Ross Cameron - How to Day Trade: A Detailed Guide to Day Trading Strategies, Risk Management, and Trader Psychology

HOW TO DAY TRADE

A Detailed Guide to Day Trading Strategies, Risk Management, and Trader Psychology

ROSS CAMERON

AuthorHouse

1663 Liberty Drive

Bloomington, IN 47403

www.authorhouse.com

Phone: 1 (800) 839-8640

2015 Ross Cameron. All rights reserved.

No part of this book may be reproduced, stored in a retrieval system, or
transmitted by any means without the written permission of the author.

Published by AuthorHouse 05/03/2018

ISBN: 978-1-5049-5772-4 (sc)

ISBN: 978-1-5049-5773-1 (e)

Library of Congress Control Number: 2015917812

Because of the dynamic nature of the Internet, any web addresses or links contained in this book may have changed since publication and may no longer be valid. The views expressed in this work are solely those of the author and do not necessarily reflect the views of the publisher, and the publisher hereby disclaims any responsibility for them.

CONTENTS

Dedication to Mom, Dad, Lisa and Lauren. Thank you for your love, support, and understanding. You keep me focused, driven, and happy.

Success as a day trader will only come to 10% of those who try. Its important to understand why most traders fail so that you can avoid those mistakes. The day traders who lose money in the market are losing because of a failure to either choose the right stocks, manage risk, find proper entries, or follow the rules of a proven strategy. In this book I will teach you trading techniques that I personally use to profit from the market. Before diving into the trading strategies we will first build your foundation for success as a trader by discussing the two most important skills you can possess. I like to say that a day trader is two things, a hunter of volatility and a manager of risk. Ill explain how to find predictable volatility and how to manage your risk so you can make money and be right only 50% of the time. We turn the tables by putting the odds for success in your favor. By picking up this book you show dedication to improve your trading. This by itself sets you apart from the majority of beginner traders.

The act of day trading is simply buying shares of a stock with the intention of selling those shares for a profit, within minutes or hours. In order to profit in such a short window of time, we trade shares of companies that have just released breaking news, made a big earnings announcement or have any type of fundamental catalyst that results in above average interest from retail traders and investors. The type of stocks a day trader will focus on are typically much different from what a long term investor would look for. Day traders acknowledge the high levels of risk associated with trading volatile markets, and they mitigate those risks by holding positions for very short periods of time.

While investors typically look for 5-10% annual returns, day traders look for trades that have the potential to make 5-10% intraday returns. However, in order to profit from intraday moves, most day traders will take large positions which can result in a high level of single stock exposure. Some will even engage in the high risk practice of trading on margin (money borrowed from your broker). For example, a day trader with a $25k trading account may use margin (buying power is 4x the cash balance) and trade as if he had $100k in equity. This is considered leveraging your account. By aggressively trading on margin, if the trader can produce 5% daily returns on the $100k buying power, the trader will grow the $25k initial equity at a rate of 20% per day. The risk of course is that the trader will make a mistake that can cost him everything. Unfortunately, this is the fate for 9 out of 10 traders. The cause of these career ending mistakes result from a failure to manage risk.

Imagine a trader who has just taken 9 successful trades. In each trade there was a $50 risk and $100 profit potential. This means each trade had the potential to double the risk for a 2:1 profit loss ratio. The first 9 successful trades produce $900 in profit. On the 10 th trade, when the position is down $50, instead of accepting the loss, the untrained trader purchases more shares at a lower price to reduce his cost basis. Once he is down $100, he continues to hold and is unsure of whether to hold or sell. The trader finally takes the loss when he is down $1k. This is a trader who has a 90% success rate, but is still a losing trader because he failed to manage his risk. We will discuss in detail how to identify stocks and find good trade opportunities, but first we will focus on developing your understanding of risk management. Traders that dont utilize risk management techniques stand a good chance of being among the 90% of retail traders who lose money in the market.

Over my years as a trader and as a trading coach, I have worked with thousands of students. The majority of those students experienced a devastating loss at some point due to avoidable mistakes. It is easy to understand how a trader can fall into the position of a margin call (a debt to your broker). The money to trade on margin is easily available, and the allure of quick profits can lead both new and seasoned traders to ignore commonly accepted rules of risk management. The 10% of traders who consistently profit from the market share one common skill. They cap their losses. They accept that each trade has a predetermined level of risk and they adhere to the rules they set for that trade. This is part of a well-defined trading strategy. Its common for an untrained trader to adjust their risk parameters mid-trade to accommodate a losing position. For instance, if they said their stop loss is at -$50, and the trade goes down to -$60, they might say theyll hold for just a few more minutes to see if it comes back up. Before you know it, they are looking at an $80-100 loss, or worse, and they are wondering how it happened. Ill admit that its extremely difficult to achieve the level of discipline to sell when you hit your max loss on a trade. Nobody wants to lose, but the best traders are great losers. They accept their losses with grace and move on to the next trade. They never allow one trade the ability to destroy their account or their career. This characteristic will keep them in business as a day trader for a long time.

The skill to take losses and not allow them to cause you to lose focus is an act of mindfulness. Our human emotions often work against us while we are in trades. The emotions of fear and greed are present in every trader. The successful traders are able to experience those emotions without acting on them. When you allow emotions to overtake your rational thought process, you run the risk of over trading, exposing yourself to unnecessary risk, and unplanned losses. It takes years of emotional conditioning to be able to sit for eight hours watching the computer screens while maintaining composure the whole time. For new traders, we encourage starting with shorter blocks of time and maintaining a constant focus on the idea of thinking like a risk manager.

Buying Long or Selling Short

If you are new to trading you may not be familiar with the concept of selling short. Traders who sell short are borrowing shares from their broker to sell those shares at a high price, with the intention of buying the shares back at a lower price, and profiting from the drop. When you sell short, your account will show in your open positions window, a negative position (e.g. -1000 shares). You have borrowed 1000 shares from your broker and sold them. The broker expects that you will buy back those shares. When you buy back those shares, it is called covering your position. Some traders have a short bias and prefer to trade as stocks drop. One of the risks with short selling is that if the stock goes up, you will eventually be forced to cover your position. Since theoretically prices can climb infinitely, a trader could experience an infinite loss if they do not cover their open short position.