AQUICKANDEASY

INTRODUCTIONTOMAKINGMONEY—WHILEMANAGING

YOURRISK

STARTDAYTRADINGNOW

AnyoneCanDay

Trade!Includes:

Entry&ExitStrategies

DailyTradingChecklists

StartupCosts&ConsiderationsRisks&Benefits|MarketIndicators

MICHAELSINCEREAuthorofthebestselling

Understanding

OptionsandAllAboutMarketIndicators

DEDICATION

To my mother and father,who never stopped believingin me, or in what I couldachieve.

PRAISEFORSTARTDAY

TRADINGNOW

Sincere tackles a verydifficult task: teachingsomeone — who knowsnothingabouttrading—how

today trade.Hedoesagoodjob of explaining the varioustools (indicators, charts, etc.)thatcanprovideguidanceandclues for making the “buy”decision. Sincere shows thereader how to protect assetswith stop-loss orders andissues plenty of warningsabout the complexity of thejob. The reader should graspthe necessity of beginninggently and having thepatience to gain useful

experience before enteringintothefraywithrealmoney.—MarkD.Wolfinger,authorThe Rookie's Guide toOptions

Contents

PART1:GETTINGSTARTEDTHEOPENINGBELL:

WHATISDAYTRADING?CHAPTER1

LearningtheBusinessCHAPTER2

ReadingChartsCHAPTER3

InterpretingPatternsCHAPTER4

UsingTechnicalIndicatorsCHAPTER5

MakingYourFirstDayTrade

PART2:WHATIT'SREALLYLIKETODAYTRADE

CHAPTER6

OneBadTradeCHAPTER7

MeetingtheProsCHAPTER8

DoingYourHomework

THECLOSINGBELL:GOINGFORWARDAPPENDIXA:

RESOURCESFORDAYTRADERS

APPENDIXB:GLOSSARYOFTERMS

PART1

GETTINGSTARTED

Before we begin, I want tothankyoufor takingthetimeto read my book. I'mdelighted you're willing tomaketheefforttolearnmoreabout day trading, afascinating but oftenmisunderstood way to make

money.Bepreparedtolearnalot of information in a shorttime period. I've includedexplanations and definitionsof terms that may beunfamiliartoyouinthebookitself.Thesewords, italicizedin the text, are also includedin a glossary at the back tohelpyoukeepinformed.Inthispart,I'llshowyouhowto set up an account and ahome office, and how to use

specialized tools to makeyour first trade. That's theeasy part. The hard part isusing all of that informationto increase earnings.Althoughyou'reabouttotakean educational andentertaining journey, myultimate goal is to teach youto become a better traderwhilehelpingyou tomanagerisk.Andnow,let'stgetstarted.

TheOpeningBell:WhatIsDayTrading?

Day trading, or intradaytrading, is a method thatworksjustlikeitsounds:youenteratradeinvolvingoneormore stocks (or anothersecurity)andexitthetrade—

which you've only held ontoforseconds,minutes,orhours—by theendof theday. It'sonly semantics, but in thisbook I often refer to daytrading as a strategy. Youcouldalsocallitatechnique,style, or activity.The goal istomakeatradeandexitwitha profit — the sooner thebetter—and still get agoodnight'ssleep.Note to overseas readers:

While the content of thisbook was written with theU.S. stock market in mind,the information included inthis book can be applied toany stock market you tradeon.

MythsVersusReality

Many myths about daytrading exist. Becauseuninformed traders have

made mistakes in the past,many people think that daytrading is too risky. Theyincorrectly believe that daytradersarechainedinfrontofacomputertenhoursperday,making hundreds oflightning-fast trades whilescooping up $500 worth ofpennies.Although a handful of

individuals may fit thisstereotype,manymodernday

tradersarechoosieraboutthetrades they make. They tendto trade smarter and makeonlyahandfuloftransactionsa day. Rather than beinghighlyactive traders (makinghundreds of trades a day),somedaytraderspreferbeinghigh-probability traders(tradingwhentheoddsareintheir favor). It's really apersonal choicewhat kind oftraderyouwillbe.

Day trading doesn't meanyou'll be able to lounge infront of a pool in Europewhile trading on a laptop orcell phone. Although somelackadaisical traders havemade transactions while onnever-ending vacations, it'sunlikely they'll be profitablefor longwhen trading in thisenvironment.Whynot?Mostdaytradersneedtofocuslikea laser beam on their screenwithout distractions; they

havetobealertandatthetopoftheirgameatalltimes.Tradersworkveryhard—

they may put in fifty- tosixty-hour workweeks. Plus,they're responsible for theirown taxes, tech support, andeducation.Theyhavetomakelightning-fast decisions, andifthey'rewrong,itcouldcostthem money. Without aregular paycheck, manytraders feel tremendous

pressuretoovertradetomakemoney. Because the marketsare always changing, tradersmust also constantly evolveand adapt to marketconditions. A strategy thatworkswelloneyearmaynotworkthefollowingyear.Even with all of these

challenges,itispossibletobea successful day trader, butyou'llhavetoworkhardatit.On the plus side, it also

means being in control ofyour timeandyour schedule.Youdon'thavetocommutetoanofficeandreporttoaboss.It's extremely satisfying tofind a good trade and berewarded for it in money.Anddon'tforgetthatyoucantrade from anywhere in theworld, there's no dress code,and youhave the freedom tosetyourownfinancialgoals.Some traders have

combined the best of bothworlds by trading part-time.For example, you couldinitiateatradeinthemorningand set up automatic triggersto sell when the stock hits acertainprice.Inthiscase,daytrading is simply anotherstrategy that is used whenmarket conditions are right.You'lllearnaboutthebenefitsof part-time trading in thenextchapter.

Why Read ThisBook?

If you're a rookie trader andwanttolearnmoreaboutdaytrading, you've come to theright place. You'll learn howto incorporate day tradingstrategies into your tradingportfolio. And if you'rethinking of becoming a full-time day trader, by the timeyoufinishthisbook,youwill

have a better idea if daytrading is for you.Nomatterwhat kind of trader you are,many of the lessons you'lllearn in this book will beinvaluable. I will also helpyou avoid some of the mostcommontradingpitfalls.If you're reading this book

out of curiosity orentertainment,I'lltrymybestto meet your needs. Like allmy other books, I try to

explain day trading as if youweresittingacrossfrommeatmykitchen table.Mygoal isto save you time andmoneywhileeducatingandengagingyou.You'lllearn:

How to get started,including how muchmoney you'll need, howto choose and use abroker, and how to set

upatradingaccount.

Howtoreadcharts—anessential tool for daytraders.

How to use technicalindicators to determinewhere themarket, or anindividual stock, isheaded.

Howtomakea trade—I take you through your

first day trade, step bystep.

How to manage yourmoney and youremotions.

And much more,including interviewswith professional daytraders.

How Much Money

CanIMake?

You probably want to knowhow much money you canmakeasadaytrader.Perhapsyou've even set a goal —$200 to $300 a day, forexample. Wanting to makemoney may even be whyyou'rereadingthisbook.Let me tell you the first

goalof thisbook: it's tohelpyou trade well. Although

generatingprofitsisaworthylong-termgoal,it'ssecondaryto trading with the odds inyour favor, and onprobabilities.Rather than asking, “How

much money can I make?”the first question you shouldask is, “How much moneycanIlose?”Yourfinancialsafetyismy

most important concern, aresponsibility I take very

seriously. You can makemoney only if you day tradeproperly. If you don't, youcan lose all of your moneyfaster than you can say,“Whathappened?”If you're going to day

trade, you must be aware ofthe risks as well as thebenefits. Too many peopleenter the market with toomuch money and too littleknowledge.Infact,oneofthe

reasonsthatdaytradinghasabad reputation is thatthousandsofpeoplequittheirfull-timejobs,cashedintheir401(k)accounts,anddumpedeverything into the market.Many day traders madeextraordinary returns,especiallyat the topofabullmarket. Unfortunately, bullmarkets don't last forever.When they abruptly end,many once successfulstrategies stop working, and

people lose money. Sadly,they sometimes lose morethanwhattheystartedwith.Remember this: by

learning to trade well, youcan trade for a lifetime, andnot just a day. Therefore, asyou read this book, focus onbeing thebest traderyoucanbe. By the time you finishreading, you'll not only learnhow to day trade, but alsowhether day trading makes

sense for you and yourfinancialgoals.

Making $1,000 perDayI'll tellyouaquickanecdote:I have a friend who wasfascinated with how I couldenter the market andseemingly pull money outwith ease. She assumed thestock market was a hugeATM machine. Once she

calledmeupandsaid,“Ineed$1,000. Could you do a daytradeforme?”It reminded me of the

nightly infomercials thatpromise you “$1,000 a dayworking from the comfort ofyourownhome!”Nevertheless, consistently

making $1,000 a day ispossible, but hardly likely,even if you have a $100,000account.Even$500aday,or

0.5 percent, would befantastic. Thousands ofprofessional fund managerswould do anything to makethosekindsofreturns.

My suggestion is to learnabout day trading withoutsetting daily financial goals.Start by gaining knowledgeand experience. Over time,you'lldiscoverthatthekeytoyour success is discipline, acharacteristicwe'llexplore in

detailthroughoutthisbook.

TheBiggestObstacletoYourSuccess

Manylargeinstitutionsspendhundreds of millions ofdollars on high-speedcomputers and complexalgorithmstomakethousandsor more trades per day forpennies to gain an edge overother traders. Those pennies

adduptobillionsofdollarsayear. Because so manyinstitutions use these high-frequency strategies, daytrading has become morecompetitivethanever.Fortunately, the lone day

trader can prosper. Althoughit's not as easy as somepeople hope, neither is daytrading as risky as manythink.If you learn to overcome

the biggest obstacle to yoursuccess, you can carve out aprofitable niche for yourself.That obstacle? Youremotions. Learning how todaytradeistheeasypart.Thehard part is overcoming thepsychological challenges. Idevoteachaptertothistopic,butitcouldtakesometimetolearn how to ignore yourinstincts and control youremotions.If thereisanythingthat can damage your

account,it'syouremotions.Nowthatyouhaveamore

realistic idea of what you'reup against, let's begin.Remember, with the correctinformation,tools,andmentalattitude, you can be asuccessfuldaytrader.

Chapter1:LearningtheBusiness

In this chapter, you'll learnhow to open a brokerageaccount, understand capitalrequirements,andsetupyourhomeoffice.You'llalsolearnbasic trading informationandterminology.

Choosing aBrokerageFirm

After you've decided to daytrade, you need to choose abrokerage firm, which is aregistered broker-dealer thatacts as mediator betweenbuyers and sellers.Youmustopen an account at abrokerage firm tobuyor sellstocks.This important choice

involves some carefulresearch.Brokeragefirmscanbe divided into three maintypes (and all havesophisticated tradingplatformsandonlineaccess):

Online discountbrokerage firms are forself-directed traders,provide little or noinvestment advice, butoffer low commissions,

fast execution,sophisticated chartingcapability, andindependent researchandcustomersupport.

Direct-access brokeragefirms are similar toonline discountbrokerages but areusually geared to theprofessional trader,offering little support torookies, but low

commissions for high-volumetraders.

Full-service brokeragefirms primarily workwithlong-terminvestors,not day traders. Theyassignyou toworkone-on-one with astockbroker orrepresentative for anannual fee or costlycommission, which isthe price you pay for

investment advice andstockideas.

Popular online discountbrokerage firms includeFidelity Investments,thinkorswim, E*Trade, TDAmeritrade, OptionsXpress,TradeMONSTER, Scottrade,Charles Schwab & Co., andTradeKing, to name a few.Popular direct-accessbrokerage firms include,TradeStationSecurities,MB

Trading, and InteractiveBrokers,tonameafew.

CHOOSING ANONLINEBROKERAGEFIRM

When you choose anonlinetradingbrokeragefirm,pickonethathasanationally

known reputation, a twelve-hour help desk to answerquestions, and competitivecommissions (less than $10pertrade).It's a huge advantage for

rookie traders to have abrokerage firm that cananswer questions even whenthe markets are closed. Youalsowantafirmthatletsyouuse a variety of tradingstrategies (not just buy-and-

hold,butdaytradingorothershort-termtradingstrategies),has easy-to-read charts, andoffers timely fills (when youbuyor sell a stock, theorderwill be filled, or executed,quickly).Most online brokerage

firms have streaming real-time quotes, easy-to-navigateand secure websites, andunderstandableprofitandlossscreens. More than likely,

they'll also have competitivecommissionrates.Inaddition,the top online brokeragefirms have educationalresources such as webinarsand articles on trading andinvesting. They may alsoprovide you with built-intrading strategies, the abilityto customize charts, set uptrading alerts, trade options,and perhaps trade theoverseas markets. Theseperks are usually included

with the commissions youpayontrades.

Ihighlyrecommendspendingtime paper trading beforerisking real money. Manybrokerage firms have papertrading accounts that allowyoutopracticetradingbeforeinvestingrealmoney into themarket. There are alsowebsitesthatallowyoutosetup and practice tradingwithoutusingrealmoney.

Toquicklyfindareputableonline brokerage firm, do anInternet search (suggestedsearch words: “rank onlinebrokerage firms,” followedbythecurrentyear).Alistofarticles will appear fromindependent sources, such asSmart Money and otherperiodicals, that rankbrokerage firms. (Rankingsfrom Barron's will alsoappear, but youmay have tosign up for a temporary

subscriptiontoseethem.)Finally,youcanalwaysask

other traders which brokersthey recommend. Rookietraders should seriouslyconsider signingupwithoneof the top online brokeragefirms.Why?Becauseoftheirexcellent reputation, onlineand phone support, andtimelyorderfills.

USING A DIRECTACCESSBROKERAGEFIRM

After you've gainedexperience, you can considerthe no-frills direct-accessbrokers that offer discountson commissions for high-volume traders. Besides

competitive rates, the mainadvantages of direct accessare the customizable charts,the news and scanning datafeeds, and very fast fills.Benefits suchas fast fills areincluded in the commissionsyoupaytotrade;others,suchas news and data feeds,sometimesrequireyoutopayanadditionalfee.Also, by using a direct-

access broker, you can

manuallyselectanElectronicCommunication Network(ECN), a computerizedsystem that allows traders totradedirectlywitheachother.Some traders like to routetheir orders directly to anECN, especially in fastmarkets. Some onlinebrokerage firmsallowyou todo this as well. The mainbenefit of using an ECN isthespeed.

Lack of customer supportisthemaindisadvantagewithsome direct-access brokers.Unlikemanybrokeragefirms,who patiently discuss allaspects of trading with you,some direct-access brokersonly offer help with theirsoftware. The good news?These firms compete fiercelyto attract new customers, somany of them are addingmoreservices.Therefore,talkto them to find out exactly

whattheyoffer,howmuchitwill cost, and how muchsupportyou'llreceive.To find the top-rated

direct-accessbrokeragefirms,do an Internet search(suggested search words:“rank direct-access firms,”followedbythecurrentyear).Again, Smart Money andBarron'swillprovidealistofthe top direct-access brokers,inadditiontootherrankings.

Questions,Questions

Before signing up with abrokerage firm, ask a lot ofquestions,orcarefullylookattheirwebsite. Find out aboutmonthly charges,commissions, and marginrates (the amount of interestyou will pay if you borrowmoney from the brokerage),the kind of chart softwarethey offer, and whether the

help desk is open nights andweekends.If possible, experiment

withthetradingsoftwareandcharts before opening anaccount.Somefirmswillgiveyou access before you signup. Brokerage firms highlyvalue active traders like you,sotheywilltryandmeetyourneeds.

WhereDoISign?

Now that you've chosen abrokerage firm, it's time toopen a trading account.Before you're allowed totrade, you must fill out aquestionnaire about yourtrading experience and risktolerance.Don'tbeconcernedwith your answers; it's not atest and it isn't used foranything. (In fact, after youplace your first trade, thequestionnaire is filed awayand, more than likely, never

lookedatagain.)You'll also learn the

minimum requirements toopen an account, whichmaybe $2,500, although this willvary depending on thebrokerage firm. Then you'llbeaskedwhetheryouwanttoopen a margin or a cashaccount. Margin simplymeans that you can borrowmoney from the brokeragefirm, if needed. To give

yourself more flexibility,you'll probably want tochoose margin, though justbecause you can use it, itdoesn'tmean you should.Asa beginner, it's best to avoidusing margin (for now), butit's helpful to have itavailable. Nevertheless, it'ssuggested you learn to tradewithyourownmoneybeforetrading with borrowedmoney.

Note: tobeapproved foramargin account, you mayneed a minimum of $5,000.You don't have to provide acredit report to be approvedformargin; your collateral isthestocksyou'rebuying.You'll also be asked to

specify the kind of tradingstyleyoumightuse,includingday trading. In addition today trading, you can choosetobeaninvestorortrader.An

investorisapersonwhobuysand holds stocks or otherfinancial instruments for anextended time period; atrader, on the other hand,buysandsellsstocksorotherfinancial instruments, hopingto profit from short-termprice fluctuations.(Eventually, you mayconsider opening twoaccounts: one for short-termtrading,andanotherforlong-terminvestments).

Finally, thebrokeragefirmwillaskyouhowmanytradesyouplantomakeperweekormonth.However, as soon as you

mention day trading, youmust follow special rulesdesigned to make sure thatyou have the financialresources to manage a daytrading account. See thesection later in this chaptercalled“WhatIsaPatternDay

Trader?” to learnabout thesespecialrules.

Saving onCommissions

Arevolutionarychangeinthebrokerage industry occurredwith the move to lowcommissions.Intheolddays,brokerages often chargedcommissionsof$100ormoreper trade. That forced many

people to buy and holdstocks. Once online tradingwas introduced, expensivecommissions became ahistorical footnote. Now,commissions are usually flatfees of $10 per trade or less,although it varies from firmtofirm.Youmayalsobeableto negotiate a “per share”commission. It depends onyour trading style and therateschargedbyyourbroker.

For now, stickwith paying aflat fee and as you gainexperience, you can alwaysexplore other commissionstructures.

Over time, if you do a lotof trading, you can negotiatefavorable commissions withthe brokerage firm. Aprofessional trader, forexample,wouldprobablypay$0.015 or $0.01 per share.Note: even with the lower

rates,day tradinggeneratesalot of commissions. To beprofitable, you'll need tomake more money on thetrade than you pay incommissions.

What Is a PatternDayTrader?

Becauseofabusesinthepast,the National Association ofSecurities Dealers (NASD)

Regulation Board ofDirectors and the Securitiesand Exchange Commission(SEC) set up specificguidelines for anyone whodaytrades.Ifyoumakemorethan four day trades withinfive business days, you willbedesignatedasapatterndaytrader.Forexample,ifonMonday

you buy Oracle (Nasdaq:ORCL) and sell the stock

beforetheendoftheday,thatis considered a day trade. Ifyou buy Oracle on TuesdayandsellitonWednesday,thatisnotadaytrade.Ifyouthenbuy and sell Oracle threetimes on Thursday, thatrepresents three more daytrades, and you've justreached your four day-tradequota. In this example, onThursday you are nowdesignated as a pattern daytrader.

Once you're labeled as apattern day trader, you musthave a minimum of $25,000in your account at all times.By the end of each tradingday, if you don't have$25,000cashinyouraccount,the brokerage firm can redflag (put a warning) on youraccount, and even freeze itfor ninety days. To becompletely safe, you shouldconsider funding youraccount with $30,000 as a

cushion,incaseyoubeginbylosing money. Don't blameyour brokerage firm; it's theSEC who came up with therules.

THE FULL-TIMEDAYTRADER

Consistently makingenough money to support

yourselfandafamilycanbeachallenge for a full-timetrader, even with a $50,000account. That's why it'simportantforyoutostartwitha practice account. If you'reconsistently successful at it,then you might think abouttradingforaliving.However,even though you may notmake day trading a full-timecareer,youcanstillusesomeof these strategies whenmarket conditions are right,

orevenonapart-timebasis.

THE PART-TIMEDAYTRADER

If you're concerned thatyouwon'tbeabletocomeupwith the $25,000 minimumrequired to be a pattern daytrader, you have otherchoices. First, you can plan

on being a part-time daytrader and not make morethan four day trades withinfive business days. If youchoosethisstrategy,youhaveto carefully watch youraccount at all times so youdon't make more than fourtradesinthatfive-dayperiod.The main advantage to

beingapart-timedaytraderisthatyoucanoccasionallyusedaytradingstrategieswithout

having to meet the strictfinancial requirements, suchasthe$25,000minimum.The downside is that it's

not easy to stay within thefour-trade rule. If marketconditions are right, and yousee good day-trade setups,you may be tempted to addanother tradeor two,butyoucan't. If you don't have that$25,000 account, you mustnot become a pattern day

trader. Itmay be a challengetolimityourselftofewerthanfour day trades within fivebusiness days, but thealternativeisaseverepenalty(as mentioned before, youraccount could be frozen forninetydays).Onceyoumakethat fourth trade, it's too late:you'reapatterndaytrader.Thepatternday trader rule

involves other nuances,which is why it's best to

discusstherequirementswiththe representatives at thebrokerage firm.For example,atthistime,IRAsand401(k)saren't considered part of the$25,000minimum.However,many of the rules will likelychange over time, so staycurrent by talking to therepresentatives.Keepinmindthat day trading is notappropriate for yourretirement savings.Keep thatmoney separate. Use money

youcanaffordtolose.

Money: Feeling thePainIf it seems you need a lot ofmoney to make money,consider what professionaltrader and market wizardWilliam Eckhardt said: “Iknow of a fewmultimillionaireswho startedtradingwithinheritedwealth.In each case, they lost it all

because they didn't feel thepain when they were losing.In those formative first fewyearsoftrading,theyfelttheycould afford to lose. You'remuchbetteroffgoingintothemarket on a shoestring,feelingthatyoucan'taffordtolose. I'd rather bet onsomebody starting offwith afew thousand dollars than onsomebodywho came inwithmillions.”

UnderstandingMargin

Ifyouhaveamarginaccountwith a brokerage, you mayborrow funds from thebrokerage firm to finance allor part of a trade.When youdo this, there is a marginrequirement, meaning thatyou must have a certainamount of equity (such ascashor securities)ondeposit

withthebrokeragefirmtobeusedascollateral.Howmuchequityyou'llneeddependsona variety of factors. If you'rean investor or trader (not aday trader), the brokeragefirmwillusuallylendyouupto 50 percent (depending onthe stock you're buying)account value. This is calledmargin buying power. Whenyouusemargin,youareusingleverage, which means youare trading with borrowed

money. When you useleverage (i.e., margin),although you can increasepotentialreturns,youcanalsoincreasethepotentiallosses.For example, if you had

$10,000 and wanted to buystock, the brokerage firmwould likely lend you up toan additional $10,000 to buymoreshares.That'sa totalof$20,000(2:1buyingpower).Although the brokerage

firm has some flexibility indetermining how muchbuying power you have, theFederal Reserve Board setsthe maximum amount youcan borrow. The exactamount of buying powerdepends on a number offactors, including the type ofsecurityyouwant tobuyandyour marginable assets (forexample,someassets,suchasannuities, are notmarginableandcan'tbeusedasequityor

collateral). Call yourbrokeragefirmtofindouttheexact rules. In addition, askthe interest rate they chargeformargin.More than likely,the interest ratewill be quitefavorable.Patterndaytradersplayby

a different, more aggressiveset of rules. Once you aredesignated as a day trader,youwillprobablybeallowed4:1 intraday leverage. For

example,ifyouhave$30,000in the account, you will begiven enough buying powerto buy a total of $120,000worth of securities (4 ×$30,000). This means totalfor the day, and not the totalyoucanownatanyonetime.In other words, you can buy$120,000 worth of securitieson Monday, but you're notallowed to hold themovernight. That's becauseovernight, the margin

requirementisstill2:1,whichmeans that if you use all ofyour intraday buying power(4:1 leverage), youmust sellsecurities before the end ofthe day to meet the marginrequirements(2:1).If you don't follow these

rules, you'll get the dreadedmargin call. In fact, the lastcallyoueverwant to receiveisamargincall,whichmeansyoumust add enoughmoney

to your account to meet themargin requirement withintwenty-four hours (somebrokerage firms give lesstime, or sometimes more, sobe sure to ask), or furtheraction may be taken. Forexample, they couldimmediately sell yoursecurities to ensure that themargincallismet.Bottom line: don't put

yourself into a position to

receive amargin call. If youdo,it'saclearwarningsignalthat you are losing money.Thiswouldbeagoodtimetocallyourbrokerageandseeifyou can work together toprotect your account fromfurtherdamage.

Why Margin Is SoDifficulttoManage

Most people, especially

beginners, have a difficulttime managing margin. In away, it's like receiving ahome equity loan or a creditcard with $30,000 down andan additional $90,000 as aloan — very tempting tospend it on a big screentelevision instead of the newroof you need. For manypeople, using margin can beanemotionalexperiencesinceit'ssoeasytowinbigorlosebig.

If you're a rookie, I'drecommend not going onmargin until you've gainedmore knowledge andexperience. If a trade worksin your favor, margin candefinitely accelerate thegains.Ontheotherhand,ifatrade doesn't work in yourfavor, the losses canaccelerate substantially, andit's possible to damage youraccount.

In the old days, manyuninformed traders usedmargin to bet huge sums ofmoney on ultimatelyworthless companies likePets.com and Kozmo.com.When these companies wentbankrupt,sodidsometraders.It's painful enough to losemoney in the stock market,but when you lose borrowedmoney, it's even worse.Eventually you have to paybackthatborrowedmoney.

If you handle marginproperly, and don't use it asan ATM, it can provide youwith extra leverage. As arookie trader, though, youshouldonlybuywhatyoucanaffordandlearntotradewithyourownmoney.

Taxes for DayTraders

Few people want to read

much about tax regulations,especially when they changeevery year. Nevertheless, ifyou become a full-timetrader, you'll need a taxadvisor who knows how tohandle tax issues.Anadvisorcan also tell youwhether it'sadvantageous for you to usemark-to-market accounting,which is primarily forprofessionals. This meansyoursecuritiesarerevaluedattheendofeachtradingday.

If you don't trade actively ortradeonlya smallnumberofshares per trade, hiring a taxadvisor could be costlycompared to your incomefrom trading. Read IRSPublication 550(www.irs.gov) for guidancetogetyoustarted.

The good news: theInternal Revenue Service(IRS) has improved the waytheyhandle traders'accounts,

primarily because tradingbecame so popular and theyhad to update their methods.Also, brokerage firms haveimproved their methods ofcalculating gains and losses.Usually, you'll receive anend-of-year summary thatyou can simply hand to youraccountant. Be sure to hangon to your receipts, as youcandeductcertainexpenses.

Setting Up a HomeOffice

Nowthatyou'velearnedhowto open and fund a tradingaccount, the next step issetting up your home office.Although it might betempting, you don't need torun out to buy a newcomputerandsixmonitors.

Start slowly and don't

invest huge amounts ofmoney when setting up yourdaytradingbusiness.

Most traders set up theoffice in a secluded area ofthe house so they canconcentrate on makingserious financial decisions.Install a television setwith amute button (so you canwatch but not get distractedby financial networks).Keepitsimpleatfirst,andyoucan

always add to it as needed,andastechnologyimproves.

BUYING ADESKTOPCOMPUTER

Since your computer canmake or break you as a daytrader, it's your mostimportant purchase. You'll

needenoughspeedandpowerto run multiple programs,screens,andnewsfeeds.Daytraders must multitask, soyou'll need high-speedInternet connections and lotsof memory (especiallyRAM).No matter what kind of

computeryouuse,besureit'sreliable and fast. Mostbrokerage firms work bestwith Windows-based

operating systems, but arescrambling tomeet theneedsof Apple users. Ask yourbrokerage firm for details ontheprogressthey'vemade.Because desktop

computers are getting fasterand cheaper, standardequipment usually includeslarge hard drives, graphiccards, multiple ports, andwireless routers. You'll alsoneed to invest in a reliable

backup system in case yourharddrivefails.You'll need a high-

resolution monitor, whichshould be at least 19 inches(21 inches is better). This iswhere you'll put your charts,orderentryscreens,streamingquotes, and technicalindicators. The price ofmonitors has also dropped,but you should still shoparoundforagooddeal.

Next,you'llneedareliableconnection to the Internet.Years ago, installing a high-speed T1 line in your homecost thousands of dollars;nowyoucanconnect toyourbrokeragefirmwithaDSLorcablemodemthat'salmostasfast as, and a whole lotcheaper than, a T1 line.Fortunately for consumers,prices are far lower than inprior years and speeds keepimproving as competition

between Internet serviceprovidersincreases.Your goal is to trade

effectivelyfromhomeduringall market conditions —especially in volatile, fastmarkets, the kind ofenvironmentmostdaytraderscrave. It's a personal choicewhethertouseDSL,cable,oran even newer technology;you just need a dependable,fast connection. Nothing is

more frustrating than havingto struggle with a slowconnection during a fastmarket. Even worse, youdon't want to be knockedoffline in the middle of atrade. You may have toexperiment with differentsetups before you make thefinaldecision.Some traders pay a little

more to subscribe to tradingnewsletters, news feeds, or

customized or prebuiltscanning software that helpsthem choosewhich stocks tobuy or sell. At first, yourbrokerage firm should meetmost of your immediatetradingneeds.Asyoubecomemore experienced, you canalso pay for additionalfeatures (news feeds andscanning software). Again,start slowly and buy onlywhatyoureallyneed.

TRADINGFROMALAPTOPCOMPUTER

Most professional tradersuse desktop computers, andperhaps use a laptop in caseof emergency or when onvacation. Nevertheless, thenewest generation of laptopcomputers is quiteremarkable.Theadvantageof

laptops, obviously, is thefreedomtotradeanywhereintheworld.In the past, most laptops

had extremely small screens,but now some of the largestlaptops have plenty of roomfor your news feeds, orderentries, and charts. With afew clicks of the mouse ortouchpad,youcanseealotofdata. The pros who do tradefromalaptoptendtohookup

a second 19- or 21-inchmonitor to keep tabs on allthe information. It's possibleto trade from a laptop, butyou may have to buy asecond, or perhaps a third,high-resolutionmonitor.Brokerage firms allow

customers to tradeon thego,using a variety of mobiledevices,includingcellphonesand tablets.Whetheryoucanmake money consistently

using these devices isquestionable (you may needto see more charts andinformation than they canshow), but they're ideal inemergencies. Without adoubt,therearedevicesyettobe invented that will maketradingonthegoeveneasier.

PROTECTINGYOURCOMPUTER

Usea top-of-the-line surgeprotector to protect yourequipment. One errantlightning strike could leaveyouwithafriedcomputer.Install the latest virus

protection software and —equally as important —Internetsecuritysoftware.It'samazing how many peoplemake financial transactionsworththousandsofdollarsonunsecured computers with

outdatedvirussoftware.Hackers constantly attack

vulnerable computers,looking for potentialweaknesses. Most brokeragefirms spend millions ofdollars toprotect theironlinecomputer accounts fromattack, but for a lot lessmoney, you can also protectyour home computer. Thisincludes keeping up-to-datewith computer patches and

system updates, especially ifyou have a Windows-basedsystem, as they are moreprone to viruses. Be sure tohavebothaphysicalfirewall,most likely built into yourrouter, and a softwarefirewall, included with theWindowssoftware.If you set up a wireless

network at your house,immediately create a strongpassword so your neighbors

or passersby can't piggybackon your Internet connection.Anypasswordshouldincludea combination of letters andnumerals.If you use your laptop

outside your home, be waryofusingpublichotspotswhentrading stocks. Sophisticatedhackers can potentially viewpiecesofinformationthatyousendfromyourcomputertoawireless access point. If

you're routinely trading in aremote location,youcanbuyabroadbandcardfromoneofthemajor cell phone carriersthat will give you the mostsecureconnection.Ifnot,stayonline for the shortest timepossible.Most important, never use

public computers or kioskswhen making financialtransactions; doing so couldput all your account

information, includingpasswords, at risk. Manycomputers, public orotherwise, are installed withkeystroke-logging softwarethat recordsevery transactionyou make, includingcapturing passwords. If youdon'tfollowthesebasicrules,bythetimeyoureturntoyourhotel or home, your accountcouldbeatrisk.

What Kind ofTrading Strategy DoYouUse?

Now that you have a betteridea of how to choose abrokerage firm and set upyour home office, let's learnmoreabouttradingstrategies.No one-size-fits-all strategyworks for traders. Strategiesdepend on your personalityand trading style. A strategy

thatworkswellforonetradermay not make any sense toanother.In addition to day trading,

you may want to try othertrading strategies that haveworked well in the past. Ofcourse, past performancedoesn't guarantee futureresults. Nevertheless, therecould be times when you'llwant to abandon day tradingforamorelucrativeapproach.

Here are three of the mostrecognizedtradingstrategies:

SWINGTRADING

Unlike day traders, whorarelyhold,orkeep,positionsovernight, swing tradersattempttocapturestockgainsover a short period of time,typically two to five days.Althoughnotlockedintoany

specific time frame, swingtraders usually buy early intheweekbutarebackincashbytheweekend.Many professional traders

use more than one tradingstyle. Therefore, duringcertain market conditions,they may switch from daytrading to swing trading.Swing trading, especiallyduring short-term trendingmarkets, could be the right

strategy.

POSITIONTRADING

Position traders, unlikeday traders or swing traders,hold positions for extendedtime periods, usually severalweeks or months, butpossibly longer. Unlike buy-

and-hold investors, however,position traders won't holdindefinitely and will sell aposition when profits arerealized(ortolimitlosses).Inmany ways, position tradingissimilartoswingtradingbutwithalongerholdperiod.

SCALPING

Before decimalization,

scalping was all the rage.That's when traders tried tograb a quick $0.25 per shareor more within seconds orminutes,tradingthousandsofshares, and netting a quick$200to$500pertrade.Itwasa lot more difficult than itseemed. At that time, a fewpopular books written aboutscalping were misleading —they made scalping soundlike an easy strategy thatanyonecoulddo,wheninfact

it is very, very difficult formost people. The practiceprobably cost people a lot ofmoney.As a day trader, you will

probably scalp on occasion— that is, enter and exit astock within seconds orminutes for a quick profit.The idea is to make manytrades(fromfivetohundreds)but aim for smaller profits.Keep in mind, however, that

this is a stressful tradingmethodthatcanendinlossesbecauseofcommissions.

History of theMarketBefore the Internet, gettingcurrent quotes was a hugeordeal. One hundred yearsago,stockquoteswereputonblackboards, thencommunicated to investorsand traders by telephone or

hired runners. Many peopleshowed up at their broker'soffice and sat all day staringat blackboards, and,eventually,tickertape.

The New York StockExchange(NYSE),locatedat11 Wall Street in LowerManhattan, opened in 1792under a buttonwood tree.Twenty-four New Yorkmerchants, or stockbrokers,signed the Buttonwood

Agreement, which specifiedthey would only trade witheach other and which set afixed transaction fee, latercalledacommission.By1817,thecostofaseat

on the exchange was awhopping $25, but ten yearslater, the cost had risen to$100. (In recentyears, a seatontheexchangecostbetween$3and$4million.)In 1906, the Dow Jones

Industrial Average (DJIA)surpassed 100 for the firsttimeinitshistory.Boomsandbusts along the way oftencreated millionaires orpaupers. For the most part,thepublicwasuninterestedinthestockmarket,consideringit a game for the wealthy toplay.That attitude changed in

the 1920s, when the public,enthused about the booming

stock market, put theirpaychecks and life savingsinto the market. It seemedlikeaneasywayforthe“littleguy” to get rich, and manydid.TheDJIApeakedat381in1929,ayearthatwillneverbe forgotten in stock markethistory.On October 29, 1929,

Black Tuesday, the DJIAplunged,eventually falling to198. Rumors swirled about

suicides of once-wealthyindividuals who losteverything. Huge crowds ofpeople gathered around theNYSE, blaming short-sellersforthecrash.A group of bankers,

including J.P. Morgan, usedtheir own money to startbuying, which temporarilystoppedthepanic.Infact,themarket started going up aspeoplescoopedupstocksthat

seemedlikebargains.Although the next few

years saw rallies andcorrections, by 1931 themarket reached an all-timelow of 41, which was 89percentbelowitspeak.Sadly,it tookmorethantwenty-fiveyears for the stockmarket torecover its precrash level of381.Bythistimethepublic'stasteforthestockmarkethadweakened. Comedian Will

Rogers (who may have beenquoting Mark Twain)summed up the mood of thecountry when he said, “I'mnot so concerned about thereturn on my money, as thereturnofmymoney.”

InsidetheNYSE

Over the next few decades,the NYSE added moretrading floors, and installed

the latest technology. TheNYSE is still considered oneof the most prestigiousexchanges in the world, andthe shares of most of thelargest U.S. corporationstrade on it. As electronictrading became morecommon,theNYSEcloseditsmaintradingroom,aswellasother rooms that were nolongerneeded.TheNYSEspecialists,who

are responsible for ensuringthat all transactions arereported in a timely andaccurate manner, have beenthe heart and soul of theNYSE since its inception. Inrecent years, the specialists'influence and power hasdiminishedascomputersnowhandlethemajorityoforders.Stockortickersymbolson

theNYSEareusuallyashortabbreviationfor thecompany

listed, and are always threelettersorfewer.Forexample,the ticker symbol for Coca-Cola is KO; for GeneralElectric it's GE; for HomeDepot,it'sHD.

InsidetheNasdaqThe Nasdaq was created in1971 as the world's firstelectronic stock market. Itexists only electronically andhasnotradingfloor,andthus

no people yelling andscreamingorders.At the time itwas created,

people wondered if a fullyelectronic exchange was agoodidea,butinretrospect,itwas ahead of its time.Trading volume on theNasdaq has continued toincrease. In the past, daytraders tended to gravitatetoward the Nasdaq since itwas new and many of the

stocks on it were volatile.There, the peoplewho act asmiddlemen are calledmarketmakers.Theyare responsiblefor providing a two-sidedquote (one side for buyersand the other for sellers) forthe stocks they handle. Onestock may have as many asfifty market makers assignedtoit.A few decades ago the

Nasdaqwashometomostof

the up-and-comingtechnologystocks.Newhigh-tech companies likeMicrosoft and Apple werewelcomed therebecause theywere too small to be invitedtotheBigBoard(theNYSE).Nasdaqstocksymbolsmay

be four or five letters long.For example, the stocksymbolforIntelisINTC,andforApple,AAPL.

Chapter2:ReadingCharts

To be a day trader, you'llneed a set of powerful toolsto help you determine whento enter and exit the market.Themostcommontoolisthestockchart.When you view a stock

chart, you're looking at

history:you'llseestockpricesmoving higher or lower overtime.The chart can help yousearchforstatisticalcluesthatmay give you an edge overother traders. Using a stockchartmeansyouaren'trelyingstrictly on your emotions tomaketradingdecisions.Traderssaythatapictureis

worth a thousandwords, andyou'll see why when youanalyze charts. By studying

them,youcandetectwhetherbuyers or sellers are incontrol of the market, whichcanhelpyou find stocks thatare on themove, the kind ofstocks that can turn intoprofitabletrades.Stock charts rely on a

universal language calledtechnicalanalysis,which isamethod of evaluatingsecurities based on pricemovements and volume.

Nearly anyone canunderstandthislanguageaftersome study. Technicalanalysis helps you makestatistical assumptions abouta stock, which can increaseyour chances of a successfultrade.When you look at a stock

chart, you're primarilylooking at price and volume.An alternative method ofanalyzing stocks is

fundamental analysis, or thestudy of the underlying datathataffectsacorporation.Forexample, fundamentalanalysts look at earnings,assets and liabilities,competitive companies, andthe actions of companyinsiders. Some traders use acombination of fundamentaland technical analysis, usingfundamental analysis to findgoodcompaniesandtechnicalanalysistodeterminewhento

enterorexit.As a day trader, you'll

almost always use technicalanalysis.Whenyoupullupastock chart on a screen, youhaveachoiceof time framesranging fromminutes, hours,days, ormonths.Day traderswill use very short timeframes: 5-minute, 15-minute,30-minute, and 60-minutecharts. Sometimes theydisplay a daily chart for

longer-term trades, andperhaps a weekly chart toidentifyalonger-termtrend.

ChartBasics

Charts are displayed on yourcomputer screen when yousign into your brokerageaccount. They are constantlyupdated and have manyfeatures, all of which can becustomized.Let's take a look

at some of the terms you'llrepeatedly read and hearabout when using technicalanalysis.

UNDERSTANDINGSUPPORT ANDRESISTANCE

Support and resistance arekey concepts in technical

analysis,andit'sessentialthatyou understand how theywork. Basically, as the stockpricemovesupordownonachart, itmight suddenly slowdown or speed up when itreaches support or resistancelevels.Understandingsupportand resistance helps let youknowwhen toenterorexitaposition(astockoranyothersecurity).Theconceptofsupportand

resistance is actually quitesimple:whenastocktouchessupport,whichissimilar toafloor,itmightbeagoodtimeto buy (because the price islikelytoincrease).Andwhena stockhits resistance,whichissimilartoaceiling,itmightbe a good time to sell(becausethepriceislikelytodecrease). Think of supportand resistance as a tradingzone rather than exact pricelevels.

To be even more specific,supportisthepriceatwhichastock's price has stoppedfalling and has either movedsideways (e.g., the price ismoving in a horizontalpattern)orreverseddirection.At this level, sellingpressurehas dropped off and thedemand for the stock wasstrong enough to prevent theprice from dropping further.Demand will exceed supplyand prevent the price from

falling.Resistance, on the other

hand, is the price at whichselling pressure is strongenough to prevent a stockfrom rising further. Supplyexceeds demand, and buyingpressure has stopped. Moresellers will enter the marketand prevent the stock fromgoinghigher.Technicians analyze charts

todeterminewhathappensto

a stock when it reaches keysupport or resistance levels.Often, the price of a stockwillreverseandbounceoffofa support or resistance level.Manyday traders takeactionwhen a stock breaks throughsupportorresistance.Whenever you look at a

chart, you always want toidentifytheselevels.Thekeypoint is determining how thestock, or market, will react

whenitapproachessupportorresistance. Will it breakthrough,orwillitreverse?Toanswer this importantquestion, you will probablyspend hours studying charts.It is not a skill that can belearnedquickly.Important note: when

resistanceisbroken,thatleveloften turns into support.Conversely, when support isbroken,itfrequentlybecomes

thenewresistancelevel.Figure 2.1 is an example

of support and resistance(blackarrows):

FIG2.1:SupportandResistanceSource:Stockcharts.com

VOLUMERULES

In conjunction with price,volume has always been oneof the most importantindicators to watch. Volumeis simply the number ofshares traded over a givenperiod.Volume is usually

displayed at the bottom of achart.Technicianswho study

volumeobservean incredibleamount of information. Forexample,they'lllooktoseeifastock,ormarket,hashigherorlowerdailyvolumethaninprevious days. How is thisuseful? When you combinevolume with price, you willgetextremelyimportantcluesas to whether the stock (ormarket) will continue risingor falling, or if it mightreverse direction. Likeanything related to the stock

market,youhavetotaketimetostudytheseclues.Basically, volume is

tabulated by a computer thatcollects all of the tick (pricemovement) data and drawsthe volume bars. As volumegoes higher, and momentumincreases, the volume barsrise. Conversely, as volumedecreases, and momentumdecreases, the volume barsdrop.

To confirm a bullishbreakout, technicianswant tosee if a stock moves higheron higher volume and if themove is accompanied bybroad-based buying activity.Thisisapositivesignforthebulls. On the other hand, astock falling on highervolume could signal the startof a short-term correction. Itis a clue that newbuyers areafraidtostepintobuy.

Whatmakesa stockgoupor down? Buyers push thestockup and sellerspush thestock down. A problemwithstudyingvolume,however,isthat you don't know who isresponsible for the increasedvolume: buyers or sellers.Thus, it's important to usevolume to confirm what youseeonthechartandnotmakeany trade based only onvolumedata.

Additionally, the increasedpopularity of high-frequencytrades has skewed some ofthe volume statistics. Forexample, a stockmay appearto be attracting buyinginterest, but it's only fromhigh-speed computersscalping for pennies. It'ssimilar to a car stuck inneutralrevvingitsengine:it'smaking a lot of noise butgoing nowhere. Again, it'sessentialyoustudyvolumein

conjunctionwithprice.Note: you'll also hear

people talk about liquidity,which is how easy it is fortraders toget intooroutofastockatasingleprice.Liquidstocks are filled quickly andyou can buy or sell themimmediately. Illiquid stocksare much more difficult tosellatacompetitiveprice.Asyou can guess, day tradersneedliquidstocksinorder to

getinandoutrapidly.

IDENTIFYINGTHETREND

The entire purpose oflooking at a chart is to helpdeterminewhichdirectionthestock is going: up, down, orsideways.Chartshelp tradersidentify the trend. By

identifying the trend, tradersdecide whether to follow thetrend, wait for a pullback(when the stock price fallsbackfromitspeak),orsimplystay on the sidelines. Oneglance at a chart can helpdeterminewhichdirectionthestockiscurrentlyheaded.Thechallenge, of course, isfiguring out when the trendmightend.Let's take a look at the

threetypesoftrends:uptrend,downtrend,andsideways.Making Money on an

UptrendThe popular “follow the

trend” strategy has beenhighly successful for tradersover the years. In fact, youmay have heard the saying,“The trend is your friend.”Nothing is sweeter thanbuying at the beginning of atrend and riding it until it

ends.When a stock climbs

higher and higher, it's on anuptrend. For many traders,following an uptrend is theeasiest and most profitablestrategy. Sometimes, stocksmove up so fast that they“breakout” above the currentresistance level and movedramatically higher. It's veryprofitablefortraderstoownastockthatbreaksout.

To be precise, an uptrendoccurswhenthestockpriceismaking a series of higherhighsandhigherlows,whichyoucanseeonachart.For example, when you

lookat thepricepatternonachart, if today's intradayhigh(the stock price) is higherthan yesterday's intradayhigh, that's a higher high. Ahigher low is when today'sintraday low is higher than

yesterday's intraday low.Multiple higher highs andhigher lows makes anuptrend.Unfortunately, not all

markets or stocks cooperate.Although the idealenvironment for almost alltraders and investors is anuptrend, many markets arechoppy and volatile. Daytraders,however, can findanuptrend on any chart, from

minute to daily charts. As aday trader, you'll primarilyuse intraday charts such asthe 60-minute, 15-minute,and5-minutetoenterandexittrades.Figure 2.2 is an example

ofanuptrend:

FIG2.2:UptrendSource:Stockcharts.com

SurvivingaDowntrendTheoppositeofanuptrend

isadowntrend,whenastockmoves lower and lower.Sometimes stocks will moveso low they break downbelow the current supportlevel, andmove dramaticallylower. It's a money-losingsituation if you're long (youboughtthestockbelievingthepricewouldgoup)wheninadowntrend. To be moreprecise, a downtrend occurswhen the stock price ismaking a series of lower

highs and lower lows. Youcanseethoseonthechart.For example, when you

look at the price pattern, iftoday's intraday low (thestock price) is lower thanyesterday's intraday low,that's a lower low. A lowerhigh iswhen today's intradayhighislowerthanyesterday'sintradayhigh.Multiple lowerlowsandlowerhighsmakesadowntrend.

Long, agonizingly slowdowntrends, which Icharacterize as death by athousand cuts, can befrustrating for investors andtraders. Suddenly, in themiddle of a downtrend, themarket may have a quick,fear-fueled selling frenzy,catching everyone off guard.As a result, stock priceswillplunge.Figure 2.3 is an example

ofadowntrend:

FIG2.3:DowntrendSource:Stockcharts.com

Managing a SidewaysPattern

No stock goes up forever,so eventually the stock getsexhausted as sellers overtakebuyers. At that point, thestock moves sideways orevenfallsinprice.You may see a pattern,

which,according to technicalanalysts, is simply behaviordisplayed on a screen. Withexperience, you'll be able toinstantly recognize patternsand perhaps get clues as to

what the market, or anindividualstock,mightdo.The sideways pattern can

beveryfrustratingfortradersas the stock goes up anddown without goinganywhereatall.Thesidewaystrendcan last daysorweeks,but if you study trendsclosely, you'll learn there arethree types of sideways orhorizontalpatterns:tradingina range, congestion, and

consolidation.Let's begin by taking a

closer lookat the three typesofsidewayspatterns.TradinginaRangeA stock in a trading range

can be quite frustrating forsomepeople.Atradingrangeis the difference between thehighest and lowestpriceof astock. Put another way, atradingrangemeansastockismovingupanddownbetween

support and resistance in ahorizontal range. In fact,investorsorlong-termtraderscan't seemtogenerateprofitswhena stock reaches the topor bottom of a range andreverses direction. In theshort term, the stock ismovingbutdoesn'tbreakoutoftherange.Itkeepsmovingbetween support andresistance.Asadaytrader,ifyoucan

identify these reversals, youcan make a decent living—but no one said it was easy!Buyingwhenastockdipsandselling when it rallies is achallengingstrategy,butit'saskill you must develop ifyou're serious about being atrader. This is the heart andsoul of day trading. It alsotakes a lot of practice to buyon thedipandsellona rallywhen a stock is fluctuatingbetween support and

resistance on an intradaychart. Also, on an intradaychart, the trading range isusuallyalottighterthanonadailyorweeklychart.Figure 2.4 is an example

ofatradingrange:

FIG2.4:TradingRangeSource:Stockcharts.com

Going Nowhere:Congestion

When a stock trades in arange, you can make moneywhen you time it right. Butwhen a stock is in acongestion pattern, it's goingnowhere. Author and traderToniTurnerjokinglyreferstoitashavingastuffed-upnose.In congestion, the stock

fluctuates in a tight,unpredictable pattern thatmakes trading extremelydifficult. In addition, volume

is low while in the pattern.Turner gives the followingadvice: “If you notice stockcongestion, stay away. Youdon't kiss your friends whohave colds, and you don'ttrade stocks that trade incongestion patterns, unlessyou want your tradingaccounttogetsick.”Most traders avoid stocks

that are in a congestionpattern, although in this

example the stock suddenlybrokeoutofthetradingrangeand moved higher. SeeFigure2.5.

FIG2.5:CongestionSource:Stockcharts.com

TheBattle:ConsolidationThe third sideways pattern

is consolidation, which oftenappears on charts as a verycompressed, fluctuating line(if this is hard to visualize,look at Figure 2.6 for anexample). Consolidationreflects the battle betweenbuyers and sellers and,whenthisstockpatternfinallyends,it could move violently ineither direction, up or down.

That is why somany traderslike to trade off of thispattern. If you candeterminewhichdirectionthestockwillgo, then this pattern will beprofitable. The challenge,however, ismaking a correctprediction. (Hopefully,turning a pattern into aprofitabletradewillbeoneofyourgoals.)Note: although it is

difficult to anticipate if a

stock will break above orbelowaconsolidationpattern,there are often clues. Forexample, look for risingvolume, which suggests thestock might make a suddenmove. Also, in an uptrend,the stock has a better chanceof moving higher out of thispattern.Ontheotherhand,ina downtrend, the stock couldsuddenlyfall.Thelongerastocktradesin

a consolidation pattern, themore explosive the potentialmove when it breaks aboveresistance levels, or belowsupportlevels.Figure 2.6 is an example

ofconsolidation:

FIG2.6:ConsolidationSource:Stockcharts.com

UNDERSTANDINGTIMEPERIODS

As mentioned earlier, daytraders use short-term timeframes such as a 5-minute,15-minute, 30-minute, 60-minute charts, and a dailychart for a longer-term view.You can also choose weeklyor monthly charts to see aneven bigger picture. Manydaytraderswillputthemajormarket indexes, such as theDow, S&P500, andNasdaq,onadailyorweeklychart toseethelong-termtrend.It'sa

reality check that helps themidentify the primary trend.Manytradersdon'twanttogolong if the daily trend isdown.The time frame you use

when day trading is apersonal choice. Experimentuntil you find your ownfavorite time frame. Forexample, Toni Turner likesusing an 8-minute chart,whileothertradersoftenusea

5-minute or 10-minute chart.“I liketouse8-minutechartsfordaytrading,”Turnersays,“in place of the 5-minutechartsthatmosttradersuse.Ilike to ‘get off the fives’because most other tradersare on 5-, 10-, or 15-minutecharts. I also use 13-minutecharts. I use daily charts totarget the primary trend,support and resistance, andentryprice.ThenIdrilldownto my intraday charts to

executeentries.”

No matter what time frameyou choose, 10-minute, 60-minute,ordaily,always lookat the stock over a span ofdays. If you're looking at a10-minute chart, look at itover aperiodof two to threedays. Youwant to see if thestock is climbing above theprevious day's high, orwhether it's weak comparedwith yesterday. A month is

probably too long if you'reday trading, a few days isrecommended.

ChartTypes

Now that you have a basicunderstanding of chartvocabulary,we'lltakeacloserlookatthethreemostpopularcharttypes.Whenyoupullupa chart, you choose whichtype you want to view: line,

bar,orcandlestick.Thereareadvantagesanddisadvantagesto each, which we willdiscuss.

EASY ON THEEYES: LINECHARTS

In the past,manyWesterntraders relied on two-

dimensionallinechartstogetavisualsnapshotofthestockmarket. A line chart simplyplots the closing prices of astock over a specific period.Then a line connects eachpricepoint.They're the easiest to use

and are visually appealing,especially when seen ontelevision, PowerPointpresentations, or in books.Although long-term investors

or traderssometimesuse linecharts for a “big picture”view of the market, linecharts don't provide muchdetailedinformation.

Bottom line: day tradersusually need moreinformation than a line chartcanprovide.

Figure 2.3 is an exampleofalinechart.

MORE DETAILS:BARCHARTS

A bar chart providesmoredetailsaboutthemarketopen,close, high, and low. A barchart includes a horizontalscale at the bottom of thechart with a range of pricesfor almost any time period.The“bar” is the stock'spricerangeforthetimeperiod.

In a daily chart, forexample, the top of the barrepresents the highest pricesold for the day, while thebottom of the bar representsthelowestpricefortheday.Each bar also has a short

horizontallinethatextendstothe left and to the right. Theleft line represents theopening price for the tradingday, and the right linemarkstheclosingprice.Bystudying

a bar chart in combinationwith volume, astute traderscanget clues as towho is incontrolof themarket:buyersorsellers.

Bottom line: bar charts aremore useful than line charts,butdaytradersprobablywantto use the next chart type:candlesticks. This can reallyhelpyoureadthemindofthemarket.

SEEING WHO'S INCONTROL:CANDLESTICKCHARTS

Day traders need evenmore information than isprovidedbylineorbarcharts,which is why candlestickcharts are so popular. Theyshow the range between the

openingandclosingpriceofastock during any given timeperiod.With one glance at a

candlestick, experiencedtraders can immediately seewhetherthebullsorbearsarein control, and whether areversal is possible. Whenused in conjunction withtraditional technicalindicators (formulasdisplayed on a chart to

determine a stock's, or othersecurity's, future pricemovements),candlestickscanbe a powerful source ofinformation. With a littleexperience, candlesticks arealso relatively easy tointerpret. Toni Turner put itthisway: “Candlestick chartsare the luxury version of barcharts. It's like switchingfrom a black-and-whitetelevisionsettolivingcolor.”

Bottom line: it'srecommended that you usecandlestick charts becausetheyprovideavastamountofinformationandvisualclues.

Figure 2.7 is a dailycandlestick chart of the S&P500.

FIG2.7:Candlestick1MonthSource:Stockcharts.com

The History ofCandlesticksCandlesticks are actually

the oldest form of technical

analysis,originallycreatedbyMunehisaHomma,awealthyJapanese rice trader, in theeighteenth century. SteveNison, president ofCandlecharts.com and authorof the best-selling book,Japanese CandlestickCharting Techniques(Prentice-Hall,2001),wasthefirst to introducecandlestickstotheWest.“The Japanese say that

every candlestick line tells astory,” Nison says. “Thecandlestick has the sameinformation as the bar chartbut it's constructeddifferently. By usingcandlesticks,youcanvisuallysee who's in control of themarket at the time thecandlestickisformed.”RealBodyThe candlestick has two

main components, the real

body and shadows. The realbody is the rectangularportionofthecandlestickanddisplays the range betweentheopeningpriceofthestockand its closing price.With aquickglanceoftherealbody,you can gain clues as towhetherthebullsorbearsareincontrolofthemarket.Studying the color of the

real body gives importantinformation. If the real body

is white (or clear), it simplymeans the close was higherthan theopen, abullish sign.The taller and longer thewhite real body, the morebullish it is. During a rally,you want to see a series oflong white candles, andpreferablyonhighervolume.On theotherhand,ablack

(orfilledin)realbodymeansthe close was lower than theopen. The taller and longer

theblackrealbody,themorebearish it is.Aseriesof longblackcandlescanindicatethebearsarenowincontrol.“Weget nervous when the realbodygetssmallerandsmallerbecause it means that supplyand demand is becomingmoreequal,”Nisonexplains.Put another way, long

white candlesticks reflectstrong buying pressure whilelong black candlesticks

reflectstrongsellingpressure.Shortcandlesticksreflectthatprices are consolidating, i.e.not moving too far in onedirectionoranother.ShadowThe shadows of a

candlestick are the thin linesthat jut out above or belowthe real body. Shadowsreflect the highs or lows ofthe day. The shadow abovethe real body is the upper

shadow, while the shadowbelow is the lower shadow.For example, a long uppershadow indicates that theday'shighwaswellabovetheopen and the close.Conversely, a long lowershadow indicates that theday'slowwaswellbelowtheopen and the close. It givestraders a clue as to whetherbuyers or sellers are incontrol. Therefore, acandlestickwithalongupper

shadow and short lowershadow indicates that buyersare in control; prices wenthigher. Conversely,candlesticks with long lowershadows and short uppershadows indicate that sellersare in control and thereforepriceswentlower.OpenandCloseAs you gain more

experience, it will be clearthat the most important part

of each day is the open andclose.Tradersareoftenquiteemotionalwhen placing theirorders at the open. The lasthourisalsovolatile,asmanytradersclosetheirpositions.To review, the top of the

candlestick body representsthe closing price, and thebottom is the opening price.If the candle body is hollowor white, the closing pricewas higher than the opening

price. Conversely, if thecandle body is black, theclosing price was lower thanthe opening price. With oneglance you can discoverdetailedinformationaboutthesecurity.

DrawingTrendlinesDid you ever play the game,“Connect the Dots?” This isexactly what it's like whenyou draw trendlines. (Instead

ofdots,however,youconnectaseriesofhighsandlowsona chart to confirm a trend.)Drawing trendlineshelpsyouto determine support andresistance. This can helpdetermine when to enter astock,orwhentoexit.You can use your

brokerage firm's software todraw trendlines or, if youwant to do it the old-fashioned way, take out a

ruler and connect the highsandlows.Ifyoudrawtwotrendlines,

oneconnecting thehighsandoneconnecting the lows,youwill createwhat analysts calla channel (or envelope).Creating a channel can helpyoudeterminepricetargets(aprojected price), which isbased on the concepts ofsupportandresistance.By drawing trendlines,

you'llbeabletoseeonachartwhen a stock or index ismaking higher highs andhigher lows (uptrend).Conversely, you can also seeif a stock is making lowerlows and lower highs(downtrend). In bothexamples, an increase involume boosts uptrends anddowntrends.You can look atthe volume bars to see ifvolume is supporting themovehigherorlower.

Figure 2.2 shows atrendline in an uptrend.Notice how the trendline,whichactsas support (whichis like a floor), connects tothe three low points (#1, #2,and#3).

Chapter3:InterpretingPatterns

Youcanlookatchartpatternsto find stocks to buy or sell,thoughasarookiedaytrader,patterns may be one of thelasttoolsyou'llneedtostudy.It does take practice tointerpret them correctly.Some rookie traders make a

few trades based on patternsonly to watch them fail, andgiveup.That'swhyyoudon'twant to make a trade basedsolelyononepattern.Instead,use technical indicators toconfirm what you think yousee.Some traders immediately

see thepatterns,while otherslook but don't noticeanything. In fact, if you'regood at pattern recognition,

you'll want to explore thedozens of other patterns thatyou'll see on charts. I'veincluded a list of additionalsources in the Resourcesappendixifyouwanttolearnmore.If patterns aren't your

strongestarea,memorizeonlythemostimportantones(suchas those included in thischapter). Fortunately, themore you study charts, the

more you'll be able torecognize the patterns. Ifyou're keeping a tradingjournaltorecordyourtradingexperiences (a practice Ihighly recommend), be sureto keep track of the patternsthat work for you, and theonesthatdon't.Let'sbeginbytakingalook

at the key patterns that aremost useful to day traders.Many of these chart patterns

will be used on very shorttime frames such as on a 5-minute, 30-minute, or 60-minutechart.

BasicChartPatterns

These chart patterns are themost popular ones used byday traders. As mentionedearlier, making trades basedon patterns can be difficultand, as a rookie, it won't be

your highest priority. Thatbeingsaid,it'susefultolearnthe most basic patterns incase you do see them on achart.

DOUBLE BOTTOM(BULLISH)

Acommonbullishreversalpattern is the double bottom,

whichlookslikea“W.”Afteran extended downtrend, thestock has failed to breakthrough support after twoattempts, and rallies higher.After thepattern iscomplete,the trend changes frombearishtobullish.Thereisalwaysthechance,

however, that the stock willconsolidate, or stagnate,before breaking throughresistanceandmovinghigher.

Look foranearly increase involume on the left bottombefore the first breakout.Although this is an easilyrecognized pattern, thedoublebottomdoesn'talwaysgive an actionable signal, sobesuretoconfirmwithothertechnical indicators beforeyou make a trade based onthispattern.Figure 3.1 is what the

double bottom pattern looks

like:

FIG3.1:DoubleBottomSource:Stockcharts.com

DOUBLE TOP(BEARISH)

The double top, whichlookslikean“M,”isamajorbearish reversal pattern thatshows twopeaksat the sameprice level.After an uptrend,the stock has failed to breakthrough resistance after twoattempts. After the pattern iscomplete, the trend changes

frombullishtobearish.Thereisalwaysthechance

thestockwillmovesidewaysbefore it breaks throughsupport and moves muchlower.Lookforanincreaseinvolume near the left topbefore thestockheads lower.One of the most famousdouble tops was the Nasdaqin2000,andanyonewhopaidattention to the signalprobably saved his or her

portfolio.Just as with the double

bottom, the double top iseasily recognizable butdoesn't always give anactionable signal.As always,you'll want to confirm withtechnical indicators beforeyou make a trade based onthispattern.Figure 3.2 is what the

doubletoppatternlookslike:

FIG3.2:DoubleTopSource:Stockcharts.com

HEAD ANDSHOULDERS(BEARISH)

The head and shouldersreversal pattern shows up alot in charts, indicating thatbuyinghasstoppedatthetopof the trend, and has thepotential to reversedirection.If you look at the chart inFigure3.3,you'llseethatthe

stock really does look like aheadandshoulders.The stock moves higher,

then pulls back to form theleft shoulder. It then moveshigher to form the head, butfailstobreakthroughsupport,formingtheneckline.Finally,the stock rises again to formtherightshoulder,butfailstobreak resistance. At thispoint,thispatterntellsusthatthestockisdoomedasitfalls

belowtheneckline.Inadditiontowatchingthe

price, you'll also studyvolume. Generally, the headis formed on diminishedvolumeindicatingthatbuyingpressure is not as strong asthe firstmoveupwardon theleft shoulder.Volume shoulddecreaseontherightshoulderforthepatterntoplayout.Onthe last attempt in the rightshoulder, volume should be

even less than the head,indicatingthatbuyingvolumehasdisappeared.

An inverted head andshoulders,whichisbullish,istheexactoppositeoftheheadandshoulders.

Figure3.3iswhattheheadand shoulders pattern lookslike (#1 and #2 are the lowpoints):

FIG3.3:HeadandShouldersSource:Stockcharts.com

GAPS

Agapoccurswhenastockopens up at a different pricefrom where it closed thepreviousday.Forexample,ifMicrosoftclosedat$23.80onWednesdayandthenopensat$24.55 on Thursday, therewould be a $0.75 gap in thechart. Gaps, which show upas open spaces on a chart

where no trading hasoccurred, are the result of animbalance between buy andsellorders.Gaps are caused by

breaking news or earningsreports, or because there's notrading at a particular pricelevel. When this occurs, thestock suddenly jumps,reflecting strong buying orsellingpressureinthestock.Gaps show up most

frequently in a daily chart,but you may see them whentrading intraday.An intradaygap almost always occurswith stocks that are thinlytraded.Inanormalstockthatdoes a decent amount ofvolume, an intraday gapdoesn't occur often(exception: a middaybreaking news report). Mostgaps occur in the premarketorpostmarket.

Sometimes you'll heartraders talking about “fillingthegap,”whichsimplymeansthat thepricewillretrace, orgo back, to the last pricebefore the gap, resulting inthe gap being closed. In theexample above, Microsoftwould fill the gap byretracingto$23.80.There are actually four

typesofgaps:CommonGaps

These uneventful gapsappear relatively often,perhaps caused by an orderimbalance. More than likely,volumewillberelativelylowand the gap is filled, orclosed, rather quickly.Common gaps often occurwhen a stock is movingsideways. A common gapprobably won't give you atrading opportunity,especially if volume is low.Most technicians advise not

tradingthematall.Figure 3.4 is what a

commongaplookslike:

FIG3.4:CommonGapSource:Stockcharts.com

BreakawayGaps

Thebreakawaygapcanbethe most profitable andexciting if you own sharesbefore it breaks out.Suddenly, the stock gaps up,perhaps on higher thannormal volume.Thismay bethestartofasignificantmovehigher,orsothebullshope.It's possible that the stock

will continue tomove higheronstrongvolumeinthesamedirectionasthegap.Although

the gap may eventually befilled, it may not happenimmediately, which is whytraders like breakaway gaps.In fact, it could take a longtimetofill.Some professional traders

like to buy breakaway gapsright at the open (notrecommended for rookiesbecause stock pricessometimes fall quickly at theopen. If you are riding a

breakawaygap,youprobablydon'twanttotakeyourprofitsright away, especially if youare long the stock overnight.Why?Thiscouldbe the startof a new trend higher.Therefore, assuming youhave profits at day's end,you'll probably change frombeingadaytrader toaswingtrader.Again,noonesaidthattradingwaseasy!Figure 3.5 is what a

breakawaygaplookslike:

FIG3.5:BreakawayGapSource:Stockcharts.com

Runaway orContinuation Gap (Also

Referred to as MeasuringGap)Justaswiththebreakaway

gap, the runaway gapsuddenly gaps up on highervolume and increasedenthusiasm from buyers.Sometimes there will be asudden pullback before thestock breaks out andcontinues upward. It is as ifthe stock pauses or restsbefore resuming its prior

trend.Youmaywonderwhat the

difference is between abreakaway gap and arunaway gap. According totechnicians, the runaway gapoccurs in the middle of atrend, while the breakawaygapbeginsanewtrend.Don'tworry if you find it hard todistinguish between thevarious gaps; it definitelytakes experience to trade

them successfully. Withmuchmoreexperience,you'lleventually learn the nuancesof using gaps, and perhapswhen to detect profitableopportunities. Simple? No.Possible?Yes.Figure 3.6 is an example

ofarunawaygap:

FIG3.6:RunawayGapSource:Stockcharts.com

ExhaustionGaps

Eventually, all good gapscome to an end. After thestock has made its movehigher and higher, the stocksuddenly gaps up on higherthan normal volume. Then,lateinthetrend,afterthebigprice move, the stock getsexhausted, and demanddecreases. A correction maybe imminent. The stock willslowdownas the stockpricefalters. Because exhaustiongaps are often followed

quickly by a reversal,informed traders immediatelyenter sell orders as theyrealize the gap is ending, sotherecouldbeamaddashoutofthestock.In addition, volume may

pick up as previous buyersnotice the exhaustion andunload their shares.Hopefullyyouarealreadyoutofthestockbeforeitreverses,because now itmay feel like

it'stoolatetogetout.Figure 3.7 is an example

ofanexhaustiongap:

FIG3.7:ExhaustionGapSource:Stockcharts.com

Chart Patterns forExperiencedTraders

Now that you've beenintroduced to the most basicpatterns,it'stimetostepitupa notch. The followingpatternsaren'tthatdifficulttospot, but turning them into aprofitable trade takes skillandexperience.Learning how to identify

these patterns can be useful,

but don't worry if you can't“see” some of them. Simplydrawtrendlinestomakethemmore visible. Most chartprograms allow you to drawlines, which makes patternseasiertorecognize.

TRIANGLES

One common pattern is atriangle, which is part of a

continuation pattern. Torefresh your memory, acontinuation pattern meansthestockissimplycontinuingto move in the samedirection, perhaps pausing(consolidating) along theway, but the stock trendremains intact. Thecontinuation pattern can bebullish or bearish, but thetrendisnotdisrupted.Thereare threemain types

of triangles: ascending,descending, and symmetrical.With a little practice, you'llstart seeing triangleseverywhere!AscendingTrianglesIn an ascending triangle,

the stock price is makinghigher lows, but the highsremain the same, indicatingthat resistance is strong inthatarea.Nevertheless,everytime that price sells off from

the resistance level, awayfrom that area, bulls arewilling to step in earlier andearlier to buy, therebycreating the ascendingtrianglepattern.Abreakoutisinevitablewherethetwolinesconverge.Asthepointof thetriangle is formed, the lowerline of the triangle acts assupport while the upper lineof the triangle acts asresistance.

Figure 3.8 is an exampleof the ascending triangle, abullishpattern.

FIG3.8:AscendingTriangle(Bullish)Source:Stockcharts.com

DescendingTriangleThe descending triangle is

an inverted image of anascending triangle. Adescendingtriangleismakingadeclinetoanewlow.Everytime the stock tries to rally,bears are willing to step inearlier and earlier, trying tosell the stock, therebycreating the descendingtriangle pattern. Where the

two lines converge, it'spossible there will be adownsidebreakout.Again,asthe point of the triangle isformed, the lower line of thetriangleactsassupportwhilethe upper line of the triangleactsasresistance.Figure 3.9 is an example

of a descending triangle, abearishpattern.

FIG3.9:DescendingTriangle(Bearish)Source:Stockcharts.com

SymmetricalTrianglesSmall symmetrical

triangles are called flags andpennants.Manytradersclaimthat flags (and pennants) aresome of the most reliablesignals. (Unfortunately,technical analysis is not 100percent accurate, but somepatterns are more reliablethan others.) Continuationpatterns such as flags andpennantsallowastocktorestby moving sideways for awhile before continuing totrendhigherorlower.“It'sthe

pause that refreshes,” sometradersjokinglysay.PennantsKeep in mind that a

pennant is similar to a smalltriangle, but its trendlinesconverge as the pattern isformed. Ideally, therewillbea strong move, up or down,afterthepatterniscompleted,and the lines narrow, whichcreatesthepennant.Flags

Flags are short-termcontinuation patterns thatreflect a brief pause(consolidation) after a quickmove, before taking offagain. You'll want to see ifvolume increases as thepattern is being formed.Although similar to apennant, a flag's trendlinesarenearlyparallel.Whenyousee this pattern on a chart, itreallylookslikeaflag(anditoften has a mast on either

side)!Figure3.10 is an example

ofabullflag:

FIG3.10:BullFlagSource:Stockcharts.com

Note: A bear flag, on theother hand, looks like aninvertedflagonaflagpole.

CandlestickPatterns

Many traders look atcandlestick patternformations for clues towhento buy or sell. Candlesticksareoftenusedtogaincluestomarket psychology orchangesinthetrend.

Hereareafewofthemostpopularcandlestickpatterns:

THEDOJI

Thedojiisaverycommoncandlestick patterncharacterized by small, thinlines and an equal openingand closing price. The crossformed is the doji, which isofteninterpretedasindecision

between the bears and thebulls. If you see a stock thatmakes a doji top, afterconfirming with otherindicators, you might thinkabout taking money off thetable. The doji is a definitewarningsignal.In addition, there are

variationsofthedoji,suchasthegravestonedoji(openandclose occur at the lowof theday, which signals a major

turning point in the directionof the trend) and the long-legged doji (open and closeare nearly equal, whichsignalsindecision).

DARK CLOUDCOVER

The dark cloud cover isanother common candlestick

pattern thought to be quitereliable. It's most useful atidentifying market tops.Looking as if it's a cloudyday, this pattern often showsthatbuyersaregivingupandsellers are becoming moreaggressive.

HAMMER

The hammer, a bullish

reversal pattern, has a shortreal body that's at the top ofthat day's trading range.When you see it for the firsttime,itreallydoeslooklikeahammer!Often the hammer will

form at the end of a stockadvance, in which case it's ahanging man. When thehammerformsattheendofastock decline, it is called abottomingtailhammer.

HOW TO USECANDLE STICKPATTERNS

Steve Nison, president ofCandlecharts.com and acandlestick pattern expert,shared his insights about theuseandmisuseofcandlestickcharts. One of the mostcommoncandlestickpatterns,Nison says, is the bearish

engulfing pattern, “when theblackrealbodywrapsaroundthewhite realbody.Thishasmore likelihood of a reversalthanthedarkcloudcover.”But evenmore reliable, he

says, is when a candlestickpattern confirms a traditionalWestern pattern. “You canuse candlesticks to confirmthepattern,andhaveagreaterlikelihoodofa tradeworkingout,” Nison notes. “For

example, you could use thedark cloud cover to confirmresistance,whichisastrongersignalthanadarkcloudcoverbyitself.”The key is to understand

that candlesticks reflectmarket psychology.Therefore, he suggests thatyoufocusonthepatternsthatmake themost sense to you.“You'll find a lot of dojipatternson a chart,”he says,

“but because they are sofrequent, they are not asimportant on an intradaychart.”One of the advantages of

candlesticks, Nison adds, is“thatitshowstheforceofthecurrentmove.Forexample,ifyou have a hammer at thebottom end of a recentdowntrend, the candlestickwill show that less of thatdowntrend is losing

momentum.”What is important for day

traders, he says, is studyingtheindividualcandlelinesforsignals. “If youhave a seriesofhammers,aseriesoflowershadows at the same supportarea, it's showing you eitherdemand is coming in orsupplyisdryingup.”Although there are dozens

of actionable candlesticksignals, Nison uses scanning

software to focus in on onlythetwentypatternsthatmakethemostsenseforhim.Ifyouare first learning aboutcandlesticks, he recommendshavinganevensmallerlist.

MISUSES OFCANDLESTICKS

Not surprisingly, some

traders misuse candlesticks.“A lot of people see the dojiand think there will be areversal,” Nison notes. “Adojiduringanuptrendmeansthemarkethasgone fromuptoneutral.Itdoesn'tmeanit'sgone from up to down. It'sincreasing the likelihoodofareversalbutitdoesn'tmakeit100 percent.” The key tobeing an informed trader, hesuggests, is getting acandlestickeducation.

Another example ofcandlestick misuse is thehammer candle signal. “Youmight have a hammer signalthat you shouldn't buy. Thenagain, you could have ahammer signal that might bea great buying opportunity.We call that a candle incontext.Lookatthecandleinthe prism of the currentmarket action.” For example,he'd combine technicalconcepts suchas support and

resistance and overallmarketdirection with candlesticksignals.“If thehammer iswithina

longer-term trend, howeveryou define it,” he explains,“and the hammer isconfirming a support level,and if there is a good risk-reward on the trade, I'd bemore aggressive at buyingthan a hammer that iswithinalonger-termdowntrend.”

Other misuses ofcandlesticks include usingthem by themselves withouttechnical indicators, and notpaying attention to moneymanagementbeforeplacingatrade. In particular, Nisonsaysit'sessentialthatyouusestop-lossorders.“I place my stops using

candle signals, for example,under the low of thehammer,” Nison says. “I

prefer to wait for themarketclose, but if you're tradingintraday and you can't waitfor the close, you have toplacecertainintradaystops.”It's sometimes too late for

day traders to wait for themarket close, so you have toplace intraday stops. Nisonexplains,“Iuse thecandle toset stopout levels, forexample, the high of theshooting star, the high of the

doji, or the low of thehammer, or the low of thebullishengulfingpattern.”It's very important, Nison

suggests, to firstdetermine ifa trade has a favorable risk-reward. “You could have agreat candle signal,”he says,“but if it's not a good risk-reward, the candlestickdoesn'tmatter.”Hecautionsthatoneofthe

biggest problems with

candlesticks is that peoplerecognize a pattern andimmediately buy. “Even ifyouhaveacandlesticksignal,you should confirm withWestern technicals,” Nisonexplains. “The mistake thatpeoplemakeisrelyingsolelyon candlesticks. Youshouldn't look at them inisolation.”In fact, one of the

limitations of candlesticks is

that they don't give pricetargets. “Candlesticks aregood at picking highs andlows,andhelpingknowwhentoexit,”saysNison,“butyouneed Western technicalanalysis to get price targets.This is why our educationfocuses on the best ofcandlesticks with the best ofWesternindicators.”

ADVICE FOR DAYTRADERS

Nison suggests that daytraders keep their eye on thedailychartsevenifthey'renottrading them. “If you havesupport and resistance on adaily chart,” he says, “that'susually more important thansupport and resistance fromthe intraday charts, since

most people are looking atdailycharts.SoIwouldkeepa daily chart in the back ofmymindwhendaytradingtosee if I get any candlesticksthat confirm the support andresistancelevels.”For example, if support is

at $20 on a daily chart, andyou see a bullish hammer orbullish engulfing pattern,Nison says that's moresignificant than the bullish

engulfing pattern confirmingsupport on an intraday chart.The reason? The daily charthas a longer time frame,whichismoresignificant.On the other hand, one of

the advantages of looking atan intraday chart is yousometimes get an earlyreversal signal, Nison says.“Let's say in the first twohours of trading on anintraday chart you see a

bullishengulfingpattern,”hesays. “By the end of the dayonthedailychart,themarketmight have moved upalready, so by the time youget the candle signal, it's toolate.”Heexplainsthatthecandle

signal on a daily chart needsthecloseoftheday,whileona 30-minute chart, forexample, all you need is thecloseofthe30-minuteperiod.

“Even if you are swingtrading, look at the intradaycharts for an early turningsignal,”Nisonsuggests.Nison has some final

advice for traders: “I haveseen traders lose lots ofmoney with the wronginformation aboutcandlesticks. It isvital that ifyou really want to usecandlesticks correctly, it'sessential you get the right

information.”

The ContradictoryHistoryofLevelIILevel II, a Nasdaq data feedprovided either free or for asmall monthly charge bymost brokerage firms, showsquotes from the Nasdaqmarket makers. When youtypeinasymbolforaNasdaqstock in Level II, you'll seethemarketparticipantssorted

bythebestbidandaskprices(the bid price is the highestpriceabuyeriswillingtopayforastock,and theaskpriceis the lowest price a seller iswillingtoacceptforastock).Years ago, Level II was

extremely popular withtraders. It gave marketplayersaninsidelookatwhatthe market makers were upto, or what is called marketdepth. Day traders were

particularly interested inLevelII,gaininginsightsintomarket action that helpedgivethemanedge.Entire books were written

aboutusingLevel II tomakemoney by scalping. Tradersclosely studied Level II forclues, trying to identify whowas“TheAx,”or themarketmakerwho controlled all theorders on a particular stock.One strategy included

emulating the trades of theAx, who was usually on therightsideofatrade.Buttheruleschanged,first

moving from fractions todecimalization. Then marketmakerswhopostedpricesonLevelIIwereallowedtohidetheir true size, so a 10,000-share order may show 100shares. Another trick wasplacingan imaginary50,000-sharesellordertoscareaway

other market players fromplacingbuyorders.AlthoughLevelIIisnotas

popular as in the past, manytradersstillfinditvaluabletodiscoverthemostcompetitiveprices. Others use it to findsupport and resistance. Forexample, if you see a clusterof colors at a certain pricelevel, this could be used forsupportorresistance.Allthatcongestion gives traders an

idea where to place theirstops.If you're curious about

Level II, ask your brokeragefirmforaccess.Someprovideit at no cost, and otherschargeasmallmonthlyfee.WhileLevelIIquoteshave

both proponents and critics,many traders find that theinformation found in Timeand Sales, another featureadded toLevel II, tobevery

useful. Time and Salesdisplays the actual trades (orprints) that are taking place.In addition to the price, itshows the size of the orderand the true time the tradewasmade.Unlike Level II, where

ordersareoftenhidden,Timeand Sales shows ordersexecuted on an exchange.This represents most of theorders. (Why not all orders?

It has been reported thatanonymous, large orders aresometimes arranged “off thebooks.”)Nevertheless, Time and

Sales tells traders what'sreally happening in themarket. For example, if youseeastockrallying,andTimeand Sales verifies there is asurge of large trades, it's acluethatbiggerplayersareinthegame.

Keep in mind that,although traders do look atTimeandSales forclues, it'sonly another tool to helpdetermine market strength,not a definitive answer.Although useful for many,onlyyoucandetermineif it'sworthwhileforyou.

Figure 3.11 is a screendisplayofTimeandSales:

FIG3.11:TimeandSalesForillustrativepurposesonly.Source:FidelityInvestments.©2010FMR

LLC.Allrightsreserved.Usedbypermission.

Chapter4:UsingTechnicalIndicators

Asyou learnmoreaboutdaytrading, you will rely moreand more on a set of toolscalled technical indicators,whicharethosecrookedlittlelines plotted on, above, orbelow a stock chart. Theymeasure a stock's short-term

priceactivityinvariouswaysto help predict the stock'sfuture price movement. Youusuallyselect indicators fromadropdownlistthatisnexttothe chart. They are used tohelp increase the odds ofmaking a successful trade.Many day traders usetechnical indicators to maketradingdecisions.For example, one use of

indicators is to help identify

when the market or anindividual security isoverbought or oversold.When there is too muchbuying (overbought), or toomuch selling (oversold), thisis a clue there could be areversal. Why? Because if astock or index has risen toomuch and too quickly, apullback often occurs.Identifying overbought andoversold conditions is justone way to use technical

indicators.Some traders use technical

indicators to try and predict,or anticipate, stock or indexdirection.Althoughindicatorsare helpful, don't make thecommon mistake of lettingthem make the buying andselling decisions for you.Indicators provide importantinformation about marketconditions, but in the end,you make the trading

decision.Youhave toput allofthepiecestogethertomakeadiagnosis.Although there are

hundreds of technicalindicators,manyaretooslowto be useful to day traders.That'swhy I'll focusona setof indicators that are popularwith many day traders.Eventually you'll find ahandful of indicators thatmake sense to you and your

tradingmethodology.If you've never used

indicatorsbefore,thischaptermay seem a littleoverwhelming at first. Afteryou've used indicators a fewtimes, however, you'll findthey'reeasy toputonachart(but not always easy tointerpret). If you want tolearn even more abouttechnical indicators, you canpick up a copy of my book,

All About Market Indicators(McGraw-Hill, 2011), whichwas written for the novicetrader.

Finding IndicatorsThatWorkforYou

Although you'll soon beintroduced to a number ofindicators, you don't want tohave more than four or fiveonachartatone time.Some

traders use so manyindicators they get afflictedwith a condition known as“indicatoritis,” as onefinancialbloggerputit.Unfortunately, there is no

magicindicatorthatwillgiveyou all the answers.Indicators simply guide youintherightdirection,pointingout clues as to what mayoccur. At times, indicatorscontradict each other, so you

must act as a referee anddeterminewhichisgivingtheright message. For example,one indicatormay generate abuy signal, while anotherindicatormay generate a sellsignal.Often,someindicatorswork well in one marketenvironment but not well inanother.Forexample,movingaverages(MA)workwellinatrending environment but arenot as effective in a choppymarket.

The indicators you'll readabout next should not beconsidered as actionabletrades, but only guidelines.Also, always use otherindicators to confirm beforebuying or selling a stock orindex.

The Most PopularIndicator: MovingAverages

Moving averages are one ofthe most popular technicalindicators,andoftenthemostreliable, nomatterwhat yourtime frame. To be specific,moving averages show thevalue of a security's priceover the duration of a timeperiod, for example, the last20, 50, 100, or 200 days.When you overlay themoving average over thestock price, the relationshipbetween the moving average

and price is visible. Again,the experienced eye may beabletodiscernvaluablecluesabout how the stock pricemayreact.Moving averages are easy

to understand and, wheninterpreted properly, canresult in profitable trades.When moving averages areplotted, trends (discussedearlier) can be quicklyidentified. Most important,

movingaveragesoften signalwhen a trend may begin, orend. The two most commonmoving averages are thesimple moving average(SMA) and the exponentialmovingaverage(EMA).

THE SIMPLEMOVINGAVERAGE

Many people use thesimple moving averagebecause it's the default onmostchartprograms.A 10-day simple moving

average, for example, iscalculated by taking anaverageofthelast10daysofthe stock's closing price anddividing by 10. So, as thetenth day is added, the firstday is dropped off. In otherwords, old days are dropped

as new days becomeavailable.Moving averages

constantly move. As theprocedure is repeated everyday, a smooth line is createdthat can be displayed on achart. The longer the timeframe, themorepowerful thesignal, another reason whyeven day traders need tostudy multiple time frames.Why is a 5-day MA more

powerful than a 1-day MA?More data are used in thecalculation,soit'stimelier.Inaddition,a60-minutechart ismore powerful than a 5-minutechart.As a day trader, you'll use

short time frames: minutesand hours. Knowing whathappens over several dayswill be useful, but will notnecessarily affect yourintraday trades. Fortunately,

moving averages are flexibleenough to be used on nearlyany time period, includingintraday. By the way, whenlooking at moving averageson an intraday chart, thevocabulary changes slightly.For example, on an intradaychartyouwilllookatthe20-periodmovingaverage,orthe50-period (rather than a 20-day or 50-day on a dailychart).Imentionthisbecausemany traders don't realize

this. In other words, a 50-period or 200-periodmovingaverage refers to an intradaychart. Intraday charts,however, have time framessuch as a 5-minute, 15-minute, or 60-minute.Therefore, on a 5-minutechart, each candlestick, bar,or period represents 5minutes. On a 60-minutechart, each candlestick, bar,or period represents 60minutes.Anothertidbit:a10-

period moving average on a10-minute chart uses a totalof100minutesofpriceactionto calculate the movingaverage.All day traders have their

favoritetimeframes,butona60-minute chart, the 65-period and 135-period arepopular.

USING

EXPONENTIALMOVINGAVERAGES

For more preciseinformation, consider usingexponentialmovingaverages,whicharecalculatedthesameas simple moving averages,but give more weight to themostrecenttimeperiods.Moving average experts

point out that the simplemoving average, althoughuseful,canbea littleslowtorespond to market changes.So ifgivenachoicebetweenthe simple and exponential,many traders choose theexponential.In the chart shown in

Figure 4.1, we'll look at the10-, 12-, and 13-periodexponential moving averageof the S&P 500 on a 60-

minutechart.

FIG4.1:ExponentialMovingAverage,60-minuteSource:

Stockcharts.com

USING MOVINGAVERAGES

Often, it's useful to stepback and use movingaveragestolookatthemarketfromalong-termperspective.Looking at the big picture,whenastockcrossesthe200-daymovingaverage ineitherdirection, more than likely,there will be a reaction. The

same is true for the 20-dayMA and 50-day MA. Largenumbers of traders watchthesemajormovingaverages,and it's something that youcando.Asyouseemoreandmore of the crossovers, youcan record the data in yourtrade journal, and eventuallyyou may have enoughinformationtodecideifthesecrossingsrepresenta tradablesignalforyou.

THE MOVINGAVERAGECROSSOVERSTRATEGY

As a day trader, however,yourbigpicturewillbemuchshorter. For example, if thestockpricecrossesbelowthe5-period, 10-period, or 20-periodmovingaverageonan

intraday chart, this is anegative signal. After all,moving averages act assupport and resistance, so acrossing above or below themoving average is a signalyou shouldn't ignore. Othertraders use the 30-period or200-period on an intradaychart,suchasona30-minuteor60-minutechart.A popular longer-term

signal: if the 8-day moving

average (the shorter movingaverage) crosses above the13-day moving average (thelonger moving average), thiscould be a buy signal.Conversely, if the 8-daymoving average crossesbelow the 13-day movingaverage, this could be a sellsignal. Once again, daytraders use intraday chartssuch as the 60-minute, 15-minute, and 5-minute forsignals rather than the daily

chart.Althoughmoving averages

areuseful,theyaren'tperfect.First of all, they're calledlagging indicators becausethey sometimes give latesignals. By the time younotice the signal, the setuphas passed. Also, movingaverages work well when astock is trending, but if thestock is in a trading range(choppy and trendless),

moving averages don't seemto work as well. Even withthese limitations, movingaverages are signals youshouldn't ignore, and mostday traders study themclosely.

Taking MovingAveragestoaHigherLevel:MACD

The Moving Average

Convergence Divergence(MACD), a technicalindicator popular with manytraders, alsohelps to identifywhen trends may bebeginning or ending.Createdby Gerald Appel in 1976,MACDconsistsof two lines,a solid black line called theMACDline,andadottedred(orgray)linecalledthe9-daysignal line, which is actuallya moving average of amovingaverage.

The MACD line is thefaster of the two lines (theshorter the time period, thefaster the line). The key tounderstanding MACD isobserving how the fasterMACDlineinteractswiththeslower signal line. (In caseyou are interested,MACD isthe difference between the12- and 26-day exponentialmoving averages. The signalline is the exponentialmovingaverageofMACD).

MACDgeneratesanumberof signals that traders lookfor. For example, whenMACD crosses above the 9-daysignalline,thismaybeabuy signal. And if MACDcrosses below the 9-daysignalline,thismaybeasellsignal.In addition, you will also

see a flat, horizontalcenterline, the “zero” line. IfMACD crosses above the

zeroline, thiscouldbeabuysignal.Conversely, ifMACDcrosses below the zero line,thiscouldbeasellsignal.If you've never used

technical indicators before,you might wonder how theywork. The answer lies in theformula, which can getcomplicated. MACD, asmentioned earlier, is acalculation of the differencebetween theclosingpricesof

two exponential movingaverages. The result isdisplayed on a chartalongside a moving averageofthedifference.Figure4.2 iswhatMACD

lookslikeonadailychart.

FIG4.2:MACDSource:Stockcharts.com

Because MACD is such aflexible indicator,youhaveachoice of settings. Although

thedefaultsettingsare12,26,and 9 (12-day exponentialmoving average, 26-dayexponential moving average,and 9-day signal line), as aday trader, you'll use muchshorter signals. Nevertheless,youmight alsowant to viewMACD on multiple timeframes, for example, dailyand weekly charts, to get abigpictureview.Consider experimenting

withasettingof6,19,and9,as suggested byAppel in hisbook,PowerTools forActiveInvestors. Appel also saysthat traders should payparticular attention whenMACDcrossesover thezeroline because he believes thissignal has better odds ofbeingcorrect.Forexample,ifMACDcrossesover thezeroline,thismaybeabuysignal.If MACD crosses below thezero line, thiscould be a sell

signal.Whycan'tIgiveyouamoredefinitiveanswer?First,no indicator is perfect, andthereisalwaysthechanceforfalse signals. Second, youdon't want to enter a largeposition based on the resultsof one indicator. Rather,manytradersuseindicatorstoconfirmwhattheyalreadyseeon a chart. The signal helpsthemmakeadecision.Another signal to look for

isdivergence, forexample, ifprice moves up but MACDmoves down, and vice versa.Many traders look for signsof divergence inMACD andbelieve it can lead to aprofitabletrade.In addition, many traders

relyontheMACDhistogramdeveloped by ThomasAspray. A histogram isplotted on top of MACD,givingavisual representation

ofpricemomentum(e.g., therate of the speed of rising orfalling stock prices). As the“peaks and valleys” of thehistogram get smaller, itmeans that momentum isslowing down, perhapssignaling a change indirection. Conversely, as thepeaks and valleys get talleranddeeper,itmaysignalthatmomentumisincreasing.To fully appreciate

MACD, you must take thetime to experiment with thesettings.Ifyouchoosetousethis indicator,you'llprobablyusemultipletimeframeswitha variety of settings.MACDcan be used on very short-term charts (e.g., 5-minute,15-minute,and60-minute) todaily,weekly,ormonthly.

Volatility Rules:BollingerBands

Bollinger Bands, created byJohn Bollinger in the 1980s,are popular with day tradersbecause they're so flexibleand easy to use. When youfirst plot Bollinger Bands ona chart, it usually appearswith the default setting of a20-period simple movingaverage and 2 standarddeviations (20, 2). (Putanother way, the defaultsettingistheupperandlowerBollinger Bands placed at a

distance of 2 standarddeviations from a 20-periodsimplemovingaverage.)In the chart in Figure 4.3,

you'llseefourlines.Themostvolatilelineisprice.Youwillalsoseeanupper,middle,andlower Bollinger Band. Themiddle Bollinger Band (thedotted line) is thedefault20-daymovingaverage.It is thebase for the upper and lowerbandsandisusedtodescribe

the current trend. When youselect Bollinger Bands fromthe list of indicators that areincluded in your chartprogram, itwill be displayedon the chart, as you'll see inFigure4.3.Figure4.3showsBollinger Bands on a 60-minutechart.

FIG4.3:BollingerBandsSource:Stockcharts.com

When the stock price tagsor pierces the upper band, itmeans the stock isoverbought (there has beentoo much buying). Look at

the chart above for anoverbought signal.Conversely, when the stockprice pierces the lower band,itmeansthestockisoversold(there has been too muchselling). Keep in mind thatjust because a stock isoverbought or oversolddoesn'tmeanthatareversalisimminent.In fact, stocks and indexes

can remain overbought or

oversold for long timeperiods. On the other hand,sometimes stocks will piercetheupperandlowerbandandimmediately reversedirection, and head directlyforthecenter.Keep in mind that for a

stock to pierce the upper orlower band, it takes a verystrong move. After all, thedefault setting is 2 standarddeviations, which is well

outsidethenorm.Although there are no

guarantees, it's not surprisingif a stock reverses directionwhen it pierces the upper orlower band.The best advice:whenastockisoverboughtoroversold based on BollingerBands, you should payattention, but it isn'tnecessarily an actionabletrade.In addition to observing

overbought and oversoldconditions, day traders alsolook at the shape of thebands. A band that iscontracting, or squeezingtogether,meansthatvolatilityis low.This isaclue that thestock may reverse direction.Conversely, if a band isexpanding, which reflectshigh volatility, the stockcouldreversedirection.Usually, stocks won't

remain in this condition forvery long. As a day trader,you use Bollinger Bands toidentify extreme conditionsand only take action afterconfirming with otherindicators. Like all of theindicators included in thischapter,youhavetoputthemonachartandusethem.Thatistheonlywayyou'lllearniftheyworkforyou.

Taking a RollerCoaster Ride:Oscillators

The next two indicators,Relative Strength Indicator(RSI) and Stochastics, arecalled oscillators becausethey move up and downbetween0and100onachart.Although they're createdusing complex formulas,they'rerelativelyeasytouse.

Thehardpart,ofcourse,iscorrectly interpreting theindicator's signals. The mainpurposeoftheseoscillatorsisto determine if a stock orindexsuchastheS&P500isoverbought or oversold. Theideal environment foroscillators is when there is alot of volatility. Oscillatorsare often most effectiveduring theseconditions.Let'stake a look at how you canuse the two most popular

oscillators, RSI andStochastics.

THE DRAMAKING:RSI

When you select RelativeStrengthIndicator(RSI)fromyourbrokeragefirmsoftware,this momentum oscillatorappearsasasinglelineonthe

top or bottom of a chart.Becauseithasonlyonesignalline,it'srelativelyeasytouse.Originally created by J.Welles Wilder, RSI is oftenused by short-term traders tohelp determine whether astock is overbought oroversold.To be specific, when RSI

rises above 70, it's a signalthat a stock or market isoverbought. Conversely,

whenRSIdropsbelow30,it'sasignalthatastockormarketis oversold. As mentionedearlier, a stock can remainoverbought or oversold forlengthy time periods beforereversingdirection.Keep in mind that the 30

and 70 levels are onlyguidelinesandnotfixedrules.Often,duringbullmarketsorbear markets, the RSI levelsadjust according to market

conditions,soit'simportanttobe flexible when using thisindicator.Figure 4.4 is what RSI

looks like on a 60-minutechart:

FIG4.4:RSISource:Stockcharts.com

Start with the default 14-daysignal for a longer-termsignal, but experiment with

the 9-day to see how RSIreacts. In addition, some daytraders have been known touse 2-day RSI settings. Thegoal, of course, is to find asetting that works for you,and the onlyway to find outisbytryingdifferentsettings.Youcan record the results inyour journal, and eventuallyyou'll be able to make senseofthedata.

Another signal you can

lookfor isdivergence,whichoccurs when the stock ishitting new lows but RSI isrising. The idea is for thestock to follow RSI as itincreases. With divergences,if theindicator ismovingup,but price is moving down,you'd consider buying.Conversely,iftheindicatorismoving down, but price ismoving up, you'd considerselling.

Although divergences areusually very effective,unfortunately, several tradershave reported that RSIdivergences have not beenveryeffective.You'llhave toexperiment on your own tosee if these traders arecorrect.As with any indicator,

especially oscillators usingshort-term time frames, falsesignals are possible. Only

withpractice,experience,andcareful record keeping canyou learn to trust yourindicator and be confident ofitssignals.

THE DRAMAQUEEN:STOCHASTICS

Many day traders favor

Stochastics,createdbyRalphDystant and George Lane.While RSI uses only onesignal line, Stochastics usestwo and sometimes three.Because RSI and Stochasticsmeasure whether stocks areoverbought or oversold(among other things), tradersoften use one of theseindicators, but usually notboth.Since Stochastics uses

multiple signal lines, it ismore volatile than RSI.However,becauseofthewaythe formula is calculated,Stochastics can give moreaccurate and precise results.Ontheotherhand,becauseofitsvolatility,itcansometimesgive false signals, especiallywhenusingshorttimeframes.ManyexperiencedtradersuseStochastics, but it definitelytakessometimetolearn.

When you select Stochasticsfrom your charting software,you usually have threechoices: Slow Stochastics,Fast Stochastics, and FullStochastics. As a new daytrader, select SlowStochastics. The reason? It'seasier touse and it generatesfewer signals. As you gainmore experience, you canexperiment with FastStochastics. When firststarting off, however, it's

probablybesttostickwiththeslower signal. The onlydownside with SlowStochastics is it has a slightsignal lag. At first, though,yourgoalistolearnallofthenuances of the variousindicators, and SlowStochasticsisagoodplacetostart.

Let's look at SlowStochastics on a 60-minutechart(seeFigure4.5):

FIG4.5:StochasticsSource:Stockcharts.com

Since we chose SlowStochastics in the chartabove,you'llnoticetwolines

thatcomeintwospeeds.Thefirst, %D, is the slower line,whilethesecondline,%K,isfaster.Thelinesarebasedona mathematical formula thatlooks at themoving average,the highest high, and thehighestlow.Someofthesignalstolook

for: If %D rises above 80,that suggests the stock isoverbought. Conversely, if%D drops below 20, that

usually means the stock isoversold. In the chart above,noticethestockiswellabove80, a signal it is inoverboughtterritory.JustaswithRSI,stocksor

indexes can remainoverbought or oversold forlong time periods beforereversing direction. It'salways best to confirm usingother indicators to determineifthestockmayreverse.

Amistakemadebytradersinthepastwasassumingthatassoonas%Dpierced80,thestock should be sold. Otherbad advice: As soon as %Dpierced 20, the stock shouldbe bought. These hard andfast rules were rathermisleadingfortraders.Nevertheless, here are a

few of the most usefulsignals:if%Drisesabove80,look for an opportunity to

sell.Conversely,if%Ddropsbelow 20, look for anopportunitytobuy.Another popular signal:

When %D and %K diverge.For example, if %D ismovingupwhile the stock ismoving down, it's possiblethe stock will follow %D.Conversely, if%Dismovingdown while the stock ismoving up, it's possible thestock will follow. If it does

follow, you may have anactionable trade.UnlikeRSI,traders report thatdivergencesinStochasticsaremore reliable; that is,Stochastic divergences workmore times than not. Again,be sure to enter what you'velearnedaboutStochasticsintoyourtradingdiary.

On Balance Volume(OBV)

On Balance Volume (OBV),originally developed by JoeGranville in the 1960s, isused to measure how muchvolumeisflowingintooroutofanindividualsecurity.Thisrelatively simple indicatordisplaysacumulativevolumetotal (when a stock rises forthe day, volume is added;whenastockfallsfortheday,volume is subtracted). Whendisplayed on a chart, OBVcangraphicallyshowwhether

volume is increasing ordecreasing.Atthemostbasiclevel, a rising OBV is abullish signal,whilea fallingOBVisbearish.Traders also compare the

OBV with price to look foreither divergence orconfirmation. If a divergenceexists, OBV is expected tomove in the oppositedirection. To be specific, ifprice ismoving higherwhile

OBV is moving lower(divergence), that is anegativesignal.Manytradersclaim OBV's most usefulsignalisdivergence.Conversely, if it is

confirming the price move,OBV should move in thesame direction. Therefore, ifprice is moving higher andOBV is moving higher(confirmation), this couldindicate that the upward rise

inthestockisstrong.Hint: a rising OBV line

means that volume isincreasing on up days. Lookatthestockpricetoseeifitismovinginthesamedirection,which confirms the priceuptrend.

Introducing MoreTechnicalIndicators

Almost all of the technical

indicators introduced abovecan be used to monitor theoverall market and/orindividual stocks (except forOBV, which is used forindividual stocks). Theindicators I'll introduce next,however, are primarily usedto monitor the broad marketsuch as the S&P 500 orNasdaqComposite.As a day trader, although

you will primarily focus on

intraday action, it is alsouseful to study the directionof the overall market. Thefollowingindicatorscanhelp.

ANOTHERFAVORITEINDICATOR: NEWHIGH-NEWLOW

NewHigh-NewLowtracks

thenumberofstocks thataremaking new highs and newlows,usuallyovera52-weekperiod. This straightforwardindicator is quite easy tocalculate and interpret. Forexample, when New High-New Low is positive, itmeans that the number ofstocks making new highsexceeds the number makingnew lows, a bullish signal.Conversely,whenNewHigh-New Low is negative, it

means new lows aresurpassing new lows, abearishsignal.Here is what New High-

New Low looks like on adaily chart. On Figure 4.6,the Nasdaq and NYSE newhighs and new lows arecombined:

FIG4.6:NewHigh-NewLowSource:Stockcharts.com

The New High-New Lowhas been a favorite of daytradersforsometime.Infact,trader and psychiatrist Dr.Alexander Elder has written

in his best-selling books thatthe New High-New Low isoneof thebest indicators forshort-termtraders.As you look more closely

at this indicator, you can seewhether new highs or newlowsareexpanding.Afterall,if new highs are expanding,especially on rising volume,this is a positive sign.Conversely, if new lows areexpanding on rising volume,

thisisanegativesign.Tradersalso lookforsigns

of divergence; that is, if themarket is going higher but ifthe stocks on the new highlistaresuddenlydroppingoff.Thiscouldbeanothersignthemarket may reverse to thedownside. And of course, ifthemarketisgoinglowerbutstocksonthenewlowlistaredroppingoff, themarketmayreversetotheupside.

Finally,ifthelistofstocksmaking new highs isexpanding too rapidly, itcould actually be a negativesignal. After all, if everystock is making new highs,some might conclude therearetoofewstockslefttobuy.It's the samewith new lows.If too many stocks aremaking new lows, and thenumber reaches extremelevels, you could concludethere are too few stocks able

to go lower. If only sellersremain,perhapsthemarketisripeforareversal.Instead of the default 52-

week New High-New Low,some short-term tradersrecommend using the 20-dayNew High-New Low, whichtheyfeelgivesamoreprecisesignalforshort-termtraders.

A DAY TRADER'S

TOOL: ARMSINDEX(TRIN)

The Arms Index, alsoknown as the TRIN, wascreated by Richard Arms inthe 1960s. Many short-termtraders use this indicator toevaluate whether the overallmarket is overbought oroversold.Basically,theArmsIndex calculates how much

volume is associated withrising or declining stockprices on the NYSE orNasdaq.Theresultsaredisplayedas

a ratio: the lower the ratio,(i.e., below 0.50) the morebullish it is for the stockmarket. The lower ratiomeans the market is gettingso overexuberant, a reversalmaybeimminent.Conversely, a high ratio is

bearish for the stockmarket,andmeans there is excessiveselling. In this case, themarket is getting so panickythatareversalispossible.Isitdefinitely going to reversedirection? Unfortunately, it'sextremely difficult to predictreversals, which is why it'spossible, but not guaranteed.It's all about probabilities.That is another reason whytraders will consult otherindicators to help make a

decision.Althoughsimpletoploton

a chart, interpreting theresultsoftheArmsIndexcanbe a challenge. It must bestudied and observed closelybefore using it for markettiming.Daytraderswhohavedone their homework claimit's extremely useful as atiming tool, although it takestimetolearnitsnuances.Figure 4.7 is the Arms

Indexonadailychart:

FIG4.7:ArmsIndexSource:Stockcharts.com

It'sbestnottomakehardandfast rules about when andhow to use the Arms Index.

Generally, if this indicatormoves above 2.0 on themarket close (there isexcessive selling), sometradersmaysee thisasabuysignal. If the Arms Indexshoots past 4.0 or higher ontheclose,itindicatespanic.Areversalmaybeimminent.Conversely, if the ArmsIndex drops below 0.50 onthe close (there is excessivebuying), the market may

reverse.Sometraderswillseethis as a sell signal. If theArms Index drops as low as0.30, this means the buyinghas reached extreme levels.Sometraderswillseethisasaclimatic high and look forsellingopportunities.

Also, a few short-termtradersplotamovingaveragesuchasthe10-dayMAtotheArmsIndextosmoothoutthevolatility.Besuretoconsider

all of these signals asguidelines rather thanactionabletrades.

DETERMININGMARKETBREADTH:ADVANCE-DECLINELINE

TheAdvance-DeclineLineis a deceptively simpleindicatorthattracksarunningtotal of the differencebetween the number ofadvancing stocks and thenumber of declining stocks.The idea is to help tradersdeterminemarketbreadth,orhow many stocks areparticipating in a rising orfallingmarket.Ascanbeseeninthechart

in Figure 4.8, when theAdvance-Decline Line isrising, that's a bullish sign.When the Advance-DeclineLine is falling, that's bearish.It can't get much easier thanthat!Although financial

websites and periodicals listthe number of advances anddeclines, it's a lot easier todisplay the totals on a chart.You can quickly see which

way the market could beheaded.Figure4.8isachartofthe

Advance-DeclineLine:

FIG4.8:Advance-DeclineLineSource:Stockcharts.com

One way to use the

Advance-Decline Line is tolook for signs of divergence,thatis,themarketisgoingupbuttheAdvance-DeclineLineis falling. It couldmean thatthe number of advancingstocks is losing steam, andcould be a clue the trend isabout to end. Keep in mind,however, that when theAdvance-Decline Line andmarket are moving in thesame direction, the signal isstronger.

Although the Advance-Decline Line is extremelyuseful to traders, there are afew nuances to using it. Forexample, sometimes thevalues mentioned earlier arelagging, which is why thisindicator is not ideal fortimingthemarket.In addition, one of the

criticisms of the NYSEAdvance-DeclineLine is thatthe NYSE, which is where

thisindicatorgetsitsdata,hasbeen skewed withnonoperating issues such asclosed-end bond funds.Criticssaytheseinterest-rate-sensitive issues don't provideanaccurateindicationofwhatthe stock market is reallydoing.Tom McClellan, whose

parents Sherman andMarianoriginally developed theMcClellanOscillatorin1969,

claims that removingnonoperating issues could beamistake.“Throwingout thenonoperating issues seemslike a good idea, but itdestroysthegoodinformationthat the Advance-DeclineLinegives.”McClellan says that you

want to watch these interest-rate-sensitive issues tomeasure liquidity. “Theseinterest-rate-sensitive issues,

which are really liquiditysensitive,aretherealcanariesin the coalmine,” he says.“They are the ones that willdo well when liquidity isgood, and they will sufferwhen liquidity is gettingscarce.” In fact, McClellanlikes to study nonoperatingissues and common stocksseparately.

NYSETICK

Some day traders rely onthe NYSE TICK to monitorwhatisoccurringontheNewYork Stock Exchange(NYSE) issues. Thecalculation is rather simple:If, for example, 1,000 stocksmoved up on the last trade(uptick) and 600 stocksmoveddownonthelasttrade,

the TICK will display areading of +400, a positivesignal. If the TICK reads+200,itmeansthat200moreNYSE stocks moved up onthe last trade (uptick) thanmoved down. Conversely, a-200 TICK reading means200 more NYSE stocksmoveddownonthelasttrade(downtick) thanmoved up, anegativesignal.Sometimes the TICK

shows extreme conditions,which is a clue the marketmay be oversold oroverbought. Based onprobabilities,areversalcouldoccur. Usually, extremes onthe TICK are +1,000 or−1,000, but they are unlikelytostayattheseextremelevelsforverylong.Traders use the TICK to

compare the number ofupticks versus downticks.

When buyers are in controland more aggressive, you'llseemoreupticks.Conversely,ifsellersaremoreaggressiveand in control, you'll seemore downticks. Trackedover time, the TICK givesinteresting insights intomarketsentiment.TICK statistics are

publishedliveontheweb,theNasdaq website, and yourbrokerage firm. Hint: place

TICK statistics on yourtrading screen along with ahandful of your favoriteindicators. (It's probably tooearly for you to have anyfavorite indicators, buteventuallyyouwill).

For ExperiencedTraders: TheMcClellanOscillatorExperienced traders often

turn to the McClellanOscillator and theMcClellanSummation Index for moreprecise information than theAdvance-Decline Line cangive. This indicator receivesits information from the netadvancesandnetdeclinesandgives traders overbought andoversold indications anddivergences. It alsomeasuresthe power of a move. TheOscillator measures theacceleration that takes place

within the daily breadthnumbers,whichmake up theAdvance-Decline Line. (Forexample,ifpriceincreasesby50 points a day, you get ameasure of the speed of themarket. However, if it onlyincreases by 40 points, it isdecelerating. The market isstill increasing, but at aslowerrate.)For day traders who want

totradewiththetrendandare

looking for detailedinformation, this oscillatormightbewhatyou'relookingfor. Nevertheless, it's not aseasytolearnastheindicatorsmentionedearlier.That'swhyI recommend you first learneverythingyoucanabout theAdvance-DeclineLinebeforetackling the McClellanOscillator.Here's an example of how

this Oscillator works: when

the 19-day exponentialmoving average (EMA) isbelow the 39-day EMA, itwill generate a negativevalue.Itmeansthatdecliningissues are stronger thanadvancingissues.Conversely,if the 19-day EMA is abovethe 39-day EMA, it willgenerate a positive value. Itmeans that advancing issuesare stronger than decliningissues.

In addition, theMcClellanOscillator also generates anumber of sophisticatedvalues that help tradersdetermine theoverall breadthof the market. Although thisindicator can be somewhatintimidating at first, manytraders use it in conjunctionwith the Advance-DeclineLine.Tom McClellan explains:

“The McClellan Oscillator

doesn't just tell you theposition of the Advance-Decline Line on a chart, butits acceleration. It tells youhow fast or slow the line ismoving, upward ordownward. For example, ifyou see a pricemove that isnot accompanied by rapidacceleration, this could beveryimportantinformation.”McClellan cautions,

however, that his indicator

should not be the first oneyou learn how to use. “Youcan't really understand theMcClellan Oscillator withoutfirstunderstandinga littlebitabout the Advance-DeclineLine statistics,” he cautions.“You should know thesestatistics are published everyday.”The McClellan Oscillator

isn't a silver bullet. “It's notgoing to tell you something

different than the Advance-Decline Line,” McClellanexplains.“Butitwillgiveyoumore in-depth information soyou'll know the completestory.”Unfortunately, not

everyone completelyunderstands how to properlyusethisoscillator.“Ifallyoudo is look at the numericalvalue of the McClellanOscillator,” McClellan says,

“you'reignoring99percentofthe most useful information.Ifallyouknowisthenumber,you don't know what thetrend is. It's like forecastingtheweatherbyonlyknowingthe current temperature.Thatwould be a very limitedwayofforecasting.Therefore,youcan only use the McClellanOscillator if you understanditsvaluerelativetoyesterdayor last week.” The key tounderstanding the oscillator,

he says, is looking at it on achart. After all, a picture isworthathousandwords.

Chapter5:MakingYourFirstDay

Trade

I've always said that theopeningofthestockmarketissimilartothethrillingstartofthe Running of the Bulls inPamplona, Spain. This iswhenthebullsareletlooseto

run in a narrow street on theway to the stadium.And justlike those souls who boldlyruninfrontofthebulls,someunsuspecting traders enterThe Street without fullyappreciating they're in anunpredictable and dangerousenvironment, and end upgettinggoredbytheherd.Remember, like any

occupation,day trading takesskill, knowledge, and

dedication. If you enter themarket without the propertoolsoreducation,youcouldbe in for an unwelcomesurprise.Tobeonthesafeside,take

as much time as needed tostudy the stock market andday trading strategies. If youjoined a professional tradingfirm, they probably wouldn'tlet you trade for an entireyear.That'sright:theywould

make you train for a yearbefore committing realmoney to the market. Keepthat in mind as you readthroughthischapter.Note: you can, however,

get started immediately withpaper trading using yourbrokerage firm software.Only you can decide whenyou'rereadytotradewithrealmoney.

Let'sGetStarted!

Althoughyoushouldn'tbe ina rush to start trading, it'stime for us to move fromtheory into practice. Alongthe way, continue writingdown your experiences inyour trading journal. Manyprofessional traders say thatone of the most helpfulexercises, and a key to theirsuccess, is keeping detailed

recordsoflessonslearned.Taking it one step at a

time, let's learn how to buyand sell stocks. If you'vebought stocks before, theinformation in this chapterwill seem familiar, althoughday trading is an entirelydifferentballgame.

Create a TradingPlan

Almost every professionaltrader creates awell-thought-out trading plan before themarketopens,eitherthenightbefore or early in themorning.Theyoftenbeginbyscanning for stocks that fittheircriteria.Many trading ideas can be

found by looking at a stockchart. Some traders usescanning software (providedby your brokerage firm or a

third-party source) to helppick stocks.By the time youfinish the book, however,you'll know where to getstock ideas. If you're stillunsure, I provide numerousresourcesinthelastchapter.It's a personal choice

whether tousesoftwareor tolook at charts manually. Atfirst, do it the old fashionedway: manually. After you'vegained more experience and

have a better understandingof what to look for, you'llprobably be grateful thatsoftwareisavailable.

When looking for stocks tobuy, avoid the cheap orilliquid stocks. It's better tobuy and sell higher-qualitystocks, even if they aremoreexpensive.

Hint: although sometraderscombinetechnicaland

fundamental analysis whenlookingforstockstobuy,daytraders rely primarily ontechnical analysis to decidewhentoenterorexit.For each stock that meets

your criteria, you'll need towritedownonpaper:

1. Your expected purchaseprice.

2. A realistic selling price

usingtechnicalanalysis.

3. Anexitpriceincaseyouwere wrong about thestock. This can be yourstop-loss, that is, thepricethatyouwillexitastock. Knowing thisprice in advance canhelp prevent you fromlosing even moremoney.

Writing these three prices

on paper is a key ingredientof your trading plan. In theheatofbattle,whenemotionscan run high, you will focusontheseprices.By now, perhaps you're

thinking:howdoIfindstocksthat meet my criteria, andhowdoIcalculateentriesandexits? The answer to bothquestions can be found byusing technical analysis. Forexample,stocksthatareabout

to breakout is one possiblecriterion. As you continuereading, you will find manyothers. Also, determiningproperentriesandexits takesexperience, and again, you'lluse technical analysis(support and resistance, forexample) for guidance. Oneguideline: get out of a stockquicklyifdoesn'tdowhatyouexpected. (I'll have more tosayaboutstop-losseslater.)

THE RISK-REWARDCALCULATION

Next, you need todeterminearisk-rewardratio.In other words, before youenter a stock, you want tomake sure that buying andselling it will be worth theeffort. Put another way, youenterthetradeifthemonetary

reward is high enough tojustify the trade and the riskrelatively low. The pros callthis a favorable risk-reward,whichisusuallyexpressedasa ratio. Determining afavorable risk-reward is oneof the key ingredients topropermoneymanagement.The risk-reward ratio can

be either simple orcomplicated to calculate. I'veread articles on calculating

the risk-reward ratio thatyou'd need an advanceddegree in mathematics tounderstand. Based on mypersonalexperience,themorecomplicated the calculation,the less likely anyone willfollow it. Therefore, I'mgoing to introduce the mostbasicrisk-rewardratio.The biggest problem with

calculating the risk-rewardratio is you have to make

assumptionsabouthowmuchprofit you “expect” tomake.Although your expectation isbased on technical analysissuch as support andresistance, you may not beright. Therefore, risk-rewardcalculations have to beflexible, depending onchangingmarketconditions.Proswilltellyoutheywant

a risk-reward ratioofat least1:2, and that 1:3 is even

better. This means that forevery $1 you risk, you“expect”toreceiveatleast$2or$3inprofit,orreward.(Asa day trader, however, thismay not always be realistic.Sometimes you have to takewhatyoucanget.)Here's the simplest

example:Youenterthestockat$20.

Your stop-loss is at $19(meaningyou'llsell thestock

at this price if it declinesinsteadofadvancing),soyouwon't losemore than 1 pointon the trade (in trading, 1point always equals $1).Based on your analysis, youplan to exit at $22 for a 2-point profit. In other words,youarerisking1pointifyouare wrong, but you aim tomake2points if right.That'sa 1:2 risk-reward ratio. Tomake thiswork, you have tobe realistic about your price

targets;hopedoesn'tcount.Themost important lesson

from this is that you don'tentera tradeunlessyouhaveareasonablygood ideayou'llbe profitable. If for anyreason the risks are toogreatand the reward is too small,don't make the trade. Thereare thousandsofother stocksyoucanbuy.To do an accurate risk-

reward analysis, you must

consideryourpositionsize.Ifyouhave too largeapositionin one stock, you could beputting your entire portfolioat great risk, no matter howattractive the risk-rewardlookslikeonpaper.

HOW TOCALCULATEPROFIT

Your profit is determinedby the number of shares youown and how many points(remember we use the wordpoints rather than dollars)your stock goes up or down.Forexample,ifyouhave100sharesofastockanditmoveshigherbyonepoint,youhaveanunrealizedgainof$100.Ifthe stock moves 3 pointshigher, you have anunrealized gain of $300. Toturnanunrealizedgainintoa

realized (and taxable) gain,youmustsell.Keepinmindthatthisalso

worksinreverse.Ifyouhave100 shares of a stock and itfallsby1point,youhaveanunrealized loss of $100.Andifyourstockfallsby2points,you have an unrealized lossof$200.Question: if you have

1,000sharesofastockanditrises by 2 points, howmuch

did you make (if you sold,thatis)?Answer: $2,000 (1,000

shares × 2 points) lesscommissions.

THEBESTADVICEYOU'LL EVERRECEIVE

The followingadvice is so

important it will be repeatedinanotherchapter:beforeyoubuy a stock, the mostimportantcalculationyoucanmake is determining what todo ifyou'rewrong.Althoughit'sa lotmorefunto thinkofhow much money you“could” make, knowing inadvancehowmuchyoucouldpotentially lose will helppreventyoufromblowingupyour account. Always thinkofworst-casescenarios.

The pros have a name forlosses: drawdown, a fancyway of saying how muchmoney you can lose in yourentire account at its worstlevel. The pros plan fordrawdown and expect it, andyou should do the same.Unfortunately,thesizeofthatdrawdown can never beknown in advance. Putanother way, don't enter atrade with sugarplumsdancing in your head while

the big badwolf is hiding inthebushesreadytopounce.

Understanding theBid,Ask,andSpread

Three key terms for tradersand investors to know are:bid, ask, and spread. Bid istheslightlylowerpriceontheleft sideof thequote. It's thebestcurrentlypublishedpriceatwhichyoucansellastock

(or asset).When selling, youmay accept the bid price (ortrytogetahigherprice).Theaskpriceistheslightlyhigherprice on the right side of thequote. It's the best currentlypublished price atwhich youcanbuyastock(orasset).Putanother way, it's the lowestprice a seller is willing toaccept for an individualsecurity. When buying, youwill pay the ask price (oroccasionallyless).Thespread

is the difference between thebid and ask prices (and incase you're wondering, thedifference is pocketed by thespecialists or market makerswhomaintainthemarket).Figure5.1 isascreenshot

of Microsoft's bid, ask, andspread.

FIG5.1:Bid,Ask,andSpreadForillustrativepurposesonly.Source:FidelityInvestments.©2010FMR

LLC.Allrightsreserved.Usedbypermission.

Putanotherway,thespreadis the difference betweenwhat someone is willing topay and the price at whichsomeone is willing to sell.You'll notice that the spreadisconstantlyinmotion.The specialists at the

NYSEandthemarketmakerson the Nasdaq usuallydetermine the spread. Theypublicly display the current

bid and ask price. (The onlyexception is if you trade viaan ECN, the tradersthemselves determine thespread).In the example above, the

ask price for Microsoft(Nasdaq: MSFT) is $24.09.To be certain of buyingMicrosoft at the currentmarket price, you'd have topay $24.09 (or you can offerless). If you already owned

Microsoft and wanted to sellit,youcouldsellitforthebidprice of $23.96 (or you candemand more). And finally,inthisexample,thespread,orthe difference between thebidandaskprice,is$0.13.Note:IamusingMicrosoft

as my example because it issuchawell-knowncompany.Asadaytrade,however, thiscompany is usually notvolatile enough to make

substantial short-term profits.The types of stocks you'llwant to day trade includesome of the following, thekindthatcanmove2,4,or5percent intraday. Forexample: AnadarkoPetroleum Corporation(NYSE: APC), AmericanInternational Group (NYSE:AIG), Take-Two InteractiveSoftware (Nasdaq: TTWO),and Blue Coat Systems(Nasdaq: BCSI). You'll find

volatile stocks on the mostactive lists at Yahoo!Finance, Google Finance,Bloomberg,tonameafew,orlisted on your brokeragefirm'swebsite.Many years ago, before

stock prices were displayedasdecimals, thespreadcouldbe very wide. In those days,stocks were displayed asfractions, so stocks routinelyhadspreadsof$0.50ormore.

After decimalization, whichwas themove from fractionstodecimals,spreadsofliquid,highly active stockstightened, often to just a fewpennies. One guideline: themore liquid the stock, thetighterthespread.Infact,ifyounoticeavery

wide spread between the bidandask,thatisawarningthatthe stock is likely to beilliquid. Illiquid stocks are

usually difficult to buy orsell.More than likely, if yousee a wide spread, you'reeither in the after-hoursmarketoryou're lookingatapennystocktradingforunder$3.Asadaytrader,youneedliquid stocks, which is whyyouwanttoavoidmostpennystocks and the after-hoursmarket.

Trading Long,

TradingShort

Professionaldaytradersknowevery market has two sides,long and short. Although it'schallenging enough to tradeon the long side, as anemerging day trader, youshould also learn how toshort.Whenyouinvestinastock

hoping that it will rise inprice,youaresaidtobe long

thestock.Yourgoalistobuylowandsellhigh.Yourprofitis the difference between thepriceatwhichyouboughtthestock and your selling price.For example, if you buy astock at $15.23 and sell it at$16.80, youmade a profit of1.57points.On the other hand, if you

sellstockandhopethatitwillgodowninprice,youaresaidto be short the stock. When

you short a stock, you firstsellthestock,hopingtobuyitback at a lower price. Yourprofit is the differencebetween the price at whichyou sold the stock and theprice at which you bought itback. If you'venever shortedstocks before, it can seem abit counterintuitive.Butonceyou learn how to use thisstrategy, you'll gladly pull itout during certain marketconditions.

SHORTINGBASICS

Here'showshortingworks:let's say you're watching thestock Daytraders, Inc. and,based on the signals listedbelow, you believe this $50stockisoverboughtandreadyforafall.Ifyoudecidetosellshort 100 shares ofDaytraders,Inc.,youplaceanorder to sell Daytraders, Inc.

at$50pershare.Becauseyoudon'townthe

stock, the brokerage firmlends you 100 shares ofDaytraders, Inc.You sell theshares, collect $5,000 (100shares × $50 per share), andyour trade confirmationshows that you sold theshares and that your currentpositioninthestockisminus(−) 100 shares. If youranalysis is correct,

Daytraders, Inc. eventuallyfalls to $49. You then turnaround and buy 100 sharesfor $4,900, thereby coveringthe short position. You nowhavea1-pointprofit,or$100.Thesharesyoubought(+100shares) cancel the priorposition (−100 shares) andyou no longer have aposition. The brokerage firmtakes the shares you justbought and returns them tothelender.Youhavethe$100

profit(lesscommissions).Many pros say they can

make more money on theshort side. The reason?Shorting opportunities oftenoccur with a huge, volatilemovedown,whichmeansthepotential for large profits.When people buy, they tendto do it more gradually(unless it's in the later stagesofabuyingclimax),butwhenpeople sell, especially when

afraid, they tend to do it inonehugemove.Theidealtimetoshortisin

a downtrend. You also wantto find stocks that are belowtheirmovingaverageandarethe laggingstocks inasectororindustrygroup.

WHAT CAN GOWRONG

Although selling shortsounds straightforward, a lotof things can go wrong.Whenyougolongastock,intheory you could loseeverything you invested. Butwhen you short a stock, youcould lose more than youinvested, which is whyshortingcanberisky.For example, what if

Daytraders, Inc. didn't dropby 1 point but increased in

value? In thatcase, foreverypoint that Daytraders, Inc.rises, you lose $100. Howhigh can a stock go up? It'sunlimited. The problem withshortingisifastockgoesup,not down, your losses areunlimited, if you don't coverorusestops.

CONTROLLINGRISK

Shorting has a badreputationamonguninformed(and undisciplined) investorswho don't understand itsnuances.When shorting, youshould have tight stops andthe discipline to cover yourposition if it's going againstyou. In addition, when youhaveasubstantialprofitfroma short, use trailing stops toprotect your profit. Investorsdon't remain panickedforever, so stocks will

eventually reverse and headhigher. Then again, it'sdifficult to predict when thismightoccur.Although experienced

short sellers are disciplinedenough to cover their shortsquickly before the positiongets out of control, mistakescan and do occur. Forexample,asadaytrader,youprobably don't want to holdanylosingpositionovernight.

That includesshortpositions.Just likewith long positions,you must closely monitoryourposition.

Asarookiedaytrader,you'llhaveyourhandsfulltryingtounderstand the long side ofthe market. That is why Irecommend that you firstunderstand the long sidebefore shorting. Althoughselling short can beprofitable, at times this

strategy can be extremelychallenging.

If You've NeverBought or Sold aStock:ReadThis

Ifyou'refamiliarwithbuyingandsellingstocks,feelfreetoskip this short section. If,however,you'veneverboughtor sold a stock, you're in therightplace.

You've scanned for stocksthat fit your criteria (again,thiswillbebasedontechnicalanalysisorscanningsoftwarefrom your brokerage firm)and you decide to buy 100shares of MicrosoftCorporation (Nasdaq:MSFT), which is trading for$23.96 per share (but it'sguaranteed to change by thetimeyoureadthis).To get started, sign onto

your brokerage firm'swebsite.Afterloggingin,youwill enter the trading area ofyour firm's website. Yourscreen could look similar towhat is displayed in Figure5.2.

FIG5.2:MainScreen,BrokerageWebsiteForillustrativepurposesonly.Source:FidelityInvestments.©2010FMRLLC.Allrightsreserved.Usedby

permission.

UNDERSTANDINGTHE MAINSCREEN

Inthemainscreen(Figure5.2), moving from left toright, you'll see a detailedquote of Microsoft withimportantinformationsuchasthe day's high and low, andthe bid and ask price. Next,an intraday candlestick chart

ofMicrosoftisdisplayed.Noticeatthebottomofthe

chart that you can add orchange indicators, time, andfrequency.Thethirdscreenisa watch list of individualstocks. On the bottom left isanorderentryscreen.This isthe screenwhereyou'll placeyourtrades.Totherightisthebreaking

news feed, which you willobserve. (Please don't make

the common mistake ofbuyingsharesofastockafteryou read about it in abreaking news story). Andfinally, on the bottom of thescreenisastreamingquote.

CUSTOMIZINGYOURSCREENS

With any brokerage firm

software that you use, youwill have the flexibility tocustomizethescreenstomeetyour needs. On any mainscreen, you can change thelayout and colors, set upalerts, create customizablecharts, generate reports, andtrade stocks or options. Asyou gain more experiencetrading, you'll learn tocustomize your screens sothat they display only themost important information.

For example, you'll want tosee chartswithmultiple timeframes, technical indicators,news feeds, profit and lossresults, and, of course, anorder entry screen. If youhavemore than onemonitor,you'll have a lot more realestate for other usefulscreens.There are hundreds of

choicesyoucanchoosefrom,so what you do or don't

include is a personal choice.At first, all of thisinformation may seemoverwhelming, but don'tworry, it will eventually geteasier.

OrderTypes

In order to place the rightorder,youneedtounderstandthe difference betweenvariousordertypes,including

market orders, limit orders,andbuy-stoporders.

FAST BUT NOTRECOMMENDED:MARKETORDER

A market order is simplytellingyourbrokertobuytheshares at the best availableprice.Ifyouchoosetobuyor

sellusingmarketorders,thenyou're letting the market,which is really automatedcomputers, fill your orderusing the national best bidandofferprice(NBBO).Thismeans that your brokermustguaranteethatyoureceivethebest available bid and askprice.Unfortunately, during

certain market conditions,such as a fastmarket, if you

use amarket order, youmayreceiveaverybadfill.Infact,oneoftheonlyreasonsyou'dselectamarketorderisifyoumust have an immediate fill,but even then you may notget the most competitiveprice.A market order can be a

disaster. For example, duringa very fast market, or flashcrash,yoursellordermaybefilled 10, 15, or 20 points

lower than you anticipated.Although a flash crash is arelatively rare event,remember that, when youplace a market order, you'regivingthemarketfullcontrolofyourorder,andthat'sneverthewisestmove.BuyExample:Microsoftis

trading at $23.82 (bid) by$23.83(ask). You enter amarket order to buy, andwithin seconds, your order is

filledat$23.83.SellExample:Microsoft is

trading at $23.82 by $23.83.You enter a market order tosell, and seconds later, yourorderisfilledat$23.82.Another problem with

marketordersisslippage(thedifference between theestimated market price andtheactualpriceyouboughtorsold). On occasion, slippageis expected, which can cut

into your profits. Because ofall of the reasons mentionedabove,day traderswill rarelyuse market orders, andinsteaduselimitorders.

COMPETITIVEAND TIMELY:LIMITORDER

When you enter a limit

order, you decide themaximum price you arewilling to pay or theminimum price you arewilling to sell. Your order isfilledwhen the stock reachesthe price you specify. Whenbuying,your limit order is atapricelowerthanthecurrentaskprice.Whenselling,yourlimitorderisatapricehigherthan the current bid price.Basically, you're instructingthe brokerage firm to buy at

or better than the specifiedprice.Yousettheparameters.Know this: the stockmaybetrading near $23, but if youwant tobid$22.50,youmaydo so. There is little chancethe order will be filledimmediately, but you areallowedtoentera limitorderatanyprice.Although limit orders are

the preferred method ofbuying or selling stock, they

have a downside. Forexample, if the stock neverreaches the limit price, yourorder won't be filled at all.You'll be left dangling withnowhere togounlessyoure-enteryourprice.BuyExample:Microsoftis

trading with an ask price of$23.83,whichisthepriceyoumustpayifyouwanttobuyitright now. You set a limitorder at $23.50, which

guaranteesthatyouwon'tpaymore than$23.50 tobuy thisstock. If Microsoft drops to$23.50or less, theorderwillbe filled. If, however, thestock never drops to $23.50,theorderisnottriggered,youdid not buy the shares, andthereisnoharmdone.SellExample:Microsoft is

trading at a bid price of$23.82, which is the priceyou'll receive if you want to

sell it right now. You set alimit order to sell at $24. IfMicrosoft rises to $24 orabove,yourorder is filled. Ifthestockdoesnotreach$24,theorderisn'tfilled.If you want to get filled

immediately, you may enteran order that is higher thanthecurrentaskpriceorlowerthan the bid price. In otherwords, if the current ask onthestockis$23.83pershare,

and you want to buyimmediately, you can enter$23.84. More than likely,you'll be filled immediately,and probably at $23.83.Conversely, if thecurrentbidpriceis$23.82,andyouwantto sell immediately, you canenterapriceof$23.81.You'llprobablybe filledwithinonesecond.

GOING HIGHER:BUY-STOPORDER

Anotherconvenienttypeoforder is the buy-stop. Let'ssay you don't want to missoutifastocksuddenlymoveshigher (based on a bullishchart pattern, for example).Byenteringabuy-stop,you'retelling the brokerage firm toenter an order to buy the

stock at a higher price. Assoonas thatprice is reached,yourorderbecomesamarketordertobuy.Example of a buy-stop

order: Microsoft is currentlytrading at $23.82 by $23.83.Youenterabuy-stoporderat$24. If the stock hits $24, itturns into a market order.Oncetheorderistriggeredatthebuy-stoppriceof$24 (orhigher),itwillbefilledatthe

next available price. On theother hand, if the stockdoesn't hit $24 (or higher),theorderwillremainunfilled.Youcanalsousethisorder

ifyouwanttobuyastockatahigher price, but are awayfromyourcomputerandcan'tenter it manually. Perhapsyou have to leave the houseanddon'twant tomiss out ifthe stock keeps going up.Then you could enter a buy-

stoporder.The only danger with this

order is if thestocksuddenlygaps up, for example, at themarket open. You could getfilled at amuch higher pricethanyouexpected.Therefore,use the buy-stop order whenyoumustmakethetrade,andavoidusingthisorder typeatthe market open. Anothersolution, however, is using abuy-stoplimitorder.

Example of a buy-stoplimit order: Microsoft iscurrentlytradingat$23.82by$23.83.Youenterabuy-stoplimit order at $24. IfMicrosoft does hit $24, itturns into a limit order, andthe shares will be bought at$24 or better. If the stockdoesn't drop below $24 afterthe trigger (the stop price),your orderwill remain open.Also, in fast markets, it'spossiblethemarketwillblast

through your buy orderwithout filling. Bottom line:because these orders are soflexible, it's suggested thatyou first experiment withthemtodeterminewhichonefulfillsyourneeds.Note: You also have the

option of entering two priceswiththebuy-stoplimitorder.The first is the stop price,which is the trigger. Thesecond is the limitprice, that

is,themostyouarewillingtopayforthestock.Checkwithyour brokerage firm to learntheirexactrules.

Placing Your FirstOrder

Figure 5.3 is an order entryscreenforMicrosoft:

FIG5.3:OrderEntryScreenForillustrativepurposesonly.Source:FidelityInvestments.©2010FMRLLC.Allrightsreserved.Usedby

permission.

This is an extremelyimportant screen, one thatyou'll have to fullyunderstand if you're going totrade stocks. Although thescreen iseasy to fillout,you

need to know what eachcolumnmeans.Beginning on the left, you

havetoenterthecorrectstocksymbol.Youwouldn'tbelievehow many traders enter thewrong symbol and buy thewrong stock! Fortunately,there's always a previewbutton (on the far right) thatallows you to catchmistakesbeforeyousubmittheorder.The next columns are the

bid-ask spread, which youjust learned about. It'simportant that you alwaysknow the bid and ask price,andlearnhowtoseekoutthebestprice.Under the Action column,

youchoosewhetheryouwantto buyor sell.Becausewe'regoing to buy Microsoft, weselectBuy.In the Quantity column,

you select how many shares

you want to buy. For thisorder,weenter100shares.Finally, in the column

Order, you have a choice oforders, limit or market.Obviously,weselectedLimit.

Anytime you're enteringfinancialinformation,besureto double-check your entries.As mentioned earlier, toomany traders lose money byinadvertently entering

incorrect symbols, shares, orprices.Pleasedon'tmakethatmistake.

Using this screen (Figure5.3),webought100sharesofMicrosoft at $24 per share.Rather than paying thecurrent ask price of $24.09,we entered a limit price of$24. Our order may not beacceptedat thisprice,but it'sless expensive than payingthe market price. As you

notice on the right, the totalcost of this order will be$2,400,pluscommissions.Onceyou'veenteredallthe

information, click on thePreview button. This givesyou a chance to review yourorder for errors. After youpresstheEnterkey,theorderis active and ready to befilled. Good work! You'veplaced your first order. (Bythe way, our order did get

filledat$24).Once you place your first

trade, youmay get the samefeeling you get when youskydiveordriveacarfor thefirst time. I hope that withtime and experience thatfeeling will disappear.Why?If you're day tradingbecauseyou're looking forentertainment or excitement,you'llprobablyendup losingmoney, and maybe a lot of

money.Althoughday tradingmay seem like gambling tosome people, if takenseriouslyandwith theproperskills, it is an acceptablemethod for generatingincome. The goal is to tradebased on probabilities andfinancialopportunities,notonluckorhunches.For some people, placing

anorder is theeasiestpartoftrading.Coming up next: the

hard part, which is how tomanage your position.Managing positions, whichtranslates intomanagingrisk,is what separates the prosfromtheamateurs.

Managing YourPosition

Managingpositionsizeisoneofthekeystoyoursuccessasa trader, and an essential

aspect of risk management.Thismeansadjustingthesizeofyoursharepositionsothatyou aren't risking too muchmoneyincaseyouarewrong.For example, some rookiesalways buy 1,000 shares nomatterwhatthestockpriceorhowmoneytheyhaveintheiraccount. This is a hugemistake. Proper share size isdependent on many factors,including stop-losses, whichwe'lldiscussnext.

PLAYINGDEFENSE: STOCKPROTECTIONORDERS

The following types ofordersaredesignedtolockingainsortoprotectyouagainstlosses. Some traders enterthese orders immediately,whileothers takeawait-and-

seeapproach.The Stop-Loss Order,

Part 1: Protecting AgainstLargeLossesOne of the more popular

defensive tools is the stop-lossorder,designedtoprotectyou in case your stock startsto plunge. You use it toautomatically sell a positionat a specified price. Sometraders enter a stop-loss assoon as they finish buying a

stock,whichmakessenseforrookies.The stop-loss order works

like this: youbuy100 sharesofMicrosoftat$23.05.Next,enter a stop-loss order at$22.25, for example. Simplyput, if Microsoft drops to$22.25orless,amarketorderto sell 100 shares ofMicrosoft at “the market” istriggered.Theideaistolimitlosses, preventing a

catastrophe.The biggest disadvantage

ofthestop-lossorder is thereare no guarantees it will befilledatthepriceyouwant,oreven executed immediately.Once it is a market order, itwill be filled at the bestavailableprice.In a normal market, the

stop-loss usually works asdesigned, and you'll end upselling at or near $22.25 per

share, in this example. An$0.80lossisnotpleasant,butit'sbetter than losinga largeramount. You have basicallycontained your loss to lessthanapoint.Youcanalwaysset the stop-loss higher, forexample, at $22.37, $22.70,oranyotherprice.Unfortunately, in a fast

market where the stock gapsdown, or if the marketplunges, the stop-loss may

not work as designed. Forexample, let's say themarketgoes into a nosedive and, onthe way down, your $22.25stop-loss is triggered. Nowyour market order is at themercy of how many sharesare being dumped, and howrapidly those shareordershitthetradingfloor(beforeyourorder).Thismeansthatitwillgetfilledatthenextavailablepricewhich, in this example,couldbeadozenpointslower

than your stop-loss price.Volatile, high-priced stockslikeGoogle(Nasdaq:GOOG)and Apple (Nasdaq: AAPL)could gap down 5 to 15percent(whileastodgystocklikeMicrosoftmightonlyfallalittle).

Ifyoudouseahardstop-loss(arealorder thatwasenteredthrough your broker), don'tcarry it overnight because ofthe possibility of market

opening gap-downs (or gap-upsifyouareshorting).

Determiningwheretoenteryour stop-loss is not an easydecision, but when you havedetermined your risk-reward,you will have a maximumloss in mind. Use thatmaximum loss to establishthestop-lossprice.There'snoright answer. Many tradersuse support and resistance todetermine where to put a

stop-loss. Other pros,however, use arbitrarypercentages (1 or 2 percent)or numerical values (1 or 2points)todeterminewheretoput their stops. If your stopsare constantly gettingtriggered, however, and thestock then zooms up, it's aclueyou'resettingyourstopstootight.The Stop-Loss Order,

Part2:LockinginProfits

Another way to use stop-loss orders is this: instead ofentering in a stop-lossimmediately after buying thestock,enterthestop-lossafteryouhaveanunrealizedprofit.In this scenario, the stop-lossisusedtoprotectsome,orall,of that profit. If the stop-lossis setaboveyourentryprice,then you will eventuallyrealizeaprofitfromthetradebecause you either sell atyour target price or at the

stop-lossprice.Example: You bought

Microsoft at $23 per share,and it's now trading at $25pershare,a2-pointgain.Youdon't want to lose out onthese profits so you enter astop-loss at $24, essentiallylocking in a1-pointprofit. Ifthe stock continues higher,raise the stop-loss price inincrements, perhaps $0.50 ata time, locking in evenmore

profit. Keep in mind thatduring a hectic trading day,you may not have manyopportunities to keepchanging stop-loss prices.Also, always cancel anyprevious stop-loss orderswhenyoureplacethem.Some experienced traders

take a “wait-and-see”approach and don't use hardstop-losses. Rather, they usementalstops.Thistakesmore

discipline, but it means thatinstead of actually enteringthe order into the computer,youeitherwriteitonpaperorkeepyourtargetpriceslockedinyourmind.If you're a novice trader,

it'sbesttobeginbyphysicallyentering hard stops. As yougain experience anddiscipline, you can decidewhichtypeofordersuitsyourtrading style. The downside

to using mental stops is youmust watch your stockpositions very closely.Unfortunately, many peoplelack the discipline to sellbasedonmentalstops.Nomatterwhichtechnique

you use, keep this in mind:“If you are ahead by threepoints,” says trader andbestselling author Dr.AlexanderElder,“youarenotgoingtogivebackmorethan

two. You have to protect atleast one point of profit. It'sabsolutely criminal to take alarge open profit and allowthe market to turn it into aloss.”Understanding the stop-

loss is an essential part ofyour education. That beingsaid, instead of entering amarket order, many tradersuse a stop-limit order,whichwe'll discuss next. As you'll

see, each order type hasadvantages anddisadvantages.The Stop-Limit Order:

Another Way to ProtectAgainstLossesThe stop-limit order

combinesbothastop-lossandalimitorderintoone.Insteadof entering one number, youenter two. The first numbertriggers the stop and thesecond number specifies the

minimum selling price youwill accept. Soundsconfusing?It'snot.Afteryoutryitafewtimes, it'seasytounderstand.Itworks like this: let's say

you bought Microsoft at$22.90 per share. When youenter a stop sell limit order,you first enter thestop price,for example, $22 per share.Atthesametime,youenteralimitprice,whichsetsa limit

on the lowest price you willaccept for your shares. Thelimitpriceguaranteesthatthestockwillbesoldatorabovethat price (assuming it's sold—limitordersaresometimesnot filled). In our example,we'll set a limit price of$21.95pershare.After setting up the stop-

limit order (with a $22 stopand$21.95limit),here'swhatcould happen in real life:

Microsoft is trading at $24per shareand it appears as ifyou'llbeabletobookaprofit.Suddenly,somebadnewshitsthe entire technology sectorandMicrosoftsuddenlydropswellbelow$22.90pershare.In this example, the stop-

loss order is triggered at $22per share. Now the orderbecomes a limit order. Next,as long as the order can besold at $21.95 or higher per

share,theorderwillbefilled.If however, the stock gapsdown below the $21.95 limitprice, the order will not befilled.Theoretically, the stock

could drop to $15 per shareand your order still will notbe filled, not until it risesabove $21.95 per share. (Bytheway, if it drops to $15 ashare, you'll want to cancelyour sell order and devise a

new trading plan.) Putanother way, you arecontrolling exactly at whatprice youwill sell the stock.In this example, you aretelling the market you willonly sell above $21.95 pershare.Youcouldalsoplacea$22

stop price and a $22 limitorder,sothatat$22theorderis triggered, but the stockmuststillbetradingat$22or

it won't get filled. As withanyorder,youare telling thecomputer that handles thetrades that you insist onreceiving thispriceandnotapenny less. In a fast-movingmarket,however,thechancesofnotgettingfilledincrease.To summarize, with the

stop-loss market order, youwill get filled, but you don'tknow the exactprice.With astop-limit order, you are

guaranteedacertainprice,buttheordermaynotgetfilledifthatpriceisn'tavailable.ACleverWaytoLockIn

Profits: Trailing StopOrdersThe trailing stop order,

entered as a dollar or apercentageamount, isamoresophisticated way of lockingin gains and minimizinglosses. The trailing stopadjusts or trails behind a

rising stock price. It's idealfor traderswhodon'twant toenter new (and cancel older)orders.Itworks like this:youbuy

a stock at $20 and enter atrailing stop order of $1.Every penny that the stockmoves higher, the trailingstop increases by one penny.Ifthestockmovesto$21,forexample, the trailing stoporder tags along, adjusting

higher. In this case, if thestockfallsto$20,anorderistriggered, and becomes amarket(orlimit)ordertosell.Instead of a dollar amount,youalsocansetapercentage,suchas1or2percent.Thetrailingstoporderonly

adjusts higher, allowing youto lock in gains, but doesn'tchange if the stock moveslower, so it also minimizeslosses.

Although the trailing stoporder locks in your gainsquite effectively when thegains are large, it doesn't domuch if you're trading forsmall profits. Also, it'spossible the trailing stoporder might trigger too fastwithveryvolatilestocks.Again, it's best to

experiment with the trailingstop in a practice account.These practice sessions are

well worth your time. Bestadvice: learn how theseordersworkbeforeyouplaceyourfirsttrade.Note that it's also possible

to enter a trailing stop-limitorder, which can give youeven more control over yourorder. The trailing stopmarket order will definitelyget you out of the stock,while the trailing stop-limitordermaynotgetfilledatall.

A SHARPALTERNATIVE:PRICEALERTS

If you're concerned thatstop-loss orders are toopermanent and that mentalstops are too loose, try thisflexible alternative: the pricealert.Manypros successfullyuse price alerts to managetheirorders.

It's quite simple: youinstruct your brokerage firmto notify you by e-mail,phone, or with a computerbeep when a specific pricetargethasbeen reached for aspecific stock. Therefore,evenbeforeyoubuya stock,you can set up automaticprice alerts for entries andexits. Alerts will tell youwhen your target prices forbuying or selling have beenreached.

For example, if you'reinterestedinaparticularstockbut feel it's overpriced, youcan set up a price alert for amorereasonableprice.Many disciplined traders

will find alerts an excellentalternative to placing hardstops.

FORSOPHISTICATED

TRADERS:CONDITIONALORDERS

Togainevenmorecontrolover your orders, you mightwant to consider usingconditional orders. Theseinstructions can be as simpleor as complicated as youwant.For example, with a

conditional order you cansimultaneously place twoordersonthesamestock.Forexample, if your stock istradingat$20,youcanplacea One Cancels the Other(OCO) order which consistsof both a stop-loss to sell at$19, and a limit order to sellat $22. Whichever order istriggered first is the one thatis executed and the other iscancelled. This type of orderis ideal for some traders

becauseitforcesthemtohavea trading plan with specificpricetargets.Youcanplace all kindsof

conditional orders. Forexample, one of myacquaintances places aconditional time order. Hesetsupaconditionalordersothathisordersaren'ttriggereduntil the market is open atleast 10 minutes. This way,he misses out on dangerous

gap ups in the morning. Asyou gain more experiencewith conditional orders, youmay also come up with newand creative combinations.(Not every brokerage firmaccepts every type ofconditional order, so becertaintoaskfirst).

OTHER ORDERCHOICES

You have other choiceswhen placing an order. Forexample, on the dropdownmenu on your order entryscreen,youmayseeGood'TilCanceled (GTC). Becausesome brokers will only holdanopenorderuntiltheendofthe day, this order instructsyour brokerage firm to keepthe order active until youcancel it. As a day trader,however, it's unlikely you'lluseaGTCveryoften,ifever.

YoucanalsochooseAllorNone (AON) which meansyou want the entire orderfilled or none at all. Thispreventsanorder frombeingpartially filled, 100 shareshere,or100sharesthere.Thisis perhaps most useful forthinly traded stocks, whenyou either want the entireorder completed, or to forgetabout the whole trade. Mosttraders tend to keep this boxunchecked,andarewillingto

acceptpartialfills.

Have a SellingStrategy

Remember the following:haveasellingstrategy.Manyrookie traders, and someexperienced ones, too, spendmostoftheirtimethinkingofstocks tobuybut spend littletimeonwhentosell.Becausesome traders don't have a

sellingplanandplayitbyear,theylosemoney.A popular Wall Street

saying is: “Cut your lossesshort and let your winnersrun.” As a day trader,however, you don't have theluxuryoflettingyourwinnersrun for too long. Once yourprofitgoalsaremet,youwanttobeoutofthestockassoonaspossible.Remember what I said at

thebeginningof thischapter.You should have threenumbers when entering themarket:theentryprice,astopprice, and a target sellingprice. Before you enter themarket, you need to knowwhentogetout.As a day trader, you may

also need a time target. Itcould be one hour, butmorethan likely you will exit bytheendoftheday.

And now, based onhundreds of interviews withtraders and personalexperience, I'm going tointroduce you to my fiveselling guidelines. Use theones that make sense to youandignoretherest.

SET FLEXIBLEPRICETARGETS

Settingpricetargetscanbechallenging. On one hand,youwanttosetrealisticpricetargets based on technicalanalysis. On the other hand,you must be flexible in casethemarket doesn't cooperate.Nevertheless, theexact targetpriceisapersonalchoice.Whatever you do, don't

refuse to takeprofitsbecauseyour profit target fell a fewquarters short. It happens a

lot:traderswillrefusetotakeaprofitbecause theywant tosqueeze a few more penniesout of a winning stock. Andthen, just like that, the stockreverses and they lose alltheirprofits! (Not if theyusetrailingstops,however).Asaday trader, you take theprofitsandrun—whatIcallhitandruntrading.

SEL WHEN YOUSEE THAT FIRSTCOCKROACH

The popular cockroachtheory applies to almostanything in life, butespecially to trading. In thetradingworld,itmeansthatifyou see or hear problemsabout a stock you own,assume that's just the

beginning. In other words,whenyouseeonecockroach,there are probably manyhidinginthebackgroundthatyoucan'tsee.Asadaytrader,you'llhave

toreactquickly if there'sbadnews about a company, orperhaps in that sector. Don'tmake the common investormistake of “hoping” that thenegative news will pass.More than likely, more bad

newswillfollow.In addition to the

cockroach theory, follow thisadvice: “When in doubt, getout.”One trader toldme thatas soon as you first thinkaboutselling,that'swhenyoushould sell. When you'reunsure about a stock or haveany doubts, either get outcompletely or reduce yourposition.Don'tforgetthatyoucan always repurchase the

stocktomorrow.

WATCH OUT FOREMOTIONAL SELLSIGNALS

This is my personalfavorite because I've seen itso often in myself and othertraders. As soon as you'recounting your profits, giving

high fives to your friends, ortelling everyone you're astockmarketgenius,that'sthetimetosell,orenteratrailingstop-lossorder.In my previous book,

Understanding Options(McGraw-Hill,2006),Iwroteaboutarookiefriendofminewho made $130,000 inoptionsprofitsinoneday,butdidn't sell because he wascertain the underlying stock

wasgoingevenhigher.Obviously, greed was the

culprit, but he didn'trecognize it until later thatweek when he lost all hisprofits and more. As I saidearlier,itisextremelypainfulto turn a profit into a loss. Idon'tthinkmyfriendeverdidrecoverfromhismistake.Note: By the way, if you

find that you're getting tooemotional about trading,

perhaps that's a signal youneed a break, or to findanotherway tomakemoney.It'snoteasytositandstareata computer screen, so Irecommend taking numerousbreaksfromtradingwhenyouhave no open orders orpositions. In addition, if youhave a series of bad trades,and your confidence is low,that is another signal youneed to exercise, take avacation, or do something

besides trading for a while.Controlling emotions isessential if you are going todaytrade.

SCALING OUT OFPOSITIONS

When it comes to sellingstocks, everyone has adifferent strategy. Some

traders liketosellallof theirshares in a single trade.Othersprefertoscaleoutofaposition,thatis,sellpartofaposition, perhaps half, andsellmoreasprofitincreases.The advantage of scaling

out is that some profits arecaptured immediately. Thedisadvantageisthatitcaneatup commissions and, forsome, it's challenging tojugglemultiple trades. Ifyou

don'thandlescalingproperly,you'dbebetteroffgettingoutof the trade all at once.Perhaps the best advice is topractice scaling out of apositiontogainexperience.Scaling is one of the

reasons why professionaltraders prefer to use “pershare” commissions ratherthan per trade. If you'reconstantly scaling in and outof a position, those per trade

transaction costs can becostly, whereas per sharetransactions are lessexpensive.By theway, scaling into a

position may make moresense to beginner traders.Instead of buying the entire100 shares at once, begin bybuying only 50 shares. Thenif the trade goes your way,you can buy the other 50shares.

NEVER TURN ALOSS INTO ANINVESTMENT

One mistake you shouldnevermakeisturningalosingstock into an investment, inother words, holding a stockovernight hoping that it willcome back. It almost neverdoes! As a day trader, whenyou have a losing stock, sell

that loser before the end oftheday.That'soneofthebestwaystolimitlosses.

HowtoSell

Now that you've learnedsome selling guidelines, let'sgo ahead and sell our stockfor a gain (in this example).We'll open up our tradingscreen and take a look at thecurrentbidandaskprice(see

Figure5.4):

FIG5.4:SellOrderScreenForillustrativepurposesonly.Source:FidelityInvestments.©2010FMRLLC.Allrightsreserved.Usedby

permission.

AfterbuyingMicrosoft for$24.00pershare,wewillnowsell the stock at the currentbidpriceof$25.14.Ourgain

is1.14points×100sharesforanapproximatetotalof$114.Although we could have

sold the stock for a fewpennies higher than thecurrentbidprice,wedecidednot to quibble over pennies,andtosellfora1-pointgain.AfterclickingonthePreviewbuttontomakesuretheorderisaccurate,weplacetheorderandwithinseconds,it'sfilled.Ifyou'redreamingofeven

bigger profits, first learn thebasics. The purpose of theserelatively small trades is tobuildyourself-confidence,tolearn the nuances of orderentries and exits, and tomanage risk. This is the costof your tuition. By usingsmall share sizes andavoiding margin, you canlearn valuable lessons whilenot putting much of yourentireportfolioatrisk.

TradingOptions

As an informed trader, it isimportanttolearnhowtobuyandselloptions.Youcanuseoptions to protect or hedgeyour stock portfolio, tospeculate, and to generateincome.Let's briefly go overthreebasicoptionstrategies.

SELLING

COVEREDCALLS

Basically, while holding alongpositioninanunderlyingstock,aninvestorwillsell(orwrite) covered calls on thoseshares in order to receiveincome.Let's say you own 100

sharesofXYZ.Youthensell1 call option (1 call isequivalent to 100 shares of

stock)toanoptionbuyer.Thebuyerpaysapremium(cash)for the rights to those 100shares at an agreed-uponprice (strike price). You getthe cash up front while theoption buyer receives therighttobuythatstock.Example: you own XYZ

Corporation, which iscurrently $33 per share.Yousell1 coveredcall at a strikeprice of $35 per share.Why

sell an option? For themoney. The cash premium(the amount depends on thecall option price, whichconstantly changes) is yoursto keep. If the stock pricerises within a certain timeperiod, (which could beanywhere from days toyears), you may be requiredto sell the shares. Thathappens when the stock isabove $35 when expirationarrives.On theotherhand, if

the stock drops in price, theoption will expire worthlessbut you still keep thepremium. Also, because youstill own the stock, youmayhaveunrealized losseson thestock. Nevertheless, thepremium you received willhelpoffsetthelosses.This strategy, which is

flexible and costs little, hasbeen used for years togenerateextraincomeorcash

flow.Inaway,you'rerentingyour stocks to other peopleand they pay you for theprivilege. The strategy has adual purpose: to enhanceearnings and offer you someprotectionagainstloss.Some people will buy

specific stocks just so theycan receive cash up front(premium).Underlyingstocksthat are neutral to slightlybullish are considered ideal

forthecoveredcallstrategy.There are risks. For

example, if the underlyingstock falls more than thevalueof thecoveredcallyousold, then you are notprotected. That is why Isuggestyousellcoveredcallson stocks that are not veryvolatile.

BUYING OPTIONS

FORSPECULATION

One of the reasons thatsometradersbuyoptionsistospeculate. Most speculatorsprobably lose money,althoughnooneissureoftheexact percentage. Tospeculate,youcaneitherbuyputs (you believe theunderlying stock is going

down), or calls (you believetheunderlying stock isgoingup). Buying calls and putsworkthesameway,althoughyoubuy themforcompletelydifferentreasons.When you buy a call,

you're expecting theunderlying stock to rise inprice; therefore, buying callsisabullishstrategy.Toprofit,the call buyer has to becorrect about the direction

andthetiming.ExampleofBuyingaCall:

1. Youbuy1March20calloptionofDaytrader,Inc.The option has a strikeprice of 20 and expiresthe third Friday inMarch.Itcosts$3.30percontract for a total costof $330 pluscommission.

2. IfDaytrader, Inc.movesabove $20 a share (thestrike price), the optionbecomes more valuable.The higher the stockmoves above the strikeprice, the more theoptionisworth.

3. If the option is wellabovethestrikepriceonor before the expirationdate (third Friday inMarch), it is likely you

can sell the option for aprofit. If theoption isatorbelowthestrikepricebefore the expirationdate, you will have aloss. (However, there isalways the remotechance the underlyingstock will move highervery quickly and turnthisintoaprofit).

Themainbenefitofbuyingcallsisthatyoucanspeculate

onstocksthatyoudon'town,andthecostcanberelativelyinexpensive. Also, with callsthemostyoucanloseiswhatyou invested, and not more.Another advantage is thatbuyingcallsisoftenlessriskythan owning stocks,especially if the stock goesdown,notup.Because somecall andput

options are so volatile,speculatingwiththemisoften

moredifficult thanbuyingorselling stocks. Nevertheless,for those who want tospeculate, options are afascinating investment, eventhough they do take sometimetofullyunderstand.

HEDGING WITHOPTIONS

Rather than buying calls,youcan alsobuyputs.Thereare twomain reasons to buyputs. One is for speculation.The other is for protection.Forexample,apopularhedgestrategy is buying protectiveputs. The protective put actslike insurance for your longpositions. Buying a put forthis reason is similar tobuying insurance for yourhouse before an approachinghurricane.

You might wonder whyyou don't just enter a stop-lossorsellthestockyouown.JoeHarwood,manageroftheOptions Industry Council(OIC) help desk, explains:“What if there is a tradinghalt and the stock opensdrastically lower?” Or, hesays, “Perhaps you own anIPO or are with a companythat has selling restrictions.Also, shareholders mightwant to protect unrealized

gains for tax purposes,especiallyifastockhasrisena lot. If the stock drops, theput might increase in value,whichwouldoffsetpartofthelossinthestock.”Harwood says buying puts

isnotalwayscheap,but theyare an effective way toprotectthedownside.“Thisisone way to hedge yourportfolio. It will cost moneyand take away from your

overall return, but maybe itwill help you protect yourinvestment,”headds.Nevertheless, there are a

number of factors that mustbeconsideredbeforebuyingaprotective put. Author MarkWolfinger,whopublishestheOptions for Rookies.comblog, agrees that buying putsis a reasonable strategy, butwith some caveats.“Protective puts are fine

when the puts are relativelyinexpensive,”hesays.Although Wolfinger

recognizes protective putsmake sense for some, hisbiggest objection is the cost.“There is a point wherelogical investors willrecognizetheyarepayingtoomuch. I don't have thatnumber, but if it costs 20 or30percentperyeartoprotectstock, it's too expensive

because there is little chanceofearningaprofitbyholdingthestock.Ifyoucandoitfor5 percent a year, then I'dconsiderit.”He says that some people

will buy protective putscontinuously, renewing themevery three months. “Duringa crash, for example,protective putswork, but thecostcanbeveryhigh.Toearna profit, the stock has to rise

by that 20 percent toovercome the cost ofinsurance.That isunlikely tohappen.” The best, andsimplest, hedge, he says,wouldhavebeentosellsomestock.

After-HoursMarketTheafter-hours (orextended)market is the Wild West ofelectronic trading. This iswhere mostly professional

traders go to trade after theregularmarket closes at 4:00P.M. (ET). The after-hoursmarketclosesat8P.M.(ET).If you're a rookie trader,

the after-hours market is notthekindofplaceyouwanttovisit very often. Althoughuseful for pros, it can beintimidatingforrookies.Unlike in the regular

market, the spreads betweenthebidandaskareoftenvery

wide — sometimesridiculously so. Why?Becausetherearefewbuyersandsellerswhoarewillingtodisplay their bids and offers.Traders use electroniccommunication networks(ECNs) to display those bidsandoffers.ECNs act as electronic

middlemen, using a networkof computers that workbehind the scenes to match

buy and sell orders. If youmakethemistakeofplacingatrade after hours withoutknowing the fair price, youcould lose money. If you doparticipate, you mustabsolutely use a limit order(anorder toabrokeragefirmthat specifies a specific priceto buy or sell a security)Usinglimitordersisonewayof protecting uninformedtraders from getting reallybadprices.Evenifyoudouse

a limit order, however, it'shardtoknowwhatafairpriceis — another reason whyafter-hours trading is adifficulttradingenvironment.Theafter-hoursmarketalso

suffers from a lack ofliquidity, which means thatit'sdifficult toget intooroutof a stock. Unlike in theregularmarket,wherebillionsof shares are traded everyday, only a few million are

tradedafterhours.If you participate in the

after-hoursmarket,becertainyouunderstandtherules.Askyour brokerage firm forguidance. Keep in mind thatsome rules that are in placeduring regular market hoursaren'trequiredafterhours.In general, the after-hour

marketistooriskyforrookietraders, another reason whythis session is sometimes

referred to as “AH” or“AmateurHour.” Because ofthe wild price swings andwide spreads, I recommendthat you first learn about theregularmarket.

PART2

WHATIT'SREALLYLIKETO

DAYTRADE

Congratulations! You'vefinished Part 1, whichincluded the mechanics ofday trading, which, whileimportant,areonlyonesmallpart of the process. To

succeed as a day trader, youmust be disciplined andconsistentlyfollowaseriesofbuying and selling rules. Ifyou're consistently ignoringyour own rules of when toenter or exit, or how tomanageaposition,you'renotverydisciplined.One thing you should

know about being a newtrader: you're going to losemoney.That's right, during a

typical day or week, you'llprobably have more losingtrades than winning trades.It's the price you pay forbeing a rookie. I know thatsome new traders enter themarket already anticipatingthey'll make $200 or $500everyweekoreveryday.I'mheretotellyouthatissimplynotarealisticgoal.Ifyoucanmake 20 percent in a year,you're beating the vastmajority of professional

traders. In fact, after the firstyear,ifyoustillhaveenoughmoney to continue trading,that would be fantastic. Bythen, you'll have a PhD inmaking mistakes, the degreealmost every trader earnsduringhisorherfirstyear.Beginning now, I'm going

to take you into the trencheswith day traders, so you canlearn how to use all of thesetools to make profitable

trades.

Chapter6:OneBadTrade

Because I wanted to bedifferentfromotherauthors,Idecidedtogiveyouareal-lifeideaofwhat it's liketomakeareallybadtrade.IfIsimplylisted The Rules, as mostauthors do, you wouldn'texperience what it's really

like to be an undisciplinedtrader.Therefore, I wrote this

chapter as a narrative, basedonamostly truestoryofonerookie trader. Unfortunately,at one time or another,thousands of other tradershavehadsimilarexperiences.I'm hoping that by readingabout his mistakes, you canavoid repeating them. Inreality, most traders have to

learn the hard lessons forthemselves. My goal is tosave you from suchexperiences.AlthoughHal (not his real

name)learneda lotabout thestockmarketfromhisfamily,he had only made a handfulof trades,mostly investmentsinwell-knowncompanieslikeIBMorApple.As a waiter at a local

restaurant in 2007, Hal had

heard from the other serversand some customers that itwas possible to make farmore than 10 percent a yeartrading in stocks. In fact,other waiters claimed thatthey were making $200 to$300 per day by day tradingfrom their homes. To earn$200 a day, or $50,000 ayear, seemed like a dream toHal. He could quit workingfull-time and concentrate onmaking money, all from the

comfortofhisownhome.The more Hal thought

about trading, the more heliked the idea. When onewaiter pulled up in a brandnew car, made possible bytrading,Halwasconvincedtogiveitatry.Hewasgoingtoincrease his income bytrading stocks. He began bywatching financial televisionprograms, monitoring onlinechat rooms, and reading

Internetblogs.Heevenreadacoupleoftradingbooks.

TheTip

At work, Hal got into aconversation with a regularcustomer, Mr. Morgan (nothis real name), who seemedlike he had a lot of money.Mr.Morgandroveanice carand had an oceanfrontcondominium. Mr. Morgan

toldHalthathecouldmakeareally nice living tradingstocks. “I trade stocks for aliving,” Mr. Morganexplained.“I'maprofessionaldaytrader.”Thestockmarkethadbeen

going up for a number ofyearsbuthadbeenextremelyvolatile over the last fewmonths. For many traders,this seemed like a good timetoscoopupbargains.Halhad

hiseyeonalow-pricedstockthat he couldget for only$7per share. He immediatelytold Mr. Morgan about hisidea.“Stay away from stocks

like that,” Mr. Morgan said.“Ithasnovolumeandapoorhistory.”Hal was eager to

participateinthemarket.“Sowhatdoyourecommend?”“I'm associated with a

group of professionaltraders,” Mr. Morgan said,“butfirstyouhavetopromisenot to tell anyone about mytrades.”“Ipromise,”Halsaid.“Okay, we really like

Citigroup for a positiontrade,” he said, almost in awhisper. “It was trading at$50 per share but now it's at$38.We think this is a goodbuyingopportunity.”

Hal was impressed withCitigroup, one of the mostwell-known banks in thecountry. Hal went on theInternet and researched whatother analysts thought aboutthis company.Theconsensusseemed positive. Everyoneliked it. At $38 per share,Citicorp seemed like abargain.“How many shares should

Ibuy?”Halasked.

“That's up to you,” Mr.Morgansaid.“Ibought4,000sharesformyaccount.”Fourthousandshares!That

would costHal $152,000, animpossible amount ofmoneyforhimtoobtain.“What if I bought 1,000

shares?”Halasked.“That's a good start,” Mr.

Morgan replied. “We expectittogobackto$50pershareinthenearfuture.”

That would be a 12-pointgain!Halrelishedtheideaofmaking $12,000 in a fewweeks.He could nevermakethatkindofmoneywaitingontables.Hal was tired of being a

waiterandwaseagertomakea killing in the stockmarket.Since he worked nights, hecould trade during the dayand still make it to workbeforehisnightshiftstarted.

Hal's biggest problem wasfunding his account. He hadalready saved up $5,000, buthe needed a lotmoremoneyto buy 1,000 shares at $38.First, he charged $5,000 onhis credit card. Then hebeggedhisparentsformoney,but his father had a betteridea.HeagreedtoaddHaltohistradingaccount,aslongasHal split theprofits.The twomen drove to the brokeragefirm and signed the required

application forms. Hal waspleased when he had accessto over $100,000 on margin,more than enough money tobuy1,000sharesofCiticorp.Thatweekend,Halwentto

the bookstore and bought ahandful of trading books.Healso bought a huge 21-inchmonitorandattachedittohiscomputer with two top-of-the-line surge protectors. Healso bought copies of

Investor'sBusinessDaily,TheWall Street Journal, andBarron's. He was ready andwillingtobeatrader.AfterHal'sshiftendedlate

Sunday night, he went tosleep,wakinguparound9:00A.M, eager to place his firsttrade. He was excited aboutthe prospect of making aquick $12,000. He called hisgirlfriend and told her thatafter he sold his stocks for a

profit, they were going toParisnextsummer.Hal opened up the

brokeragefirm'ssoftwareandwasdazzledbythechartsandother information on thescreens. It looked like fun,but it was confusing. Hecalled the brokerage for helpwith the entry screens andalso sent Mr. Morgan an e-mailacoupleoftimesbeforethemarketopened.

TheRise

Hal placed his first trade at9:40 A.M., ten minutes afterthe market opened. Citicorpspiked up a few points rightat the beginning, whichconvinced Hal that the stockwas going even higher. Heentered a market order for1,000 shares as Citicorpcontinued to move. Hebought 1,000 shares at

$40.50.Cost:$40,500.At first, Citicorp zoomed

up another two points, to$42.08, giving Hal anunrealized profit of over$1,500. That was moremoney than he evermade inone day as a waiter. Hethought about selling, but hewanted a homerun, not asingle. “Tomakebigmoney,you have to bet bigmoney,”hetoldhimself.

As the market closed forthe day, Hal decided to holdthe stock overnight, thrilledthathehadstillhada$1,500profitinoneday.That night, Hal's

confidence in Citicorp grewas he read positive articlesabout the company.One guyon TV ranted about Citicorpfor over ten minutes, andyelled into the cameras thatthe stock was a “buy, buy,

buy.” The only negativearticles Hal foundwas aboutthe entire financial sector,which seemed somewhatweak.ButHalreadanarticlethatclaimedthatCiticorpwasimmunetoapossiblebankingcrisis.That night, Hal called his

mother and told her he wasgoing to get rich. His fatherwas also pleased with hisson'ssuccess.

Hisgirlfriendstoppedbytolookathiscomputermonitor.“You should have sold it,”shesuggested.“Iwouldhavetakenthemoney.”Hal frowned. “You don't

know anything about thestockmarket.”

MarketMayhem

Overthenextfewweeks,themarket fell by more than 1

percent, and so did Citicorp.Infact,Citicorpdroppedby7points(morethan15percent)to approximately $35. His$1,500gainhadturnedintoa$5,000loss.He calledMr.Morgan for

advice.“We're buying more,” Mr.

Morgan said. “Citi hasn'tbeenthislowinyears.It'stoocheaptosell.”“I don't know if I can

afford to buy more shares,”Halsaid.“If you don't buy more

shares, you'll be making thebiggest financial mistake ofyour life!” Mr. Morganscreamedintothephone.“Okay,okay,”Hal replied,

intimidated byMr. Morgan'sloud voice. So Hal placedanother market order foranother1,000shares.Hewasfilled at approximately $36

per share for a total cost of$36,000. He had nowinvested over $75,000 inCiticorpstock.For the next few weeks,

Hal was obsessed withCiticorp, and so was hisentire family. They werecheeringthestockon,andnoonecouldtalkaboutanythingelse.“Ifthisstockgoesto$50,”

Hal promised his girlfriend,

“We're going to have thebiggest party ever.” Copyingthe antics of the host of apopular financial program,using a blue marker, Halwrote the stock symbol—C—oneveryknuckle.All month, Citicorp

seesawed between $35 and$37 per share. Hal saw Mr.Morgan at the restaurant acoupleoftimesbuttherewasno news. “Sometimes you

just have to wait,” Mr.Morgan said, shrugging hisshoulders.Over thenext fewmonths,

thestockmarketfellbymorethan 3 percent, but Citicorpdid even worse, falling to$25.WhenHal lookedat thecomputer screen, he feltdizzy.Nowheandhis fatherwere down over $25,000. “Ican't believe this,” Halgroaned.

He called Mr. Morgan,who told him that whathappened to the market wasan unusual event. “You can'tplan for the unexpected,” hetoldhim.“Justsittight.Itwillcomeback.”Hal was hopeful he could

get back to even.Hewantedhismoneyback.A few months later,

Citicorp fell by another 5points. Hal had more than

$37,000 in losses, and nowowed the brokerage firm forthe margin he used. Halcontinuously called Mr.Morgan but there was noanswer. Finally, he reachedhimlateonenight.“Mr.Morgan,what should

wedoaboutCiticorp?It's$20pershare.I'mgettingkilled.”“Oh, Citicorp. I sold that

stock a month ago,” Mr.Morgan snapped. “And don't

evercallmeagain!”Late that night, Hal

receivedaphonecallfromhisfather. “I got a margin callfrom the broker thisafternoon,”hesaid.“Ihavetoadd more money withintwenty-four hours or they'regoing to sell all the shares. Ifeel sick.” Hal felt evenworse.Thenextmorning,Halwas

hoping that Citicorp would

bounceback,butitcontinuedto fall.His father calledHal.“I sold it,” he said. “We gotcreamedonthatstock.”By the time the position

was liquidated, withcommissions and charges,Hal and his father had lostover $45,000.Hal personallyowed $10,000 in credit cardcharges.

LessonsLearned

Laterthatnight,Halsatdownand wrote down all of themistakesheandhisfatherhadmade with Citicorp. He wasshockedatwhathedid.“HowcouldIhavebeensostupid?”hethought.

WHAT WENTWRONG

Ironically, most of theworst mistakes Hal madeoccurredbeforeheplacedhisfirst trade. The first financialmistakeHalmadewasbuyinga stock based on a tip, evenfrom a so-called financialprofessionallikeMr.Morgan.Hal thought thatMr.Morganwas smarter than themarket,a deadly error. Tipsters likeMr. Morgan are everywhere,and it costs them nothing togiveoutfreeadvice.Theonly

antidote to listening to stocktips from so-called tradingexperts is to keep your earsshut,andnotpayattention.

Lesson#1:Don'tlistentotips.

Hal borrowedmoney fromhis credit card to fund hisaccount, a serious moneymanagement mistake. Evenwithhisfather'shelp,Halwastrading with money hecouldn'taffordtolose,which

shouldhaveforcedhimtobeextracareful.Instead,hetookunnecessary risks. Thepressure to pay back hisfamily and make a big tradewas tremendous. The proscall this tradingwith “scaredmoney.”

Lesson#2:Don'tborrowmoneyto

fundanaccount,anddon'ttakeextrarisksunderany

circumstances.

Hal believed that to makebigmoney,hehad tobetbigmoney. This myth isperpetuated to separatepeoplefromtheirmoney.Halshould have invested a smallamount of money, especiallywhenhewasfirststartingasatrader. He didn't anticipatethat when you bet big, youcanlosebig,too.

Lesson#3:Managemoneycarefully.

Beawareofhowmuchmoneycanbelostandbecertainyoucanaffordthat

loss.Based on the advice he

heard fromMr.Morgan,Halentered the market withunrealistically highexpectations. For example,Mr. Morgan lured Hal intothe trade by saying thatCiticorp “should” be at $50pershare.Themarketdoesn't

care what Mr. Morgan oranyone thinks. There is no“should”whenitcomestothemarket; anything is possible.AsHallearnedthehardway,the market always has thefinalword.

Lesson#4:Themarketisalwaysright.Hal anticipated huge

profitsfor this trade.Yes, it'strue that Hal “could” havemade $10,000 in profits or

more, but he also failed toanticipatepotentiallosses.Healso assumed he could make$50,000 every year tradingstocks. Unfortunately, hedidn't account for any of thelosingdays.

Lesson#5:Enterthemarketwith

realisticexpectations,anddon'tcountonpretend

profits.

ENTERING THEMARKET

Thesemistakescouldhavebeen avoided if Hal hadcreated a set of rules and atrading plan before enteringthemarket. The rules shouldhave been posted in clearview: an entry price, an exitprice, and a stop-loss.Because Hal didn't have any

rules, he ended up makingimpulsive trades without acluewhathewasdoing.

Lesson#6:Createatradingplanand

followrules.Instead of asking “How

much can I make?” Halshould have immediatelyasked Mr. Morgan, “HowmuchcanIlose?”Thiswouldhave forced Hal to use stop-lossesandtakenotherstepsto

protect his principal. If heweremoreknowledgeable,hemight have set price alerts.Hal was trading with over$75,000anddidn'tplan foraworst-casescenario.

Lesson#7:Usestop-lossesorprice

alerts.Hal also should have

followed a basic moneymanagement rule: don't riskmorethanacertainamountof

your total account equity onany one trade. For example,some traderswon't riskmorethan 2 percent of theirportfolio. For retail daytraders, however, 2 percentmightnotberealistic.The“2-percent rule” is a usefulguideline, but is not set instone. Nevertheless, withexperience, you can createyour own percentage. Sadly,Hal didn't know he shoulddecide inadvancehowmuch

to risk on his total accountuntil it was too late. Forexample, if he had riskedonly500sharesand includeda stop-loss, Hal would havebeenprotected.

Lesson#8:Setastop-lossanddon't

riskmorethanapredeterminedsumonany

onetrade.Perhaps Hal's biggest

mistakewas thinking thathis

secret weapon, Mr. Morgan,would keep him out oftrouble.BecauseHal thoughtthatthiswasarisk-freetrade,he took incredibly hugechances.

Lesson#9:There'snosuchthingasa

risk-freetrade.Once Hal began thinking

of all the money he “could”earn, greed clouded hisjudgment. It's not surprising

whathappened toHal.Ashelearned the hard way, a lackof knowledge combinedwithunrealistic expectations andgreedcandostrangethingstopeople. Remember this: as aday trader, you have to takewhat the market gives you,not what you think youdeserve.

Lesson#10:Havereasonabletarget

goalsandbookprofitswhen

goalsarereached.

PLACING THEORDER

Amazingly, all of thesemistakes were made beforeHal even placed his firsttrade. He was doomed fromthe start, but he also madesome mistakes when he

placedtheorder.For example, Hal bought

Citicorp at the market open.Because stocks occasionallygapuponthefirsttradeoftheday, entering orders at thattime can often result in badfills.It'sbettertowaitatleastfifteenminutesbeforeplacinga trade, especially if you're arookie. You have all day totrade,sobepatient.

Lesson#11:

Avoidtradingduringthefirstfifteenminutesafter

themarketopens.Another warning sign Hal

didn't heed was the rush ofexcitement he felt as heplaced his first trade.“Trading should be asemotionalasdroppingoffthelaundry at the dry cleaner,”quipped one professionaltrader. You deserve to feelpleased, however, when you

look at a profitable monthlyorquarterlyreturn.

Lesson#12:Learnhowtotradewithout

emotion.Unfortunately, Hal was so

eager to buy Citicorp heentered a market order,resulting inanespeciallybadfill. He lost over a point pershare on that trade alone,costing him more than$1,000. Hal should have

entered a limit order andtaken control of the trade,tellingthemarketthepricehewas willing to pay. Instead,Hal rushed into the tradewithout thinking, letting themarketdecideontheprice.

Lesson#13:Themarketislikean

auction;uselimitorderstogetamorecompetitive

price.In addition to using limit

orders,Halcouldhavescaledinto the tradewithahundredshares. Scaling in can be aneffective way to test themarket environment.Although initially Citicorprose, thenextday'sdropwasa warning sign. Hal wouldhave been wise to start withfewer shares. Trading with1,000 shares at one timewasrisky.

Lesson#14:

Considerscalingintoatradewithfewershares.Finally, Hal was destined

to fail because he waswoefully unprepared forpsychological warfare. OnceHal entered the market, hewas trading with sharks, andhe was the fish chum.Reading a couple of booksand financial newspapersabout the market did notprepare him for the financial

battleofhis life. If anything,Halshouldhavespentweeks,if notmonths, practicing andpreparingforhisfirsttrade.

Lesson#15:Prepareinadvancebeforeplacingyourfirsttrade.

Practicetrading.

MANAGING THETRADE

Hal also made additionalmistakes after he boughtCiticorp.At first it roseby2points. He didn't realize thatmanaging winning stocks isoften as challenging ashandling losing stocks. Themost important goal for atrader is to manage risk solosses don't get too large.Although blinded by his 2-point gain, Hal should haveset a trailing stop-loss basedonthehigherprice.

Hal also bragged to hisparents and girlfriend abouthistradingabilities,aflashingred warning signal. Thefeeling of making $1,500 inminuteswas intoxicating,butalso dangerous to hisportfolio. After making thatmuch money, Hal wasdeceived into thinking thattradingwaseasy.

Lesson#16:Avoidgreedbyusingstop-

losses.Infact,Halwassopleased

with his so-called tradingabilityheleftthehouseatonepoint, putting his account onautopilot. Some novicetraders have been known togo on extended vacationsafter placing a trade, only toreturn to a nearly emptyaccount.

Lesson#17:Nevertakeyoureyeoffof

anactivetrade.

EXITING THETRADE

A glaring psychologicalsell signal was flashed whenHalwrote the letterConhisknuckles. Once Hal fell inlove with this stock, he lostall objectivity. He stopped

paying attention to negativenewspaper articles, listeningonlytopeoplewhosupportedhis view. With that muchmoney at stake, Hal shouldhave closely monitored themarket using technicalindicators. Once Hal becamethe company's cheerleader, itwastoopainfultosell.Ratherthan relying on the facts tomake trading decisions, herelied on hope, and on Mr.Morgan.

Lesson#18:Don'tfallinlovewitha

stock.BecauseHalnolongerhad

aneutralviewofthestock,hedid not prepare for a worst-casescenario.Simplyput,hehadnocluewhat todo ifhe,or Mr. Morgan, was wrong.Some traders assume a stockis a turkey unless provenotherwise. To Hal, it wasinconceivable that such a

well-known and powerfulcompany's stock couldplunge. As a result, Halcontinuedtowatchhelplesslywithout entering a stop-loss.If he had, his portfolio couldhave been saved and thedamage might have beenminimal.

Lesson#19:Planforworst-case

scenariosbyusingstop-lossorders.

When the stock rallied thefirst day,Hal stoppedpayingattentiontotheoverallmarketand Citicorp's sector, thefinancials. IfHalhad looked,he would have noticed thatbothwerestruggling.

Lesson#20:Studytheoverallmarketandindividualsectorsfor

clues.If Hal had studied the

market, he might have

noticed that several keyindicators, such as movingaverages, were giving outwarningsignals.Forexample,Citicorp,andtheoverallstockmarket, was trading wellbelow its 200-day and 100-day moving averages, a bigwarning sign. Also, goinglong in a potential bearmarket wasn't the wisestdecision. The only indicatorthat Hal followed was Mr.Morgan,adisastrousmistake.

Lesson#21:Usetechnicalindicators.When Citicorp fell by 5

points,Hal panicked. Insteadof getting out with arelativelysmallloss,hemadeadreadfulmistake:heboughtmore shares, doubling downon his losing position.Because of a range ofemotions, inexperience, andbadadvice,Halnowriskedafinancial Armageddon. An

experienced trader wouldhave taken the loss andlooked for otheropportunities. Hal, on theotherhand,couldn'tletgo.

Lesson#22:Youmustbewillingtoacceptsomelosses.

Althoughmanytraderscanhandle winners, they oftenhavenoideawhattodoaboutlosers.ThepressureonHaltosucceed as a trader was

overwhelming, not onlyfinanciallybutemotionallyaswell. The loss of money,which represented all of hishopes, dreams, and self-esteem, caused Hal to makeimpulsivedecisions.Oncethestock didn't perform asexpected, he should havereevaluated the trade andexitedimmediately.InHal'smind,thisonebad

trade had to be successful or

he'd lose the respect of hisfamily, the love of hisgirlfriend, and his self-esteem. Itwas not surprisingthat he reacted in fear whenthe stock didn't perform asexpected.

Lesson#23:Learnhowtolosebefore

youwin.Another huge mistake Hal

made was overtrading. OnceCiticorp didn't go his way,

instead of calmly exiting theposition,hetradedagain.Thebest traderspatientlywaitforother,moreprofitable stocks.Halwassoanxioustorecoverlosseshemadewhatiscalledarevengetrade.

Lesson#24:Bepatientandwaitforprofitabletradingopportunities.

Perhaps the mostdangerous error of all was

Hal'smisuseofmargin.With his father's help, his

account was boosted to$100,000.Hal and his father were

emotionally unprepared tohandle that much money.They didn't understand howleverage increases losses onthewaydown.Inthehandsofan experienced trader,leverage can be a verypowerfultool.Inthehandsof

arookietraderlikeHal,itcanwipeoutanaccount.

Lesson#25:Rookietradersshouldavoid

usingmargin.Another error Hal made

was changing his strategyfrom a trade into aninvestment. When Citicorpfellinprice,insteadofsellingimmediately for a relativelysmall loss, he waited for thestock to come back to even.

In addition, once the stockwent against him, he shouldnot have taken the positionhome. After Hal's originalplan didn't work out, andlosses were multiplying,getting out completely wastheonlysolution.

Lesson#26:Cutyourlossesata

predeterminedprice,andsellwhentheoriginalplan

stopsworking.

If Hal had spent as muchtimethinkingofsellingashedid of buying, he may haveescaped this trade with aprofit.Hal had no ideawhento sell and was tooinexperiencedtorealizethat2points was the most themarket would ever give himon this trade. (Even ifhedidsellforagain,asanamateur,Hal might have complainedthat he “could have, wouldhave,andshouldhave”made

more money on the trade.That'sanother reasonwhyheneededatrailingstop).

Lesson#27:Haveasellingplanbefore

youbuy.In fact, Hal's only selling

plan was to wait for Mr.Morgan to tell him what todo.ByblindlyrelyingonMr.Morgan for all tradingdecisions,Halonlytradedforaday. Ifhehad learnedhow

to find his own stocks andmake his own decisions, hecould have traded for alifetime.

Lesson#28:Thinkforyourself.

Even more dangerous toHal's trading account andself-esteem,Hal allowedMr.Morgan to bully and screamat him to buy a stock.Whensomeone yells at you to buyor sell a stock, it might be

better to do the opposite. Atthe very least, Hal shouldhave taken the time to studyand think, but he was tooemotionally involved. Halcould have sought a secondopinion from a trustedprofessional.Asitturnedout,however, Mr. Morgan didn'tcare aboutHal or howmuchmoneyhemadeorlost.

Lesson#29:Don'tletsomeonepressure

youintoatrade.To Hal's credit, he finally

sold. He realized howridiculously risky the tradewas, and got out before hisfather's account was totallydestroyed. It actually couldhavebeenmuchworse.Overthe next several months,Citicorpeventuallyfellbelow$4 per share, where itremainedforseveralyears.If the stock of one of the

largest and most powerfulbanks could lose 90 percentof its value, then you knowthat anything is possible inthe stockmarket. It tookHalyears to pay back all of themoneyheborrowed.

Lesson#30:Anythingispossibleinthe

stockmarket.IfHalhadkeptajournalof

all of the mistakes he madeonhisonebadtrade,hecould

have learned enough lessonsto last a lifetime.Becausehedidn't record why and whenhe bought the stock, thenumber of shares, and histarget price, he was tradingemotionally. Without thebenefit of keeping a journal,he could repeat many of thesamemistakes.

Lesson#31:Keepajournalofalltrades.

NEVERAGAIN

Formonths,Halwasangryat himself and Mr. Morgan.“How could I be so stupid?”herepeatedlysaidtohimself.Eventually, Hal took fullresponsibility for his badtrade. After all, if Hal hadmore self-confidence andknowledge about themarket,he would have ignored Mr.

Morgan's tips and tempertantrum.Alittlegossip:Mr.Morgan

never talked to Hal again.Occasionally, Hal saw Mr.Morgan walking near thebookstoreorthemall,butMr.Morgan quickly ran in theopposite direction,mumblingto himself, “Uhhhooohhhh,uhhhhohhhh.” He probablythought that Hal was stillangry,butHalwasn'tatall.

Theyneverspokeagainbutit didn't matter. The lessonsthatHallearnedfromthatonebadtradehelpedhimnotonlyin the stock market, but inlife.Looking back, many of

Hal's trading errors could betraced to low self-esteem,inadequate knowledge, andinexperience.Mostimportant,Hal learned to trust his ownjudgmentwhenitcametothe

stock market, or with anydecision. It's reasonable tolisten to other people, butdon't rely on them whenmaking the final decision.Many traders don't knowwhatthey'retalkingabout.

Lesson#32:Trustyourself.

Even after losing somuchmoney, Hal didn't give up.For the next year, hediligently studied the stock

market and became muchmore knowledgeable. Afterhepaysbackwhatheowestohis family, he plans to re-enter the market, slowly andcarefully, andwith a lot lessmoney.“I won't make the same

mistakes,” he wrote in hisjournal.He paid a high price, but,

ironically, the lessons helearned from one bad trade

were the best thing that everhappenedtohim.

Lesson#33:Turnlemonsintolemonade.

Live to TradeAnotherDay

Ihopethatthisnarrativegaveyou some insights into hownovice traders can lose theirentire portfolio on one badtrade.Asyoucansee,trading

is an incredibly emotionalexperience,similartoridingaroller coaster with yourpockets full of cash. As daytraders, it can be even moreintense.As I said before, your

initialgoal is to learnhowtobe a good trader, notnecessarily to make money.Most important, always takesteps to protect yourportfolio: preserving your

capital is your number onegoal. There will always bemore trading opportunities,but only as long as you canremaininthegame.After several months of

trading, you'll have a muchbetter ideawhether trading isa good fit for you. As younowknow,successfultradinginvolves mastering moneyand emotions. If you'reunable to manage both, then

you may want to re-evaluatewhether you should keeptrading. Although themechanics of trading can belearned fairly easily, makinglightning-fast decisionswhilejuggling thousands of dollarsis a huge challenge. Youbetterlovewhatyou'redoing,or look for another way tomakealiving.

High-Frequency

TradingHigh-frequency traders(HFT) are the ultimate daytraders. They use high-speedcomputers to automaticallysend out millions of orders,probing and scalping forpennies, which add up tobillions of dollars in profitseveryyear. It's been reportedthat high-speed trading firmsaccount for more than 70percentofthetradingvolume

onsomedays.Retail day traders cannot

competewith high-frequencytraders or the hundreds ofmillions of dollars intechnology they own,including huge bandwidththat allows HFTs to maketransactionsinnanoseconds.Proponents of high-

frequency trading claim thatthese traders add liquidity tothemarket—inotherwords,

theymakeiteasierforothersto buy share size. Thesetraders claim they havehelped narrow spreads andlowered volatility.Unfortunately, althoughHFTs act almost like marketmakers and specialists, theydo not have to follow thestrictrequirementsofkeepinga fair and orderly market.This was quite apparent onMay 6, 2010, when thesetraders simply pulled all of

theirbidswhenthefirstflashcrashoccurred.One of the most

controversial strategies usedby some high-frequencytraders is flash trading. Thisstrategy allows traders to“ping” other large marketparticipants for a quick 30-second peak at theiroutstandingorders.Thisgivesthe high-frequency tradersinsights into order flow,

allowingthemtochangetheirordersbeforethey'refilled.For example, if an HFT

notices a sudden flurry ofbuyinginterestinaparticularstock, they could add to theposition or sell the stockshort.Gainingaglimpse intoanother participant's orderbook is about as close to“frontrunning”(theunethicalpractice of making a tradebasedonadvanceknowledge)

asonecanget.Not all HFTs use flash

trading, but the strategy iscontroversial. When the firstflash crashoccurred in 2010,the market plunged by over600 points within minutes,only to regain almost all ofthe points lost. According tothe Security and ExchangeCommission (SEC) and theCommodity Futures TradeCommission (CFTC), who

issuedajointreport,theflashcrash was caused by acomputerized tradingprogram that automaticallysold 35,000 E-mini S&Pfuturescontracts.Nevertheless,therapidand

suddensellingwasdisturbingto investors, who beganpulling money out of thestock market and putting itinto bonds. For someinvestors,flash-tradingtactics

makesthemarketseemlikeariggedgame.Although high-frequency

trading can add liquidity tothe market, if Main Streetinvestors lose confidence inthe financial markets andrefuse to invest, then all thatincreased volume meanslittle. Althoughcomputerization of ordersbegan decades ago with avariety of proprietary

programs (some claim the1987 crash was caused byprogram traders), the flashcrash was the first time thepublicgotarealglimpseintowhatishappeningbehindthescenes.Because the rules

surrounding high-frequencytradingareratherloose,morefirms are creatingmultimillion-dollar computersystems with sophisticated

algorithms designed to takeeven more market share.Until rules are put into placeto limit some of theseactivities, the retail investormaynotchoosetoparticipate.Even the perception of anunfairsystemcanbeharmfulto a market that is supposedto level the playing field forinvestors. As a result of thedamage caused by the flashcrash, the SEC proposed anew rule that prohibits all

marketsfromdisplayingflashorders.Thegoal,ofcourse,istopreventanotherflashcrash.

Chapter7:MeetingthePros

Keep inmind thatwhen youread about day trading in abook,itseemsrelativelyeasy,but in real life it'sa lotmorechallenging. That's why it'salways educational to visit aday trader's home office,especially when they're

willingtoshareafewoftheirsecrets. To give you a betteridea of what really happensbehind a day trader's door, Itracked down a handful ofprofessionaltradersandaskedthemforadvice.Bythetimeyoufinishthis

chapter, you should havelearned a few more tricks.After all, getting inside theminds of real traders can beextremely educational.

Learning about all the thingsthat can go right, or wrong,can save you time andmoney.

Toni Turner,Bestselling AuthorandTrader

Toni Turner is the best-sellingauthorofABeginner'sGuidetoDayTradingOnline,2nd Edition, A Beginner's

GuidetoShort-TermTrading,and Short-Term Trading inthe New Stock Market. Herbooks have been translatedinto multiple languages, andhave also been used astextbooks inpersonal financecollegecourses.An accomplished technical

analyst,Turneriswellknownfor her ability to presentcomplicated material in asimplifiedmannerthatmakes

itinterestingandenjoyabletolearn. She is the president ofTrendStar Trading Group,Inc.

LEARN TO READTHEMARKET

Turner says that newtraders primarily lose moneybecause they “don't know

howtoreadthemarkets.”Forexample,shesays“the

major indexes might gohigherduringtheday.Anewtradermight see this is as anopportunity to go long andholdtheirpositionsovernight.An experienced trader,however, will see that themarketmovedhigherwithinaseveredowntrend.They'llseethe lower highs and lowerlows.Thebeginnerwon't see

those signals and suffersevere losses when themarketrollsover.”To see the bigger picture,

Turnerconstantlywatchesthemajor indexes on multipletime frames, including dailyandweeklycharts,evenwhenshe is day trading. “Readingthemarket is likegettinglostin a dangerous forest,” shesays. “An experienced guidewillknowwhatsigns to look

for,seetheanimaltracks,andfind a way out. If aninexperiencedpersongot lostin the forest, he probablywouldn'tlastthenight.”

LEARN HOW TOPAPERTRADE

Togainexperience,Turnersuggests that new traders

begin by paper trading. “Bypaper trading for severalmonths and learning alongtheway,yougainconfidence.Because it's not real, youwon't lose money as you'relearningthemarketsigns.”Although paper trading is

veryhelpful,Turnersaysthatit'snotperfect.“Becauseyouremotions are not on the linewhen you paper trade,” shesays, “it's entirely different

from trading in the realmarket. Remember that it's alot easier when you papertrade because you don't feelany pain when you makemistakes.”Thekey,shesays,is to treat paper tradingseriously,andnotasagame.

READ THEFUTURE

When Turner is daytrading,shelooksattheS&P500 E-mini future contracts,which are traded in the S&Ppitat theChicagoMercantileExchange. She says they actas a leading indicator for thestocks in the S&P 500. “TheE-miniswilltickhigher,”shesays, “and then the majorityof stocks will follow ithigher. And if the S&P E-minis go lower, the majorityof stockswill go lower.You

only get a few secondswarning before this happens,but it's enough time toget inoroutofaposition.”She says thatyoucan also

watchtheNasdaq100E-minifutures, which act as leadingindicator for Nasdaq stocks.In addition, the mini-sizedDow contract is the leadingindicator for the Dow JonesIndustrialAverage(DJIA).Turner gets her E-mini

quotes from a direct-accessbroker for a small fee, butagrees that some onlinebrokersmayoffertheminthefuture. She says the futurescontracts are also displayedonmostfinancialprogramsoron the web, but day tradersneedanimmediatereading.

HOW TO USELEVELII

Although some tradershave relied less on Level IIquotesinrecentyears,Turnerfinds them very helpful fordaytraders.“IwillnottradeastockunlessIfirstlookattheLevel II screen,” she says.“Iwant to see the personalityand character of the stocksthatItrade,andLevelIIgivesme clues. I also want to seethe spread. If a stock hasmore thanaone-or two-centspread between the bid and

the ask, Iwill avoid it.” Thereason?“That'sbecausemorethan a one- or two-centspread means I may not beable to enter — or moreimportantly—exita tradeatthe exact price I amtargeting,”shesays.“Awidespread between the bid andask prices means the marketmakers are controlling myentriesandexits.”Shehasothercriteriaabout

the stocks she buys. Theyhave to be very liquid, forexample, trading between300,000 and half a millionshares a day. Volumeinformation is also displayedon traditional quote screens,but Level II goes evendeeper.Turneriswellawareofthe

limitations of Level II,especially given how somemarketplayershidetheirtrue

intentions by playing gameswith orders. “Everyone isallowed to slice up theirorders,” she says, explaininghow participants will hide alarge order by slicing it into100-share lots. She laughsand continues. “Sometimeswith Level II screens, youcan'tbelieveyourlyingeyes.”Even with these caveats,Turner finds Level II useful,particularlyfordaytraders.

ToverifywhatsheseesonLevelII,TurneralsolooksatTime and Sales, whichdisplaystheactualorders.Buteven then, some marketplayers have made sidearrangements to sell million-share lots, the so-calledshadow market, which won'tshow up on Time and Sales.“There are undercurrents ofother tradesgoingonthatwemight not be privy to,” shecautions.

PLAN THE TRADEAND TRADE THEPLAN

The stocks that Turnerlikestodaytradethemostareones that aren't in thespotlight. “The majority ofthe time, I find it better toavoid stocks that are in thenews,” she says. “Manytimes, stocks in the news are

the stocks favored by thebiggest and baddest high-frequency traders,andIdon'tcaretocompetewiththemforfractions of pennies. I'velearned from experience thatstocks that are not in themediaspotlightmaynotbeasexciting, but can developorderly patterns, and thusearnmethemostprofits.”The night before the

market opens, or early the

next morning, Turner scansthrough stocks that meet hercriteria. She begins bystudying the sectors, thenmakes a watch list of thestocks or exchange-tradedfunds (ETFs) that areconsolidating and appearready tobreakout.SheoftentradesETFsbecause theyareless risky than individualstocks and because they aremore diversified. ETFs aretraded just like stocks; they

provide diversification, andare relatively inexpensive. Inaddition to using them as ahedge against a portfolio ofindividual stocks, you canalso buy ETFs in specificsectors, countries, or assetclasses. In a way, ETFs aresimilar to buying mutualfunds, but without a fundmanager. Because of theseadvantages, many people arehugefansofbuyingETFsandhave created portfolios to

reflect their views of themarketorindividualstocks.“One of my best day

trading strategies,” she adds,“is to find stocks that are inanuptrendonthedailychart.Itshouldbeabovethe20-dayand 50-day moving average.Then I pull up a 15-minutechart with a 10-period and20-period moving average.As long as the stock isbreaking higher, you can use

the crossovers of thesemoving averages to buy andsell.”Shelooksforthefollowing

signals: “When the10-periodmoving average crossesabove the 20-period movingaverage,it'sabuysignal,”shesays. “When the 20-periodmoves below the 10-periodmoving average, it's a sellsignal. This is one of thesimplest and most basic

strategies,anditworks.Tryitas a paper trade and see if itworksforyou.”

CAN YOU DAYTRADE PART-TIME?

Turnersaysitispossibletoday trade part-time, but onlyif you are as knowledgeable

as full-time traders. “Youcan't expect tobeapart-timetrader if you enter without afull skill set and discipline,”she cautions. “It's like asurgeonwhoonlyknowshowto take out an appendix. Ifyou thinkyoucan tradepart-time with part-timeknowledge, you could getkilledinthemarket.”Inadditiontohavingskills

and discipline, Turner warns

traders about the challenges.“All new traders, and evenexperiencedones,havetoeatalittleglass.That'sthewayitis. That's why it's soimportant to trade withmoneyyoucanaffordtolose,and to have a cushion.” Shesuggests that new traders notuse margin, even when it'savailable.To be a successful trader,

Turner advises that you

“establish a well-thought-outtrading plan as soon as youentera trade.Assoonasyouenter the trade, place a hardstop—meaning a protectivestopwithyourbroker—rightaway. That keeps you out oftrouble more than anythingelseIknow.Yourgoalatthebeginning is to protect yourprincipalandstayeven.”

John Kurisko,

Professional DayTrader

JohnKurisko, also known asDayTraderRockStar,runsadailyvideoandradioshowonwww.daytradingradio.comthatanyonecanwatchduringmarkethours.Kuriskorecallshis early attempts at learninghow to day trade. “It was inthe early '90s and I waslookingforthatHolyGrailof

trading,” he says. “I wasgoing into all these chatrooms and bulletin boards tofind direction. Back then,trading from home was juststartingtotakeoff.”At the same time,Kurisko

says,daytradingwaslikethe“wild west of trading. Iremember trading CMGI,(now called ModusLinkGlobalSolutions),whichwasa venture capitalist group. I

bought 400 shares and,because I was aninexperienced trader, I wentto the mall. When I cameback, themarketwas closed,but thestockwasupover64points. I couldn't sleep thatnight. The next day, it wentupevenmore,sobythetimeI sold that morning, I was$30,000 richer. I had neverexperienced anything likethat, stocks going up 20 and30points.Unfortunately,alot

of traders blew up theiraccounts when it stoppedworking.”Over time, Kurisko

developed a style of tradingthat focuses on high-probability setups. Thiscriterion is determined by asetoffivetechnicalindicatorsthatwill setupandshow thebest risk reward entry for aqualitystockinapullback.

HIGH-PROBABILITYTRADES

One of Kurisko's daytrading guidelines is to notmake trading toocomplicated. “Instead oftryingtopickatoporbottom,andgetting takenoutofyourposition,” he suggests, “havethedisciplineandpatience to

follow the price trend. Toomany people get greedy andwant to make somethinghappen.”The key, he suggests, is

patientlywaitinguntilthereisa high-probability setup.“Many people don't knowthat one of the secrets ofbeing a successful day traderisbeingpatient.”Unlike many traders,

Kuriskoisnotascomfortable

withshortingstocks.“Maybeit's my optimisticpersonality,” he says, “but Idon't take both sides of themarket. If I see a stock topout, I'll wait until the stockcomes to a levelwhere I cango long. For me, shorting istootough.Idon'twant togetchopped up trying to find atop.”Specifically, Kurisko's

ideal setup is trading high-

qualitystocksthatarepullingback. “For me, a high-probability trade is when theprice of a high-quality stockpullsbacktothetrendlineandstarts to move up. It's atextbook trade,notgambling.The exciting part is it's suchaneasytradewhenyouseeit.I could do that trade all daylong. All the indicators lineup,andyougetabounce.Thekey is don't get greedy, andthenyoumoveon.”

Kurisko says it's mucheasier to buy on a pullbackand go with the trend of themarket than try to catch thetop or bottom. “You needpatience and discipline to letthe stock come down to anarea where it's going tobounce, whether it happensMonday, Tuesday, orWednesday. You don't chaseit. You have your businessplan and youwait for stocksto set up. I buy them and I

sell them with no emotion.It'sanexcellentway tomakealiving.”

SCANNING FORSTOCKSTOBUY

Kuriskolikestohavealistof stocks to watch, what hecalls a focus list. “I scanthroughhundredsofstocksat

night looking for high-probability setups. I mostlylookatstocksintheS&P500because they are qualitystocksthathavealreadybeenbrokenintosectors.”Hecreatedhisowncriteria,

suchasstocksthatarepullingdown to a trendline. Theyalso have to be above their200-day moving average.Finally,hescansforawedge(similartoatriangle)pattern.

Hesaysyoucouldsetupanycriteriayouwanton the scanprograms.“I'mscanningallthetime,”

Kurisko acknowledges. “Inmy office I have sevenscreens with over eightystocks.Then I have chartsofthe twelve main stocks I'mlooking at. I'm constantlylooking for divergences andbuying spikes.” BecauseKurisko is constantly on the

air,hesays,“Ihavetoactasthe eyes and ears for myviewers.”Unlike some other traders,

Kurisko doesn't use Level IIto monitor his focus list. “IneverreallygotintoLevelII.I didn't like how these ghostorderswouldsuddenlyappearand then they'd disappear.What'sgoodaboutLevelIIisyoucan see the10,000 shareorders holding at a certain

price level. What's bad issome of these orders aren'treal. Also, price action willalwaysshowuponthechartsbefore it shows up on LevelII.”Therefore, Time and Sales

ismore useful toKurisko. “Isometimes look at it to get afeel for the sizeof the tradesgoing through,” he says. “Ittells me if day traders orinstitutionalbuyersare in the

market. If a 10,000-shareorder is going through, TimeandSaleswilltellmethat.”He also uses basic

scanning software to findstocks that meet his criteria.“Imight scan for stocks thatare between the 20-periodand 50-period movingaverage, or one that isoversold on Stochastics. Itkeepsmeoutofthejunk.ButIwouldn'trecommendpaying

$900 for a program that youcangetfor$49.”In addition to scanning

software, Kurisko also paysextra for news feeds, whichhefeelsgiveshimanedge.“Iwant to know if there isbreaking news before it'sshown on television. By thattime it might be too late.Many times I've seensomething like the GrossDomestic Product (GDP)

being announced a fewseconds late. I need to be ontopofthenewsandalwaysbeprepared.”

KURISKO'S FIVEFAVORITEINDICATORS

“Thesignals I look forareStochastics, trendlines,

movingaverages,supportandresistance, and patterns,”explains Kurisko. “Startingwith Stochastics, Iwant it tobe oversold. Next, I look atthe 20-, 50-, and 200-dayexponential moving average(EMA). What's great aboutthe indicators is theyhelp letyou know when to buy andwhentosell.”Kurisko also wants to see

recognizablepatterns,suchas

candlestick reversals or aninverted head and shoulders,that match his long-onlytrading philosophy. He alsowants the stock price to betouchingsupportorresistancebeforehebuysorsells.To make a trade, Kurisko

doesn't need all fiveindicators lined up, but atleast three indicators areimportant. “Once I see thepatterns starting to build and

the indicators lined up, I'lltakethetrade,”hesays.It'salwaysanaddedbonus

if there are recognizablepatterns. “I sometimes don'tunderstand why everyonedoesn't see the patterns,” hesays. “Maybe it takesexperience to see thecurvatures of the lines andhow the market reacts tovolume,becauseI'llseeitbutothers sometimes don't.

Studying the pattern shouldnotbeascientificprocess.It'sjustthere.”The patterns appear on

almost any time frame on achart, from the 1-minute tothe daily. “The longer thetime frame,” Kuriskoexplains, “the longer youmightwanttoholdit.IfIseethe pattern show up on a 1-minutechart,thenitwillbeaday trade.But sometimes the

pattern crosses all timeperiods, so you have to bepatient to see how it playsout.”AlthoughKuriskorelieson

indicators, he tries to keep itsimple. “Sometimes we usetoo many indicators andconfuse ourselves,” hecautions. “That is why I trynot to use more than fiveindicators.”

DON'T BUY ABREAKOUT ANDOTHERRULES

“In the old days whentrading was easy,” Kuriskorecalls, “you could buy abreakout for a few points.You'd look up stocks thatwere making 52-week highson strong volume. Everyonewould jump in because they

knew the stock would gohigher.Butnow,youhavetowatchoutforabulltrap.Youget a breakout, and then itreverses.”Kuriskobelievesthatsome

of the reversals can beblamedontradersusinghigh-speed computers with black-box algorithms scalping forpennies. “That's one of thereasons many traders getfrustrated with the market.

The timing isnot like itusedto be, and many of the oldrulesdon'tworklikebefore.”One rule that Kurisko

follows is using hard stops.“Stops can be the trickiestpart of trading because itseems like the market takesout your stop, reverses, andgoes up.Usually it's becauseyou put your stop at thewrongplace.”Hedoesn'tliketoputarbitrarystops,suchas

a certain percentage, but letsthe pattern or indicator leadhimtothecorrectlocation.When exiting a position,

Kurisko likes to scale out. “Idefinitely like to scale in orscaleoutofastock.Iusuallytake half my shares off asStochastics gets overbought,oritpushesagainstthetopofthe channel line. The demoninevery trader is, ‘What if itgoes higher?’Be disciplined.

Take half off because youwant to catch thatcontinuation move. If themarketturnsover,I'lltaketherestofthepositionoff.”Based on previous

experience, Kurisko haslearned how to fight greed.“There'sasmalllittlewindowwhere you're going to makemoney, but people alwayswant more. They refuse tosell. Then the market drops

and they want their originalmoney back. I tell peopledon't think of it as a loss.Take themoney andmove itinto another stock that isactually moving up. Insteadof being stuck in a deadstock, put the money in anactive stock with the sameamount of cash. Forceyourselftomentallyexchangeit.”

THE DAYTRADINGSTIGMA

It bothers Kurisko thatthere are so manymisconceptions about daytrading. “There are manydifferent categories of daytrading,” he explains. “Youcan be a day trader and stillholdovernight.You can alsotrade positions intraday. I

don't think it's helpful toattach a label to day traders,which seems like a stigma.You make money by takingpositions when they shouldbe taken, whether it is for aday or a couple of days. It'swhatworksthatcounts.”Hesaysthatsometimesthe

part-time trader has anadvantage.“Thekeyisnottoget chopped up intraday bythehigh-speedcomputers.

Part-time traders aren'tgetting involved in all of thehyper-activityduringtheday,which is good.” He adds:“Even full-time traders canlearn to slow down a littleand only look for trades thathave the highest chance ofsuccess. Try to be morepatient.”

HOWTOSUCCEED

ASADAYTRADER

“If you don't have theknowledge and discipline,”Kurisko cautions, “you'regoing to make the samemistakes that everyone elsemakes.You don'twant to beinapositionwhereyouhaveto make money every day.That's why a lot of peoplelose money. There are times

when the market is goingsideways or down. It can getreally rough. If you're tryingto go long in a choppymarket, it's hard. You don'twanttobeinapositionwhereyou have tomake somethinghappen.Ifyouarelookingfortrades because you are boredorgreedy,you'lllosemoney.”Once you feel comfortable

and confident as a trader, hesays,youalmostreachaZen-

like feeling where you feellike you are one with themarket.It'snotlikethateveryday, he says, but there aretimes when everything isgoing right. “You have toknow where your spot is inthemarket.”

Peter Reznicek,ProfessionalTrader

Ifyouwanttobeasuccessful

day trader, you need a setstrategyandstrongdiscipline,says Peter Reznicek, chiefstrategist and cofounder ofShadowTrader.net, anadvisory firm that providesintraday and position tradingcommentary and coaching toitsclients.His main focus and

expertise is in technicalanalysis of market internals,sector strength analysis, and

identifying high-probability,low-risk, intraday and swingopportunities, in both theequity and options markets.Peter is also a principal andhead trader of TranslucentCapitalManagement,anassetmanagement firm based inPhiladelphia,PA.

HOW TO ENTERTHEMARKET

“In the intraday game, it'sso easy to get distracted byhundreds of different ideas,”hesays.“MaybeyouplanonbuyingApple in themorningbut, if you don't havediscipline, you could bepunching up fifteen otherstocksymbols thatyouheardon the news. Before youknow it, you're in a series oftradesyoudidn'tplanon.”Like many traders,

Reznicek lets the marketdeterminewhat kind of tradehe'llmake. “One of themostcommon pitfalls is peoplecoming into the marketfalselyassumingtheyhavetomake money every singleday,” he says. “Instead, it'smore a monthly or quarterlygame.”Thekey,he explains, is to

identify opportunities whenthey appear and not be

pressuredintomakingatrade.“Sometimesgoodtradesjumpout at youwhen youweren'teven looking for them.Suddenly, you see a high-probabilitysetup.Themarketis coming together andall oftheplanetsareliningup.”It's important, he cautions,

thatyoudon'ttellastockhowitshouldperform.“WhydoesApplehave to runupat leasta dollar when it breaks out?

Why does a stock that isstrong in the morning goingtostaystrongsoyoucansellitat3:59P.M.?Itdoesn'tmakesense to imposeyourwill onthemarket.”Onesolution,hesays,isto

“lookatachartandfigureoutwhere the open space in thechart is going to end. Youwant to trade in betweenareas where there is nocongestion, and thenextarea

of congestion is where theprices will be pulled like amagnet.”He explains that prices

move along a path of leastresistance, “Thepathof leastresistance is where pricesdidn't run into congestion inthepast,”hesays.“Thereareopen spaces on the chartwhere prices can run. Andthose areas where prices getcongested,orresistedinsome

manner, will be the placewherepriceswillstop.”Yourprice targets,heexplains,areareas of support andresistance.Nevertheless, he cautions,

“You have to respect riskwhen day trading becausethingshappenalotfasterandthepaceisalotquicker.Withaswingtrade,youoftenhavea stop that is several dollarsaway. But with a day trade,

your stop is a lot closer, andyou can stop out in a flash.You have to be cognizant ofthedifferentpace.”

DAY TRADINGSTRATEGIES

One of the day tradingstrategies that Reznicek usesis first looking for stocks he

wouldbewillingtoholdlongterm, “but instead of holdingit, Igetoutbefore theday isover,” he says. “The longertime frames are really thedriver of what sets up thoseintraday moves. It puts theoddsinyourfavor.”Because he keeps his day

trades and long-term tradesseparate, even if the stockcontinues to go up, he'll sell75 to90percentof the stock

beforetheendoftheday.“Ifthestockclosesatthehighofthe day, I might hold a fewhundred shares overnight.Obviously, I consider this onacase-by-casebasis.”But the one mistake he

never makes is holding alosing stock overnight. “Youhave to remain flexible, butnevermakethetradingsinofturning a day trade into aswing trade because it's a

loser,” Reznicek says. “It'sokaytoholdafewsharesofawinner, but it's unacceptableto hold a loser because youthinkitwillrecover.”Another day trading

strategythatReznicekusesisan oldie but goodie: fadingthe gap. It works like this:overnight or before themarketopens, themarkethasgapped down. And then, atthe market open, the market

continuestofallfurther.“It's relatively rare for

stocks to gap down at theopen and continue lower,”Rezniceksays.“Whatusuallyhappens is the opposite.Stocks gap down and rallyup, but most gaps fill. Youwant tofadethatgap, that is,be a buyer on thegapdown,andaselleronthegapup.Asa day trader, you don't wantto go in the direction of the

gap.”Reznicek cautions novice

traders to be careful tradinggaps as it takes a bit ofexperience to get it right.Nevertheless, doing theoppositeofthecrowdisoftenrewarding.

TECHNICALINDICATORS

Reznicek primarily usestechnical indicators tomeasure the breadth of themarket, or the marketinternals. He has a fewfavorites. “I like theAdvance-Decline Linebecause it tells me at anygiven moment how manystocks on the NYSE areadvancing versus how manyaredecliningfortheday,”hesays.“IalsousetheNYSEorNasdaqTICK,whichtellsme

how many stocks on theentireexchangeareuptickingversus downticking. I thinktheTICKisusefulasashort-termindicator.”He also looks for

divergencesintheTICK.Forexample, if the S&P 500moved lower but the TICKdidn't make an aggressivenew low, it could mean themarket has hit a low andmightreverse.

“The market internals tellme the health of the marketunder the hood,” he says.“Sincemostindividualstocksfollow the overall market, itmakes sense to firstdetermine the health of theoverall market, and thenchoose individual stocks. Ifthe market is healthy, I'm abuyer, and if the market isunhealthyandnegative,I'maseller.”

Another tool thatRezniceklikes is Time and Sales.“TimeandSaleshelpsyoutoconfirm emotions, especiallyif there is a speed up in thetapeandyouseethousandsofprintsgoingoffasyourstockis making a breakout.” Hesays that unlike Level II,which is sometimesmanipulated, Time and Salestells you the trades that areactuallygoingoff.

CANDLESTICKPATTERNS

In addition to technicalindicators, Reznicek looks atcandlestick patterns. “I havefound that most patterns canbe categorized into pretty orugly. The pretty patterns arein every book, where thestock broke out to a higherhighandpullsbackgentlyon

lower volume,making a dojior hammer. In the bookthere's a circle around thereversalbar,andanote:‘BuyHere.’Over time you realizethings don't alwayswork outthat way. What really worksistheuglypattern.”The ugly pattern, he

explains, tends to fooleveryone. For example, “thestock might be basing at thelowofthedaywithabearish

flag pattern,” he says, aninvertedflagpatterncommonin downtrending stocks.“Then thestockbreaksdownat the bearish flag, but onlyby 10 or 20 cents. That's anugly pattern. It's a failedbreakdown. Everyone waslooking for the pretty patternbutthestockbreaksdownbyonlyalittleandturnsaround.Theoddsarereallystrongthestock will rally hard fromthere.”

After years of looking atpatterns, Reznicek learnedthat often it's best to do theopposite of what the patternsays. “Why not look for afailed pattern and play it inthe opposite direction?” heasks. “Do the opposite ofwhatisnotworking.”Even more important than

individual stock patterns,Reznicek reiterates, islookingatthedirectionofthe

broader market. “Manypeople make the mistake offlipping through individualstock patterns but not payingattention to the broadermarket. They find what theythink is the right pattern,either bullish or bearish, andit fails because the marketwentagainstthem.”That's another reason why

Reznicek primarily usesindicators and chart patterns

tolookatthebroadermarket,and not individual stocks.“Youwanttoworktopdown,notbottomup.”

FINALADVICE

If you want to day trade,Reznicek suggests that youstart by paper trading andkeepingajournalofwhatyoulearned. “If you are going to

paper trade, use the sameamount of money you'll betrading with,” he suggests.“Don't simulate with amillion dollars when you'reonly starting with $25,000.Keep detailed records andtreatitliketherealthing.”

Shorting StrategiesforDayTradersDaytrader Timothy Sykes,authorofAnAmericanHedge

Fund and blogger atwww.timothysykes.com,makes more money daytradingontheshortsidethanonthelongside.“Myaverageholdtimeisoneto twodays,so I'm mainly day trading,”he says. “With short selling,the quicker the better. It'ssometimes scary to be theenemy of everyone on WallStreet.”Sykes compares learning

aboutshortselling toplayingtennis. “When I playedtennis, I hatedmy backhand.All I wanted to do was myforehand. But if I onlyworked on one stroke, I'dhaveamajorweakness.Shortselling is no different thanusing a forehand orbackhand.”AlthoughSykesadmitsthat

novice traders have to beextra careful when shorting,

hethinkstheyshouldlearnit.“Even if you don't become ashort seller, it will help youlearn more lessons about thelongside.Youwillbeabletosee what the other side isthinking.Intheend,knowingabout short sellingwillmakeyouabettertrader.”The stocks Sykes

especially likes to short arefraudulent companies. “Let'ssay someone comes outwith

an investigativereportsayinga company is a fraud.Usually, these stocks willdrop10,20,or30percentinaday. Even if you are abeginningtrader,youwanttoget in when the day's low istaken out.” For example, ifstockXYZdroppedfrom$50to $30, the minute it dropsbelow $30, a new day's low,Sykes will sell that stockshort. “A negative catalystlike a fraud accusation

combined with a technicalbreak is enough tomake it ahigh-probability short,” hesays. In fact, this is hismostprofitableshortingstrategy.“When the stock starts

cracking,” Sykes notes,“people put their stop-lossesright at the bottom. I call itridingawave.You'resurfingatsunamiofstop-losses.Youhave so many automaticcomputer generated stop

losses, the stock may go to$29.50inminutes.Butonceitcracks,thestockisgone.”Sykes cautions, however,

that youhave to be awareoflagtimes.“I'mnotsayingthatif a stock drops 50 percent,youshortitfornoreason,”hesays. “But if it takes out anew low, especially after dipbuyershaveboughtin,you'rebreaking the back of dipbuyers,andfeartakesover.It

mighttank80percent.”Therisk,Sykesexplains,is

that the stock doesn't crack.“Thenyou'veshortedrightatthebottom,whichisadanger.To protectmyself, if a stockdoesn't crack after a fewminutes, I'm out. It mightcrack later, but because I'mtradingvolatilestocks,Idon'twanttoriskabounce.”The pattern Sykes likes is

what he calls a “supernova,”

but what others call aparabolicmove,whenastockgoes vertical after the end ofan extreme uptrend. “I loveshorting stocks that make aparabolic move because it'smentioned on CNBC or inthree newsletters,” he says.“One of the strongestindicators to me is shortingon the first down day on astockthathasbeenupseveraldays or weeks in a row onnothingbutfluff.Onthatfirst

downday,all themomentumistakenout,whichleadstoamorning panic,where all thestop-losses are takenout.Allthe momentum traders arefleeing.” The key, heexplains,isshortingthenightbefore.Another strategy Sykes

likesis toshort intostrength,especiallypennystocksunder$3 a share that move onmeaningless news, what he

calls “pump and dumps.”Companiesthatareunder$3,hesays,arehisplayground.To find these stocks, he

looks for volatile stocks thatmay be the biggest percentgainers for the day. He willalso study spam e-mailstouting certain stocks. “Icollect those e-mails and betagainstthem.Theyarefraudsand eventually getinvestigated.”

The biggest mistake thatpeople make, Sykes says, isshortingtooearly.“Ifatrashystock goes from $0.25 to$1.00, it could still go to$1.75, $2.75, or $3.75. Sotiming is always a problem.Again, that iswhy Iwait forthefirstdowndaythatcrackstheday's low. Itworks likeacharmonmomentumstocks.”Before shorting a specific

stock,alwaysmakesureyour

brokerage firm has enoughshares to borrow. Brokeragefirmsborrowtheshares fromclients who have bought thestock, and if not enoughinvestorsarelong,therewon'tbeshares.Interestingly,Sykesdoesn't

short indexes like the S&P500.“Youhavenoadvantageshorting indexes,” he says.Helikestotakeadvantageoffear,hype, andmanipulation,

and it is difficult to do withindexes. Syke's other toprulesforshorting:

1. Don'tshortarisingstockjustbecauseyouthinkitwillbreakdown.

2. Ifastockyou'reshortinggoes against you, getout. Don't give it achancetogiveyouabigloss.

3. Short selling is veryquick, so take whateverprofits the market givesyou.

4. Ifyouwanttolearnhowto sell short, learn overtime.

Chapter8:DoingYourHomework

The many cautionarycomments included in thisbook are not designed todiscourage you, but to alertyou to the challenges youface. After all, it's estimatedthatnomorethan5percentofpeople who try make a

consistently profitable livingas a day trader. If you'redeterminedtobeadaytrader,youwon'tbedeterredbywhatanyonesaysorwrites.Iknowof day traders who struggledfor years before they finallymade it.They really loved todaytrade.Theyalsolovedthefact they could achievesomething that most peopleonlydreamabout.On the other hand, after

readingthisbook,ifyounowbelieve that day trading isn'tfor you, I'm delighted if Ihelped you with yourdecision. In the end, yousaved timeandmoney.Also,if day trading is somethingyou're doing because youthinkit'saneasywaytomakemoney,thenIwillhavesavedyouafortune:It'snotaneasyway to make money. If youdon't take the time to learnthe skills or have the

discipline to followtherules,then you shouldn't day trade.Just likenoteveryonecanbea professional golfer or adoctor,noteveryoneissuitedtobeadaytrader.Before you can day trade,

you really must understandyourselfandyourpersonality.That is one reason why somanyrookieslosemoneythatfirst year. The emotionalchallenges of being a day

trader are ten times moredifficult than learning thetoolsandsoftware.

The Patient DayTrader

Hopefully, you also learnedthat you don't need to makehundredsoftradesadaytobesuccessful. Sometimes thesmartestmoveyoucanmakeis to stay on the sidelines.

Although he is not a daytrader, here is what best-selling author and investorJimRogers said in the book,MarketWizards:“Oneof thebest rules anybody can learnabout investing is to donothing, absolutely nothing,until there is something todo….Ijustwaituntilthereismoney lying in the corner,andallIhavetodoisgooverthere and pick it up. I donothinginthemeantime.”

Rogerswaitsuntilhefindsinvestments that have a highprobability of success and, ifhecan'tfindany,hepatientlywaits for the nextopportunity.

WhatYouCanLearnfromDayTraders

Although many people teaseday traders forhavingsuchashort-term mindset, they can

teachyoualotoflessons.Forexample, day traders learnearly that to survive theymustget outof losing stocksquickly. It's rare to hear aprofessionaldaytradersay,“Ihope…”whenmonitoring astock. They don't rely onhope,butontoolsandcharts,as well as discipline, guts,and the ability to make fastdecisions under stress. Thesearejustafewofthehabitsofhighlysuccessfuldaytraders.

See the BiggerPicture

Even though you're a daytrader, it's always useful tokeep your eye on the biggerpicture, either when usingcharts or analyzing markettrends.Sometimespeoplegetso focused on the smalldetails they don't recognizewhat's really going on. It's alot easier to be bullish in a

bull market and bearish in abear market, as legendarytrader Jesse Livermore oncesaid.And finally, try to keep it

simple. The flashing lightsand bright colors distract toomany traders, but to reallysucceedyouwanttofocusonwhat is really important. Ittakestime,buteventuallyyouwilllearnhow.

Become a Student oftheMarket

Even after reading this book,you may still have a lot ofquestions. One question newtraders often ask is: “Howlong will it take to becomeprofitable?” Instead, youshouldask,“Howmucheffortis required before I reallyknow what I'm doing?”Although the answer is

different for each person,doing your homework is thekey.Beforeyouplaceyourfirst

trade, read books, study, andexplore before committingreal money to the market.Understanding the stockmarket is a continuous,lifelong pursuit. Althoughthis book provides you auseful introduction to daytrading,thenextstepisyours.

Below are some additionalresources, including otherbooks, which will help youonyourjourney.As mentioned earlier, if

youhaveanyquestionswhilereading this book, call theHelp Desk at your localbrokerage firm. As long asyou're a customer, therepresentatives at yourbrokeragefirmshouldansweryourquestions.

GettingStockIdeas

You may be ready to getstartedbutwonderhowtogetstock ideas. That's a verygood question! First, manyexperienced traders rely onreal-time stock scanners toprovide them with daytradingcandidates.Thiscouldbe third-party software orstocks included in yourbrokerage firm's trading

platform. The goal is to findstocks that are volatileenough to make you money,but not necessarily the mostvolatile. Also, many traderscreate a watch list of stocksthat may be good candidatesfor day trading (many ofthese stocks appear on themostactive stock lists).Overtime,youwilladddozens(oronly a few) stocks to yourwatchlist.Soonyou'llhaveauniverse of stocks, and stock

sectors,thatyou'llobserveonadailybasis.If you want additional

stock ideas, youcan listen toandwatchaprofessionaldaytrader in action. Visitwww.daytradingradio.comfora live, continuous feedofdaytraderJohnKurisko,whoI interviewed for this book.You can watch him maketrades, explain how to usetechnical indicators, identify

patterns, pick out stocks tobuy or sell, and interviewguests. This will give you areal-life look into one daytrader's world, and also helpexpand on what you'velearned in this book. Finally,if you're wondering how tochoose your first stock,watching Kurisko will giveyou some ideas. (For yourinformation, I am notaffiliated with Day TradingRadioinanyway).

ADayintheLifeofaDayTraderFor additional insights, thefollowing diary can give youclues of how other tradersprepare for the upcomingmarket day. Keep in mindthat every day trader has apersonalized trading plan, sothere is no one right way.Also,becauseportionsofthisdiary are from experienced

traders, don't worry if someoftheideasseemconfusing.7:00 P.M. (ET). The night

beforemarketopening:•Review both profitable andunprofitable trades andenter notes into yourtradingdiary.

• Write the lessons learned,and review any previousmistakes. You will makemistakes,butthegoalisnotallowing yourself to repeat

them.• If any positions were heldovernight, be certain thatthe reason for holding isstill valid. Constantly re-evaluatecurrenttrades.

•Startplanningastrategyforthefollowingday.9:30P.M.(ET)

• Scan individual charts forbuyingorsellingideas.

• Put a handful of technical

indicators on a chart forcluestomarketdirection.

•Beginformulatingatradingplan.8:00A.M.(ET)

• Scan financial newspapersandfinancialwebsitessuchas Marketwatch, Briefing,Yahoo! Finance, andBloomberg for breakingnews and potential stockideas.

•Arrange stock charts, order

entryscreens,andtechnicalindicators.

•Turnonfinancial televisionprograms like CNBC orBloomberg.

• Observe the major marketindexes such as the DowJones Industrial Average(DJIA), the S&P 500, andthe Nasdaq Composite forcluesastomarketdirection.

• Observe stock sectors forstrengthorweakness.

• Decide what indexes orindividual stocks to tradebasedonpreviousresearch.

• Review a list of stocks orexchange-traded funds(ETFs).Many traders write down

thespecificstepstheyneedtotake in a “trading checklist,”similar towhat a pilotmightuse before takeoff. Also, besure to get plenty of rest,food, and exercise before

trading. You must have aclear head before the marketopens.Andifyoufeeloutofsynchwith themarket, that'sokay.Take thedayoff, or atleast get away from thecomputer and return whenyou're ready for your “A”game.9:30 A.M.(ET). At the

marketopen:•Manageallcurrentpositions.Take advantage of

breakouts togetoutof anybadtradesinyourportfolio.Ifyouhaveanydoubts,exitthetrade.

•Continue monitoring stockor ETF sectors. Identifyindividual stocks or ETFstotrade.

•Study market indicators tomonitor the market, andlook at technical indicatorsfor clues as to marketdirection. Indicators may

help you determine entryandexitpoints.3:30 P.M. (ET). Market

closesinthirtyminutes:•Day traders close out anyopenpositions4:00 P.M. (ET). Market

closes.

FIG8.1:TheDayTraderArtist:RandyRuether

TheClosingBell:GoingForward

Now that you have a betterideawhatitmeanstobeadaytrader,it'syourdecisionwhattodonext.Youmaycontinuelearning and researching andtake my advice to practicetrade before committing realmoney into the market. Or

you may open up your firsttrading account. Either way,one of my goals was toprepareyouemotionallyforatoughbattle.As you go forward,

remember to keep educatingyourself. There will alwaysbe something new to learn:new technology, newstrategies, and new software.As the market changes overtime, and as new rules are

added or removed, therewillalways be opportunities forthose who are informed andalerttomakemoney.I want to thank you for

taking the time to read mybook.IfI'vebeenabletohelpyoumakeor savemoney, I'dbe very pleased. Mostimportant to me, I hope I'vemotivated you to keeplearning about the stockmarket.

Good luck, and be sure totakeitonedayatatime.

HowtoContactMe

Feel free to write me atmsincere@gmail.com if youhave any questions, or visitmy website atwww.michaelsincere.com.Also,ifyounoticeanyerrors,which are my responsibility,pleaseletmeknow.

Asalways,I'mdelightedtohearfromyou.

AppendixA:ResourcesforDay

Traders

BooksforNoviceDayTraders

Technical Analysis Plainand Simple (FT Press, 3rdEdition, 2010) by Michael

KahnAn easy-to-read

introduction to technicalanalysis and technicalindicators.TheComplete IdiotsGuide

toTechnicalAnalysis (Alpha,2010)byJanArpsAn introductory book

about technical analysiswritten in a user-friendlytone.How to Make Money in

Stocks (McGraw-Hill, 4thEdition, 2009) byWilliam J.O'NeilThis bestseller shows

investorshowtoprofit in themarketbyusingarule-based,systematicapproach.The Visual Investor: How

to Spot Market Trends(Wiley, 2009) by John J.MurphyA thoughtful introduction

to technical analysis and the

nuances of using technicalindicators.The Truth about Day

TradingStocks(Wiley,2009)byJoshDiPietroA first-person account

about the trials andtribulations of being a daytrader, and what the authorlearnedalongtheway.HowIMade$200,000,000

in theStockMarket (MartinoFine Books, Revised, 2009)

byNicolasDarvasOld bestseller of how a

stockmarketnewbiemakesafortune in the stock marketusingsupportandresistance.A Beginner's Guide to

Short-Term Trading (AdamsMedia,2008)byToniTurnerAn easy-to-read bestseller

aimedatnovicetradersaboutshort-term trading tactics andtools, including technicalindicators.

ABeginner'sGuidetoDayTrading Online (AdamsMedia,2007)byToniTurnerThis groundbreaking

bestsellerwasthefirsttogivea step-by-step explanation ofday trading for beginnerswith a friendly, humorousvoice.Day Trading for Dummies

(Wiley,2007)byAnnLogueAgeneraloverviewofday

trading written in a friendly

voice.Market Wizards

(Marketplace Books, ClassicEdition, 2006) and NewMarketWizards(MarketplaceBooks, 2008), by JackSchwagerThe author delves into the

mindsofprofitable traders inthesetwoclassics.Reminiscences of a Stock

Operator (Wiley, Revised,2006)byEdwinLefevre

Must-readclassicaboutthetrading experiences of JesseLivermore,alegendarytraderfrom the early twentiethcentury.Technical Analysis for

Dummies (Wiley, 2004) byBarbaraRockefellerAn introductory book

about technical analysiswritten in a user-friendlytone.High Probability Trading

(McGraw-Hill, 2003) byMarcelLinkEntertaining and realistic

bookabouthowtosucceedasahigh-probabilitytrader.Trading for a Living

(Wiley, 1993) by AlexanderElderBestsellingbookonhowto

master the psychologicalchallenges of the market aswell as how to use technicalindicatorswhentrading.

The Disciplined Trader(Prentice-Hall, 1990) byMarkDouglasBestseller on the

psychology of trading andwhat it takes to over-comeyourownemotions.

Books forExperiencedTraders

Super Trader (McGraw-Hill,2009)byVanK.Tharp

The Ultimate Day Trader(AdamsMedia,2009)byJakeBernsteinCandlestick Charting

Explained (McGraw-Hill,2006),byGregoryMorrisCome Into My Trading

Room (Wiley, 2002) byAlexanderElderTechnical Analysis

Explained (McGraw-Hill,2002)byMartinJ.PringTrading in the Zone

(PrenticeHall,2001)byMarkDouglasJapanese Candlestick

Charting Techniques(Prentice Hall, 2001) bySteveNisonTechnical Analysis from A

toZ (McGraw-Hill,2000)byStevenB.AchelisTechnical Analysis of the

Financial Markets (NYInstituteofFinance,1999)byJohnJ.Murphy

Useful Websites forTraders andInvestors

finance.yahoo.com(Yahoo!Finance)money.cnn.com(Money)www.activetrademag.com

(ActiveTraderMagazine)www.barrons.com

(Barrons)www.bigcharts.com (Big

Charts)www.bloomberg.com

(Bloomberg)www.briefing.com

(Briefing)www.candlecharts.com

(Candlecharts)www.cboe.com (Chicago

BoardOptionsExchange)www.cnbc.com(CNBC)www.decisionpoint.com

(DecisionPoint)

www.daytradingradio.com(DayTradingRadio)www.fool.com (Motley

Fool)www.forbes.com (Forbes

Magazine)www.ft.com (Financial

Times)www.google.com/finance

(GoogleFinance)www.investopedia.com

(Investopedia)

www.investors.com(Investor'sBusinessDaily)www.investorwords.com

(InvestorWords)www.ise.com (International

SecuritiesExchange)www.kiplinger.com

(Kiplingers)www.marketwatch.com

(Marketwatch)www.moneyshow.com (The

MoneyShow)

www.morningstar.com(Morningstar)www.nasdaq.com(Nasdaq)www.nyse.com (New York

StockExchange)www.optionseducation.org

(OptionsIndustryCouncil)www.quote.com

(Quote.com)www.seekingalpha.com

(SeekingAlpha)www.sfomag.com (Stocks,

Futures, and Optionsmagazine)www.smartmoney.com

(SmartMoney)www.stockcharts.com

(Stockcharts)www.thekirkreport.com

(TheKirkReport)www.thestreet.com (Real

MoneyandTheStreet)www.traders.com (Stock

andCommoditiesmagazine)

www.tradersexpo.com(Trader'sExpo)www.tradersnarrative.com

(Trader'sNarrative)www.tradingmarkets.com

(TradingMarkets)www.wsj.com (Wall Street

Journal)

Stock DiscussionGroups

The following are a few ofthe more popular tradinggroups. Use an Internetsearchenginetofindmore:groups.google.com

(Google)messages.yahoo.com

(Yahoo!)www.elitetrader.com (Elite

Trader)www.investors.com (IBD

Community)

www.investorvillage.com(InvestorVillage)www.ragingbull.com

(RagingBull)www.siliconinvestor.com

(SiliconInvestor)www.trade2win.com

(Trade2Win)www.traders-talk.com

(Trader'sTalk)

AppendixB:GlossaryofTerms

Advance-DeclineLine

This indicator plots arunning total of advancingstocks minus the decliningstockseachday.

After-hoursmarket

After the regular marketcloses,theafter-hoursmarketallows investors and tradersto buy and sell individualsecurities. This market isopen from 4:00 P.M. to 8:00P.M.(ET).

Allornone(AON)An instruction given to a

brokerage firm that requiresthatthesharesinanorderarefilledcompletelyornotatall.

ArmsIndex(TRIN)

This breadth indicatorhelpsidentifyoverboughtandoversoldconditions.

AscendingtriangleBullish pattern that forms

during an uptrend andresemblesatriangle

Askprice(oroffer)Thelowestpriceaselleris

willing to accept for anindividual security; the pricethatisofferedforsale.

BearmarketA stock market

environment where investorsare gloomy, the prices ofstocksandothersecuritiesarefalling, and thebroadmarketindexes have plunged by 20percent or more off of itshighs.

BidpriceIt's the highest price a

buyeriswillingtopayforanindividual security. Also the

best price the seller willreceive for a security sold atthemarketprice.

BollingerBandsThisindicatorhelpstraders

to identify overbought andoversoldconditions.

BondA type of loan issued by

government, localmunicipality, or company inordertoraisecapital.

BreakoutPrice movement that rises

above or below support orresistanceonheavyvolume.

Buy-and-holdInvestment strategy in

whichaninvestorbuysstocksand holds indefinitely,regardless of short-termfluctuationsinthemarket.

BuyingpowerThe total cash held in a

brokerage account that isavailable for traders to buysecurities (plus the ability toborrow and use existingprioritiesascollateral).

Buy-stoporderAnorder tobuya security

that is above the current askprice.

CalloptionAcalloption isa financial

contract thatgivesbuyerstheright, but not the obligation,

to buy an asset by a certaindate ifcertainobligationsaremet.

CandlestickPopular typeofpricechart

that displays the high, low,open, and close of each timeperiod and can be used togivetradingsignals.

CapitalgainA profit, or gain, that is

realized when an asset, suchas a stock, bond, or real

estate, is sold for a pricehigher than the originalpurchaseprice.

CapitallossAlossthatisrealizedwhen

an asset is sold for a pricelower than the originalpurchaseprice.

DarkcloudcoverIn candlestick charts, a

bearish price patternwhere ablack candlestick follows alongwhitecandlestick.

DivergenceWhenthepriceofanasset

moves in the oppositedirectionofanindicator.

DragonflydojiIn candlestick charts, a

price pattern that reflectsindecision on behalf oftraders. The stock's openingand closing price are equaland indicates the trend maybeataturningpoint.

Drawdown

Theamountofequityyouraccount lost as a result of atradeoraseriesoftrades.

Exchange-tradedfunds(ETF)

An investment fund thattrades like a stock but tracksan index, commodity,currency, or basket of assetslikestocks.

Exponential movingaverage

A type ofmoving average

used to anticipate long-termtrends. It shows the averagevalue of the underlying data,where more weight is givento the most recent timeperiods.

FederalReserve (theFed)

Createdin1913,theFedisthecentralbankingsystemoftheUnitedStates,responsibleforoverseeingmoneysupply,interestrates,andcredit.

FillorkillAn instruction to the

brokerage to either fill thetrader's order entirely orcancelit.

FlashcrashThis is the May 6, 2010,

stock market crash thatcaused the stock market toplungeover600pointswithinminutes, before recoveringthe losses. It was blamed onan errant E-mini option

futuresorder.Fundamental

analysisThis is a method of

evaluating a stock or othersecurity by examining theunderlying business, such asfinancial statements,competitors, andmanagement.

FuturescontractThis is a contract between

two parties to buy or sell an

asset (e.g., commodities,currencies, options) on aspecified future date for aspecifiedprice.

Good 'Til Canceled(GTC)

This is an instruction toyour brokerage firm to keepan order to buy or sell asecurity active until the limitprice has been reached, evenifittakesdaysorweeks.

Hammer

The hammer is acandlestickpatternthatformswhena securitymovesmuchlower after the open, butrallies to close above theintradaylow.

HedgeA hedge is used to limit

losses and involves taking aposition in one security thatoffsetsaposition ina relatedsecurity.

High-frequency

tradingThis is a computerized

trading strategy that usespowerful computers andcomplex algorithms to makemany trades at fast speedswithshortholdingperiods.

IntradayThis term means you are

buying or selling securitieswithinasingletradingday.

Laggingindicator

Thisisatechnicalindicatorthatfollows,orlags,thepriceofanunderlyingsecurity.

LevelIquoteLevelIquotesarethemost

current real-time bid and askquotesforanystock.

LevelIIquoteLevel II quotes are the

most current real-time bidand ask quotes for Nasdaqmarketmakers.

LevelIIILevel III is a trading

service that allows NASDmemberfirmstoenterquotesandexecuteorders.

LeverageLeverage is a technique

where borrowed capital isused to multiply gains orlosses, and can increase (ordecrease) the investmentreturn.

Liquidity

Liquidity refers to howquickly you can get into orout of a security at the samepricelevel.

LongpositionA long positionmeans the

investorisholdingasecurity,hoping to profit if the pricegoesup.

MarginaccountAmarginaccountrefersto

atypeofabrokerageaccountwhereacustomercanborrow

cashfromthebrokeragefirmtobuysecurities.

MargincallThis is a call from a

brokerage firm toacustomerthat demands he or she payenough cash to satisfy themaintenance requirements(and the Federal ReserveBoard rule, Regulation T) tocover against an unfavorablepricemovement.

Marketindicator

A market indicator, whichcan be technical, sentiment,fundamental, or economic,generates signals that giveclues and insight into futuremarketdirection.

MarketmakerAmember of an exchange

(usually refers to Nasdaq)that makes a market for aparticular security andensures there is enoughliquidityforthatsecurity.

MarketorderThis is an order to buy or

sell a stock at the currentmarketprice.

MentalstopThis is a stop-loss but is

not actually entered as anorder;but iswrittenonpaperorremembered.

OptionAnoptionisacontractthat

gives you the right, but not

the obligation, to buy or sellan underlying security at aspecific price for a specifictimeperiod.

OscillatorA term used in technical

analysis that refers to a typeof indicator that moves upand down, or oscillates,withinapricerange.

OverboughtOverbought refers to a

conditionwhendemandfora

security is so strong that thepricehasrisentoohigh.

OversoldOversold refers to a

conditionwhendemandforasecurity is so weak that thepricehasdroppedtoolow.

PatterndaytraderAn SEC designation for

those who buy and sell asecurity at least four timeswithin a five-day period andare now subject to certain

rules, such as maintaining atleast $25,000 in a brokerageaccount.

PositiontradingPositiontradingisatrading

strategy where securities areheld from several days tomonths.

PutAputisafinancialcontract

that gives buyers the right,butnot theobligation, to sellan asset by a certain date if

certainobligationsaremet.Resistance

On a stock chart, this aprice level where sellersprevent a stock from risinghigher.

RetracementOn a stock chart,

retracement means that theprice of a securitytemporarily changesdirection; in otherwords, it'satemporarypricereversal.

ReversalOn a stock chart, reversal

means that the price of asecuritychangesdirection.

RisingwindowAcandlestickpatternwhen

yesterday's high is belowtoday'slow,leavingagap,orhole,inthedailypricechart.

Risk-rewardratioA ratio used by investors

andtraderswhentheriskofa

particular trade is weighedagainstthepotentialreturn.

ScaleinoroutScaling in and out means

you get into or out of aposition in increments as thepricerisesorfalls.

ScalpingThis is a day trading

strategy where you makeprofits on small pricemovements.

Securities andExchange Commission(SEC)

The SEC is a governmentcommission created byCongress and appointed bytheU.S.president to regulatethe securities markets andprotect investors from fraudandmanipulation.

SecurityAn investment instrument

such as a stock, bond,

certificate of interest, oroption,tonamejustafew.

ShareAunitofownershipissued

to shareholders by acorporation.

ShootingstarThis is a candlestick chart

pattern that is formed duringan uptrend andmay signal areversal.

Shorting(sellshort)

This is the practice ofborrowing shares of stockfrom a brokerage firm andbuying them back later at alower price, hopefully for aprofit.

SlippageWhen using a market

order, thedifferencebetweenthe estimated price and theactualexecutionprice.

SpecialistAmember of an exchange

(usually refers to the NewYork Stock Exchange) thatmakes a market for aparticular security andensures there is enoughliquidityforthatsecurity.

SpreadThedifferencebetweenthe

bid and ask price of asecurity.

StochasticsStochastics is an indicator

that helps determine whether

a security is overbought oroversold.

SupportOn a stock chart, this a

price level where buyersprevent a stock from fallingfurther.

SwingtradingA trading strategy that

seeks to create profits byholding positions forrelativelyshortperiods,oftenfromtwotofivedays.

TechnicalanalysisA method of evaluating

securities and attempting toanticipate future stock pricesbasedonpriceandvolume.

TechnicalindicatorAnindicatordisplayedona

chart that attempts toanticipate future pricemovementsofasecurity.

TickThis refers to the upward

or downward movement inthepriceofasecurity.

TickersymbolThese are the letters used

toidentifyasecuritylistedontheexchanges.

TimeandSalesTime and Sales displays

information about the mostcurrent trade of a security,including time, price, and lotsize.

TradingrangeTrading range refers to a

securitytradingbetweenhighandlowpricesonachart.

TrailingstopThisisanautomatedorder,

set as a percentage or bypoints,thatadjustsupwardordownward as your stockadvances,orfalls,inprice.

TrendTrend refers to the current

direction or movement of asecurity.Downtrendiswhenoverall

direction is down, anduptrend is when overalldirectionisup.

TrendlineA straight line that

connects at least two pricepivot points, either twopivotlows in an uptrend, or twopivothighsinadowntrend.

Triangle

This is a chart pattern thatresemblesatriangleinwhichthe price gets narrower overtime because of lower topsandhigherbottoms.

VolatilityVolatility refers to the rate

atwhichasecuritymovesupand down over a period oftime.

VolumeVolume refers to the

numberofsharesofasecurity

traded during a certain timeperiod.

WedgeA chart resembling a

triangle,where theprice getsnarrower over time, but bothlineshavethesametrendbutdifferentslopes.

Acknowledgments

ToPeterArcher, acquisitionseditor at Adams Media, forgivingme the opportunity towrite this book and forpatiently working with meuntilitwascompleted;andtocontenteditorJenniferLawler

fordoingasuperbjob.I am also grateful to

Siranirin Rattananiphon foralwaysbeingthereforme.Also, to Harvey Small,

Jason Zimmer, KarinaBenzineb, KarolinaRoubickovi, Hazel DianaGarcia,andAnnaRidolfoforlistening;ToniTurnerforherencouragementandideas,andfor always giving me greatquotes; Paula Florez, my

extremely helpful assistant;Alexandra Bengtsson, whohasalwaysbeenfascinatedbydaytrading;cartoonistRandyRuether, photographer SeanMurdock, and web designerRyan Saunders; AdamBanker for his help behindthescenes;MattHeienforhispromotionalefforts.Also, without the help of

the following experts, thisbook could not have been

written:tradersJohnKurisko,Peter Reznicek, TimothySykes, and Toni Turner;Marcel Link for sharing hisinsights about the emotionaldemands of trading; CharlesKirk for lettingmeknow thepros and cons of being atrader; SimonMaierhofer forhis knowledge about ETFs;Joe Harwood for sharing hisdetailed knowledge aboutoptions; Tom McClellan forhis help with the McClellan

Oscillator; Steve Nison forhis insights into trading withcandlesticks, and MarkWolfinger for making verydetailedsuggestions.

AbouttheAuthor

MichaelSincereis theauthorof a number of investmentand trading books, includingUnderstanding Stocks(McGraw-Hill, 2003), thebestselling UnderstandingOptions (McGraw-Hill,

2006), andAll AboutMarketIndicators (McGraw-Hill,2010),tonamejustafew.As a financial journalist,

Sincere has written hundredsof columns and magazinearticles on investing andtrading, including a monthlycolumn for MarketWatch onmarket indicators. He hasbeen interviewed on dozensof national radio programsand has appeared on several

financial news programs,including CNBC and ABC'sWorld News Now! to talkabouthisbooks.Sincere also finished his

firstnovel,TheLastAuPair,about theexcitingadventuresof a group of European aupairs living in South Florida.Thebookwillbeprereleasedon Kindle, Nook, and AppleinJanuary2011.

Michael Sincere(www.michaelsincere.com) isthe author of a number ofinvestmentandtradingbooks.As a financial journalist,Sincere has written hundredsof columns and magazinearticles on investing andtrading, including a monthlycolumnforMarketWatch.Hehas been interviewed on

dozens of national radioprograms and has appearedon several financial newsprogramssuchasCNBCandABC’sWorld News Now totalkabouthisbooks.HelivesinBocaRaton,FL.

Copyright©2011byMichaelSincereAllrightsreserved.

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