Day Trade For Living - Andrew Aziz (best black authors txt) 📗

Most Important Day Trading Strategies

In this chapter, I will introduce some of my strategies, based on three elements: (1) price action, (2) technical indicators, and (3) chart patterns. It is important to learn and practice all three elements at the same time. Although some strategies require only technical indicators (such as Moving Average and VWAP), it's helpful to also have an understanding of price action and chart patterns in order to become a successful day trader. This understanding, especially regarding price action, comes only with practice.

As a day trader, you shouldn' t care about companies and their earnings. Day traders are not concerned about what companies do or what they make. Your attention should only be on price action, technical indicators and chart patterns. I know more stock symbols than the names of actual companies . I don't mingle fundamental analysis with technical analysis; I focus exclusively on the technical analysis.

Now, having said that, as I mentioned in Chapter 4, I do hunt for a fundamental catalyst, a reason why a stock is running up. If I have a stock that's running up 80%, I want to know what the catalyst is, and I don't stop until I find out. " So, it's a biopharmaceutical stock and they just got FDA approval." or "They just passed through clinical trials. Okay, there's a catalyst, now I can understand what's going on." Beyond that, you won't find me listening in on conference calls or sifting through the earnings papers. I don't care about those aspects because I'm not a long term investor - I'm a day trader. We trade very quickly - guerrilla trading! - at times we trade in time periods as short as ten to thirty seconds.

In case you' re doubting me on this point, I can tell you from experience that in ten seconds you can make thousands of dollars. I've done that. In ten seconds you can also lose thousands of dollars. I've done that too. When the market moves quickly, you need to ensure you're positioned in the right place to take advantage of the profits and reduce your risk exposure.

There are millions of traders out there and even millions more of strategies. Every trader needs their own strategy and edge. You need to find your spot in the market where you feel comfortable. I focus on these strategies because these are what work for me.

I've come to recognize in my trading career that the best setups are the seven strategies that I will be explaining in this chapter. These are simple strategies in theory, but they are difficult to master and require plenty of practice. These trading strategies give signals relatively infrequently and allow you to enter the markets during the quiet times, just like the professionals do.

Another point to remember is that in the market right now, over 60% of the volume is algorithmic high frequency trading. That means you are trading against computers. If you've ever played chess against a computer, you know that you're eventually going to lose. You might get lucky once or twice, but play sufficient times and you are guaranteed to be the loser. The same rule applies to algorithmic trading. You're trading stocks against computer systems. On the one hand, that represents a problem. It means that the majority of changes in stocks that you are seeing are simply the result of computers moving shares around. On the other hand, it also means that there's a small handful of stocks each day that are going to be trading on such heavy retail volume (as opposed to institutional algorithmic trading) that you will overpower the algorithmic trading and you and I, the retail traders, will control that stock. Each day, you need to focus on trading those particular stocks. These are what I call in Chapter 4 the Alpha Predators, stocks that are typically gapping up or down on earnings. You must look for the stocks that have significant retail traders ' interest and significant retail volume. These will be the stocks you will buy, and together, we the people, the retail traders, will overpower the computers, just like in a storyline for the next Terminator sequel.

I personally use the candlestick charts explained in Chapter 6. Each candlestick represents a period of time. As I mentioned before, you can choose daily charts, hourly charts, 5-minute charts, even I-minute charts. My preference is 5-minute charts because I believe a I-minute chart is too

noisy and at times you can be misled by normal price movement in a 1- minute interval.

And please, remember, my philosophy of trading is that you must master only a few solid setups to be consistently profitable. In fact, having a simple trading method consisting of a few minimal setups will work to reduce confusion and stress and allow you to concentrate more on the psychological aspect of trading, which is what separates the winners from the losers.

Trade Management

Before explaining my strategies, it is important to know about my order entry, exit and trade management.

It always intrigues me in the www.Vancouver-Traders .com chatroom when two elite traders select the same stock-one long and the other short. Often, by the end of the day, both are profitable, proving that experience and trade management are more important than the stock and the direction that traders pick.

My trade size depends on the price of the stock and on my account and risk management rule (Chapter 3), but 800 shares is my usual size.

I buy 800 shares all at once.

I sell 400 shares in the first target, bringing my stop loss to break­ even (entry point).

I sell another 200 shares in the next target point.

I usually keep the last 200 shares until I am stopped out. I always retain some shares in case the prices keep moving in my favor.

Some professional traders never enter the trade all at once. They scale into the trade, meaning they buy at various points. They might start with I 00 shares and then add to their position in various steps. For example, for a I000-share trade, they enter either 500/500 or I00/200/700 shares. If done correctly, this is an excellent method of risk and trade management. However, managing the position in this system is extremely difficult. Many new traders who are trying to do this will end up over-trading and will lose their money in commissions, slippage and averaging down the losing trades.

I rarely scale into a trade but at times I will, especially in very highly volume traded stocks. But remem ber, scaling into a trade is a double­ edged sword and beginners may use it incorrectly as a way to average

down their losing pos1t10ns, sending good money after bad. I don' t recommend this method for beginners. Although they can appear similar, there is a huge difference between scaling into a trade and averaging down a losing position. For beginners, averaging down a losing trade is a recipe for wiping out your account, especially with small accounts that cannot stand several rounds of averaging down.

ABCD Pattern

The ABCD Pattern is the most basic and the easiest pattern to trade, and it is an excellent choice for beginner and intermediate traders. Although it is simple and has been known for a long time, it still works very effectivel y because many traders are still trading it. As mentioned earlier , it has a self-fulfilling prophecy effect. You should do whatever all of the other traders are doing because a trend is your friend. A trend may very well be your only friend.

Let's take a look at this pattern:

Example of an ABCD Pattern.

ABCD Patterns start with a strong upward move. Buyers are aggressively buying a stock from point A and making constantly new highs of the day (point B). You want to enter the trade, but you should not chase the trade, because at point B it is very extended and already at a high price. In

addition, you cannot say where your stop should be. You must never enter a trade without knowing your stop.

At point B, traders who bought the stock earlier start slowly selling it for profit and the prices come down. Still you should not enter the trade because you don't know where the bottom of this pull back will be. However, if you see that the price does not come down from a certain level, such as point C, it means that the stock has found a potential support. Therefore, you can plan your trade and set up stops and a profit taking point.

Let's take a look at Ocean Power Technologies Inc. (ticker: OPTT) at July 22, 2016, when they announced that they had a new $50 million contract to build a new ship (There's a fundamental catalyst! Remember Chapter 2?).

The stock surged up from $7.70 (A) to $9.40 (B) at around 9:40 a.m. I, along with many other traders who had not heard the news, waited for point B and then a confirmation that the stock wasn't going to go lower than a certain price (point C). When I saw that point C was holding as a support and buyers wouldn't let the stock price go any lower than $8.10 (C), I bought 1,000 shares of OPTT near C, and my stop was below point

C. I knew that when the price went higher, closer to B, buyers would jump on massively. As I mentioned before, the ABCD Pattern is a very classic strategy and many retail traders look for it. I purchased stock between points B and C. Close to point D, the volume suddenly spiked, which meant that traders had jumped into the trade.

My exit would be when the stock made a new low, which was a sign of weakness. As you see, OPTT had a nice run up to around $12.

Let 's look at another example, this time for SPU on August 29, 2016. There are actually two ABCD Patterns. I marked the second one as abed pattern. Usually as the trading day progresses volumes become lower and therefore the second pattern is smaller in size. Please note that you will always have high volumes in points Band D (and of course points band d in this example).

Example of ABCD Pattern and abed pattern.

To summarize my trading strategy for the ABCD Pattern:

When I observe with my scanner or I'm advised by someone in our chatroom that a stock is surging up from point A and reaching a big new high for the day (point B), I wait to see if the price makes a support higher than point A. I call this point C. I do not jump into the trade right away.

I watch the stock during its consolidation period. I choose my share size and stop and exit strategy.

When I see that the price is holding support at level C, I enter the trade close to the price of point C in anticipation of moving forward to point D or higher.

My stop is the loss of point C. If the price goes lower than point C, I sell and accept the loss. Therefore, it is important to buy the stock close to point C to minimize the loss. Some traders wait and buy only

at point D to make sure that the ABCD Pattern is really working. In my opinion that is reducing your reward and increasing your risk.

If the price moves higher, I sell half of my position at point D, and bring my stop higher to my entry point (break-even).

I sell the remaining position as soon as my target hits or I feel that the price is losing steam or that the sellers are acquiring control of the price action.