by Andrew Aziz
*The author is a day trader and a swing trader, who is active in multiple markets. This book, however, focuses on day trading the stock market. His main trading hours are the first 2 hours after the open each day, between 9.30am and 11.30am, and all positions are closed at the end of the day.*
As my focus is on the crypto market, I'll highlight relevant factors I've found useful for myself.
At a glance;
scan for active stocks/cryptos (high relative volume) and pick the ones that look to have reliable setups developing to trade that day
Risk no more than 2% on any one position
Only take the trade if it has at least 2:1 risk:reward
Take 50% profit at target 1, move stop to break even and let the rest run.
build positions by entering half size and then adding if price moves in your favour
use limit orders or marketable limit orders when possible
Stocks in Play
Due to algorithms, the majority of stocks will trend in the direction of the overall market unless they have a reason not to. But, there will be a handful of stocks that will buck the trend of the market because they have a catalyst. These are the Stocks in Play.
They will usually have fresh news;
Earnings reports
Earnings warnings or pre-announcements
Earnings surprises
FDA approvals/denials
Mergers and acquisitions
Major contract wins
Stock buybacks
You want to find stocks with high relative volume. That is, volume out of the ordinary for that stock. You will start out with maybe 10-20 stocks on your watch list and narrow them down to only 2 or 3 which you will trade that day. Use a scanner (TradingView has a decent free one) to find cryptos that are being actively traded.
You can also use ATR (Average True Range) which gives you the average range of price movement in that stock during the day. We want ATR to be high to capitalize on big moves. Author uses www.trade-ideas.com as a scanner. The scanner should look for;
- high relative volume
- low float
- high activity
You then load the chart and decide if any opportunities are developing that suit your strategy.
Day trading can be boring. You will often just be sitting watching your list. If you aren't bored you may be overtrading. "Your goal it to trade well not to trade often."
Always ask; "Is this stock moving because the overall market is moving, or is it moving because it has a unique fundamental catalyst?"
You may have to do some research, but with experience you should be able to differentiate.
Focus on where the action is. You want to be where other day-traders are. Focus on the stocks that are moving and receiving a ton of action. You can trade the majors like Apple and Coke, but these stocks will be dominated by algorithms and move too slowly, making them hard to trade.
To find out where other day-traders are, use day trading stock scanners, and stay up to date on social media. Follow a handful of traders and see what they are talking about.
We want volatility.
At the start of the trading day you'll be able to see which stocks have considerable volume. You can then scour the news to find out what fundamental catalyst is driving the volume. This lets you create a watchlist for the day. The first 2 hours from 9.30-11.30am are have the most volumes and are the best times to trade stocks. Momentum strategies work well. Andrew notes that he rarely trades stocks outside of these 2 hours.
Risk and Account Management
You need 3 skills to be a successful day-trader
Learning and master 1 or a few proven trading strategies
Proper risk management - position sizing and correct execution
Sound psychology - control your emotions
You must "live to play another day." Surviving the learning curve is one of the hardest things. You need to watch the trade you're in and the balance in your account like a scuba diver watches his oxygen.
You won't win every trade. Take the losses gracefully. Take the losses and walk away, the come back and look for another trade. We are trading, not predicting.
Success in day trading comes from risk management - finding low-risk entries with a high potential reward. The minimum win:lose ratio for Andrew is 2:1
Using a 2:1 risk:reward you can be wrong 40% of the time and still make money.
Only risk 2% of your account per trade.
Bid-ask spreads
Every stock has two prices; a bid and an ask.
The bid is always lower than the ask. The difference is the bid-ask spread.
Spreads are higher in lower volume stocks as the market makers who dominate such stocks demand higher fees from those who want to join their party. Spreads also increase during large market moves.
With a market order you are getting filled at the bad side of the bid-ask spread.
Use limit orders whenever possible.
Another crucial order type for day traders is the marketable limit order, which buys at market, but only up to a limit.
Charts and indicators
You should keep your charts relatively clean to allow you to interpret them quickly and make decisions. Author uses;
Price action in the form of candlesticks
Volume of shares being traded
9EMA and 20EMA
50SMA and 200 SMA
Volume Weighted Average Price (VWAP)
Previous days closing price
Daily levels of Support and Resistance
He keeps all his moving averages in grey and the VWAP in blue. The VWAP is the most important indicator for a day trader and needs to be easily distinguishable.
Andrew used and explains indecision candles; spinning tops and dojis, but stays away from most complex patterns as he feels they are unreliable and subject to your mood at the time.
His trading strategy is based around
price action
indicators
candlesticks/chart patterns
Most day traders monitor at least two timeframes.
The higher time frame is the strategic one, showing the overall trend and bigger picture of the price movement.
The lower time frame is the tactical time frame, allowing you to find good entries and exits.
Andrew uses 1 minute and 5 minute charts.
Trade management
Trade management refers to what you do with the position after you enter it and before you exit.
Novice traders believe that when they enter the trade, they should not do anything but wait until either their stop loss or profit target is hit. This is wrong. When you enter, you are entering based on an idea. From that point on, new price action develops either supporting your reasons or refuting them. You need to manage your open positions.
You also must learn to build positions by entering half size at the start, and adding when the trade goes in your favour, then closing some out and letting the rest run. You should refrain from averaging into losing positions (buying more when the price goes down). Andrew is adamant about this.
Andrew sets 2 profit targets for his trades. He takes 50% profit at the first target, then moves his stop-loss to break even and lets the trade run to the 2nd target. You can cut the entire trade early if price action develops against you.
Comments