rest 267 Brokers for options and futures 271 Brokers for foreign exchange 272 Being Aware of Brokerage Scams 273 CHAPTER 16: Regulation Right Now 275 Looking Back on the Road to Regulations 276 Reviewing the Regulators 277 Stock and corporate bond market regulation 278 Treasury bond market regulation 280 Derivatives market regulation 281 Foreign exchange (forex) regulation 283 Working with Brokers’ Rules 284 Gauging suitability 284 Making sure the money is legit 284 Following special rules for pattern day traders 286 Reporting taxes 287 Watching Out for Insider Trading 287 Preparing for Rule Changes in Crisis Conditions 289 Taking on Partners 290 CHAPTER 17: Taxes for Day Traders 291 Getting the Lay of the Land: What You Need to Know Based on What You Trade 292 Commodities and futures 292 Currency trading 292 Options 293 Stock trading 294 Table of Contents xi Hiring a Tax Adviser 295 The many flavors of tax experts 295 Questions to ask a prospective adviser 296 Doing Your Taxes Yourself 297 Finding out everything you want to know 297 Making it easier with tax-preparation software 298 Identifying Income Categories You Need to Know 298 Earned income 298 Investment income 299 Capital gains and losses 299 Miscellaneous income 301 Tracking Your Investment Expenses 302 Qualified and deductible expenses 302 What you can’t deduct 304 Recognizing the limitations 306 Top Secret Tax Information for IRS-Qualified Traders Only 307 Mark-to-market accounting 307 Greater deductibility of business expenses 308 Discussing Other Important Tax Info: Forms and Deadlines 308 Using the right tax forms 308 Paying all year: The joy of estimated taxes 309 Using Self-Directed IRAs 309 PART 4: THE PART OF TENS 311 CHAPTER 18: Ten Good Reasons to Day Trade 313 You Love Being Independent 313 You Want to Work Anywhere You Like 314 You’re Comfortable with Technology 314 You Want to Eat What You Kill 315 You Love the Markets 315 You Have Market Experience 315 You’ve Studied Trading Systems and Know What Works for You 316 You’re Decisive and Persistent 316 You Can Afford to Lose Money 317 You Have a Support System 318 CHAPTER 19: Ten (or So) Good Reasons to Avoid Day Trading 319 You Want to Discover Investing by Day Trading 320 You Love Fundamental Research 320 You’re Short on Time and Capital 321 You Like Working As Part of a Group 321 You Can’t Be Bothered with the Details of Running a Business 321 You Crave Excitement 322 xii Day Trading For Dummies You’re Impulsive 322 You Love Going to the Casino 323 You Have Trouble Setting Boundaries 323 You Want to Get Rich Quick 324 The Guy on YouTube Said It Would Work 324 CHAPTER 20: Ten Common Day Trading Mistakes 325 Starting with Unrealistic Expectations 325 Beginning without a Business and Trading Plan 326 Ignoring Cash Management 327 Failing to Manage Risk 327 Not Committing the Time and Money to Do It Right 328 Chasing the Herd 328 Switching between Research Systems 329 Overtrading 329 Sticking Too Long with Losing Trades 330 Getting Too Emotionally Involved 330 CHAPTER 21: Ten Tested Money-Management Techniques 331 Taking Money off the Table 332 Using Stops 332 Applying Gann’s 10 Percent Rule 332 Limiting Your Losses with the Fixed Fractional System 333 Increasing Returns with the Fixed-Ratio System 333 Following the Kelly Criterion Formula 334 Figuring the Amount to Trade with Optimal F 334 Measuring Risk and Sizing Trades with Monte Carlo Simulation 335 Taking a Risk with the Martingale System 335 Throwing It to the Fates 336 APPENDIX: ADDITIONAL RESOURCES FOR DAY TRADERS 337 INDEX 343

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