Chapter 8:
Conclusion and Final Words

This book expands on some of the simple yet effective and straightforward trading strategies that I use every day. This book’s purpose is to show you what my own day trading journey looks like. It is not meant by any means to be a stand-alone book. You are not a trader just because you read my book, or anyone else’s book for that matter. There are other strategies and there are other styles of trading, and all can be right. There is definitely more than one way to learn trading, and for certain there is more than one correct way.

The most important takeaway from this book is to know whether or not day trading is for you. Day trading requires a certain mindset, as well as a discipline and a set of skills that not everyone possesses. Interestingly, most of the traders I know are also poker players. They enjoy speculation and the stimulation that comes from it. Although poker is a type of gambling, in my opinion, as I just touched upon in the previous section, day trading is definitely not. Day trading is a science, a skill, and a career, and it has nothing to do with gambling. It is the serious business of selling and buying stocks, at times in a matter of seconds. You should be able to make decisions quickly, with no emotion or hesitation. Doing otherwise results in losing real money.

This book equips you with some more advanced knowledge about day trading, but you still have a long way to go. Can you be a mechanic by just reading a book or two? Can you perform surgery after reading a book or taking First Aid 101? No. This book develops a foundation that you can build upon.

I encourage you to read more books and find online or in-person courses on day trading. Our community is only one of the many available resources online, and it certainly is not the largest and most famous one. Although you are welcome to join our community, this book is not written to channel an audience to our website in order to generate more revenue. In this book I tried to explain as clearly as possible in a written format my thought process when trading. Some people saw my previous book, How to Day Trade for a Living, as a marketing scheme to cross-promote my courses, software and chatroom membership. I am sure there will again be some people who see that with this book. Truth be told, although I do teach and provide some day trading services, this book is not intended to be a tool for marketing them.

An unknown reader of my previous book wrote this review, reproduced below as Figure 8.1:

“The book started off very informative but soon it became redundant and repetitive. I particularly don’t like the author advertising his own website/online chat room (which charges money if you wanna use it) in the book. And I don’t like the author spending two pages talking about how a trader should eat nutritional meals and exercises blah blah blah. Just be brief and don’t waste readers’ time.”

 

Figure 8.1 - What a reader did not like about my first book.

Seven people found that review helpful. In my previous book, I emphasized how difficult a day trading career is and the potential risks involved in trading. Some readers, such as D. Carroll, did not like this approach, as set out in Figure 8.2 below:

“Book was very negative, depressing. Stopped reading it because of the constant reminder of failure.”

Figure 8.2 - What a different reader did not like about my first book.

Five people found that comment helpful as well.

New traders often search for the best traders to learn from. They think that learning from the most experienced traders is the best way to learn. On the contrary, I think new traders should look for the best “teacher”. There is a difference. Sometimes the best trader lacks in personality or has poor people skills, while a trader who is consistently profitable (but not one of the top ten) can emerge as a premier lecturer, communicator, and mentor. New traders need to find the best teacher. You don’t need to learn from the best traders to become the best trader. Think about who some of the best professional sports coaches are. Often they were not superstar players. They knew the sport, but their passion was for teaching and developing players. The skills needed to become a great trader are different from those required to be an effective trading coach. Being a star trader requires superior pattern recognition and discipline. On the other hand, effective trading coaches are often obsessed with finding better ways to teach, are patient, and communicate clearly and effectively in a simple and easy-to-understand language. They can explain their methodology coherently. Often great traders lack the monetary incentive to create the best training program.

I always recommend to new traders that they start their trading in a simulator. I believe new traders should never start their day trading career with real money. You can sign up with one of the brokers or service providers that provide you with simulated accounts with real market data. Some brokers give you access to delayed market data, but that is not very useful. You need to make decisions in real time. Most of the simulated data software is a paid service, so you need to save some money for that software. DAS Trader offers the best simulated accounts for $150 per month (at the time of writing). Check out their website (www.dastrader.com) or contact them at [email protected] for more information. This, by the way, completes my unpaid and unsolicited advertisement for them!

Trading education costs might be annoying at the beginning and seem unbearable, but they really are not that onerous when you consider trading as a new business or career. If you use a simulator for six months, and trade only with simulated money, it will cost you somewhere around $1,000. This is the cost of a proper education. If you are seriously considering day trading as a career, it’s a small expenditure compared to the cost of an education for a new profession. For example, imagine that you want to go to school to get an MBA - it will easily cost you over $50,000. Likewise, many other diploma or post-graduation programs cost significantly more than the education required for day trading.

When in the simulator, practice with the amounts of money that you will be trading in real life. Should you use DAS Trader, you can define your buying power in their simulator. For example, if you plan to trade with $10,000 in your real account, you can then set your simulator to $10,000. It is easy to buy a position worth $100,000 in a simulated account and watch it lose half of its value in a matter of seconds. But could you tolerate this loss in a real account? No. You would probably become an emotional trader and make a quick and rash decision, which almost always results in a major loss. Similarly, it is easy to buy a large size with an imaginary $100,000 cash and make a $5,000 profit every day. You’ll start to feel that you can easily make a few grand a day, when in reality you actually plan to start trading with an account of only $5,000.

Always trade in the simulator with the size and position that you will be using in your real account. If you don’t, there is no point in trading in a simulated account. Move to a real account only after at least three months of training with a simulated account, and then start small, with real money. Trade small while you’re learning or when you are feeling stressed. As I recounted in Chapter 1, not too long ago a trader emailed me, explained his bad results, and asked for my advice. I encouraged him to switch to a simulator for a while so we could identify his problem. He replied, and I quote his exact words:

“I never traded in a simulator. I cannot afford to earn fake money for 3 months.”

If you, as a reader of this book, are wondering about some aspect of day trading or are struggling with a specific issue, please don’t hesitate to have a chat with me in our chatroom. I’m always happy to give some advice and guidance to colleagues.

New traders often skip some or all of the above-referenced steps in the process and lose their money very fast. Many curse the market and give up their day trading career forever, wondering if it is ever possible to make money by day trading. Remember, take baby steps in life. No toddler starts out by running a marathon. Success in day trading is one foot forward and then the next. Master one topic, and then, and only then, move on to the next.

Most traders struggle when they first begin, and many do not have sufficient time in the morning to practice in real time. Those who can give trading more time when they start have a better chance to succeed. How long does it take to be a consistently profitable trader? I don’t think anyone can become a consistently profitable trader in less than three or four months. After four months of paper trading, you need at least another three months of trading with your real money in small share size to master your emotions. After six months, you may become a seasoned trader. Eight months is probably better than six months, and twelve months is perhaps better than both. Are you patient enough for this learning curve? Do you really want this career? Then you should be patient enough. Do you have this much time to learn the day trading profession?

It always amuses me when I see books or online courses and websites that offer trading education that will make a person money starting on day one! I wonder who would believe such advertisements.

You must define a sensible process oriented goal for yourself, such as: I want to learn how to day trade. I do not want to make a living out of it for now. Do not set an absolute income for yourself in day trading, not for at least the first two years. This is very important. Many traders think of inspiring goals such as making a million dollars or being able to trade for a living from a beach house in the Caribbean. These goals may be motivating, and they definitely have their place, but they distract you from focusing on what you need to do today and tomorrow to become better. What you as a new trader can control is the process of trading: how to make and execute sound trading decisions. Your daily goal should be to trade well, not to make money. The normal uncertainty of the market will result in some days or weeks being in the red.

Often new traders email me and ask how they can become full-time traders while they are working at a different job from 9 a.m. to 5 p.m. New York time. I really don’t have any answer for that. They probably cannot become a full-time trader if they cannot trade in real time between 9:30 and 11:30 a.m. New York time. You do not need to have the whole day available for trading, but you at least need to be available for the first two hours following when the market opens. If you insist, I would say the first one hour following market Open (9:30 to 10:30 a.m. New York time) is the absolute minimum time you should be available for real trading or practice, in addition to any time you need for preparation before the market opens at 9:30 a.m. Sometimes I am done with trading and hit my daily goal by 9:45 a.m., but sometimes I need to watch the market longer to find trading opportunities. Do you have this flexibility in your work-life schedule? If not, you could consider trading in the currency market (Forex) because that market is open 24 hours a day, closing only on the weekends.

Trading is a full contact sport. You are competing with the sharpest minds on the planet. Traders all around the world, at their home offices, or in the proprietary Wall Street firms, are all sitting behind the most sophisticated tools imaginable, ready to take your money. Anything less than your full effort and attention is disrespectful and will very likely result in your trading account suffering a heavy and tragic loss.

You need to take trading seriously. Day trading is not a casual activity. For those who think it’s cool to know a few things about the markets before jumping in, but nothing more, it always ends in regret. For those who cannot devote the necessary time, there are other kinds of trading that are not quite as demanding as day trading, such as the currency market, and that might be a better fit for people whose schedules cannot accommodate the intense commitment that day trading requires. So, in a nutshell, do it right or just don't bother doing it. If you can't do day trading, that's okay. You don't have to do it, and you can always look for another challenge that complements your budget and/or schedule. I feel obligated though to warn every reader of this book that it is very easy to lose your life savings when day trading. As I wrote at the beginning of this paragraph, you need to take trading seriously.

A very excited Trader Dwight emailed me to share his trading endeavor. The first part of his email is reproduced below as Figure 8.3. He is passionate about trading and he is working hard to save more capital for it, but his schedule does not allow him to properly focus on day trading. Let’s read this excerpt from his email together, as it’s both educational as well as entertaining:

“Hello Andrew,

“I purchased your audible Version 4 from amazon and started to listen to it as I do my morning deliveries. First day of listening I was hungry to learn more. So I stop all trading in my account……I continued to listen.

“I work for a plumbing supply in N.Y.C. and start my day roughly around 7 a.m. I was active with real $$$ on Scottrade since March 2017 and have been doing due diligence at night and trading during the day and was fortunate to be one of the lucky ones to make some gains. (Roughly from 2k to 5k). Now this is all happening as I drive the streets of New York delivering supplies. Sometimes stuck in traffic I can make a trade, and if I need to I pull over to watch Level 2 and make a trade or two. I have been doing straight kamikaze instead of Guerrilla warfare. Lol.

“I started to lose these gains and felt I had no control and realized I was lucky. This is where I am at now in writing to you……Today as I finished listening to the book (which I will listen to again in front of my desktop to follow all your charts and examples I missed while I was driving and listening to the audible), I started to map out and set goals for the next 12 to 18 months. I keep saying to myself, “how will I be able to learn on a simulator live time when I am driving during these hours?” I have evenings to educate myself which I will continue to do, but how will I be able to manage this hump? ...

“Thanks for taking the time to read this. Enjoy your weekend.”

Figure 8.3 - Excerpt from Trader Dwight email.

His story is an excellent example of why you should not even try day trading if you cannot dedicate sufficient time and energy to it. You don’t open a restaurant only because you may have some time during the week to run it. No, you need to be able to run it perfectly or else you are destined to fail. As I mentioned near the beginning of this book, I was unemployed when I started day trading. Then I had to find a job to pay the bills because I was losing my savings on day trading. I am lucky that I live in Vancouver, Canada (in the Pacific Time Zone), because I could trade and practice between 6:30 and 8:30 a.m. and then be at work for 9 a.m. If you don’t have this luxury, maybe swing trading is better for you.

However, please note that making a living out of swing trading is even more difficult. The best swing traders can expect an annual return of 15 to 20% on their account size. Day traders, on the other hand, look to profit between 0.5-1% of their account size daily. The currency market (Forex) is open 24 hours/5 days per week, and perhaps you should consider trading currencies and commodities if you do not have sufficient free time to practice day trading or swing trading. This book, though, is not a useful guide for swing trading or for the Forex market. They are both different from day trading in so many ways. My longtime friend, Zack Zarr, is helping Forex traders in our community by sharing his trades and analysis of the market. He is also the author of an excellent Forex trading book.

You must always be continuing your education and reflecting upon your trading strategy. Never stop learning about the stock market. The market is a dynamic environment and it’s constantly changing. Day trading is different than it was ten years ago, and it will be different in another ten years. So keep reading and discussing your progress and performance with your mentors and other traders. Always think ahead and maintain a progressive and winning attitude.

Learn as much as you can, but keep a degree of healthy skepticism about everything, including this book. Ask questions, and do not accept experts at their word. Consistently profitable traders constantly evaluate their trading system. They make adjustments every month, every day, and even intraday. Every day is new. It is about developing trading skills, discipline, and controlling emotions, and then making adjustments continually.

Traders who are regularly profitable have studied the fundamentals of trading and have learned how to make logical and intelligent trades. Their focus is on the rationale for their actions rather than on making money. Amateurs, on the other hand, are focused on making money every single day. That kind of thinking can be their worst enemy. I am not consciously trying to make money as a trader. My focus is on “doing the right thing”. I am looking for excellent risk/reward opportunities, and then I trade them. Being good at trading is the result of mastering the skills of trading and recognizing the fundamentals of a good trade. Money is just the by-product of executing fundamentally solid trades.

As a new trader, you will be constantly looking at your profit and loss (P&L). P&L is the most emotionally distracting column in my trading platform. “Plus $250, negative $475, plus $1,100.” I tend to make irrational decisions by looking at it. I used to panic and sell my position when my P&L became negative although my trade was still valid according to my plan. Or, quite often, I became greedy and sold my winning position too early while my profit target had yet to be reached according to my plan. I eventually did myself a favor and I hid my P&L column. I trade based on technical levels and the plan I make. I don’t look at how much I am up or down in real time. P&L is not important when novices first begin trading with real money, especially when smaller share sizes are involved. Most trading platforms include an option to hide real time P&L. When this is not available, a strategically-placed strip of ever-versatile duct tape or dark-colored masking tape will conceal that information. Your goal is to develop trading skills and not to make money. You have to focus on getting better every single day, one trade after another. Push your comfort zone to find greater success.

Hard work in day trading is different from what you might initially assume. A trader should not work 120 hours a week like investment bankers or corporate lawyers or other highly paid professionals do because, for us day traders, there are no year-end bonuses (that are often distributed in a completely biased fashion anyway). More than anything else, day trading is perhaps most similar to being a professional athlete because it is judged by each day’s performance. Nevertheless, day traders should work hard, consistently and productively, each and every day. Watching your trading screens intently and gathering important market information is how we define hard work in day trading. You must ask the following questions constantly and at a rapid pace for several hours every day:

• Who is in control of the price: the buyers or the sellers?
• What technical levels are most important?
• Is this stock stronger or weaker than the market?
• Where is most of the volume being traded? At the VWAP? In the first five minutes? Near moving averages?
• How much volume at a price causes the stock to move up or down?
• What is the bid-ask spread? Is it tradeable?
• How quickly does the stock move? Is it being traded smoothly or is it choppy, jumping up and down with every trade?
• Is the stock trading in a particular pattern on a 5-minute chart? How is the stock being traded on a 1-minute chart?

These are some of the questions that I ask myself and then answer before trading a stock. All of this information should be gathered before you make any trade. This is what I mean by hard work. As you can see, day trading is an intense intellectual pursuit which requires hard work.

It is essential to get into a routine of showing up every day to trade, whether it is with your real account or in a simulator. Searching for support and resistance levels each day, including before the market opens, will benefit your trading in the long run. Turning off your PC early after a few bad trades is a strategy that should be reserved for rare occasions when it is absolutely essential to give your brain a break. Usually, spending some time in a simulator after some losses will clear your mind sufficiently. Novice traders using their simulator should keep on trading and practicing until the Close. After all, trading in the simulator is not nearly as stressful as real trading with real money. But, remember, using a simulator with no commission and no P&L is still no excuse for overtrading. At all times the focus must be on sound strategies with excellent risk/reward opportunities.

From time to time I am asked, “In your first months of trading, did you ever feel like you couldn’t do it?” The answer is: “Yes, and often!” I still, at least once a month, get really frustrated after a few bad losses and consider quitting day trading. Frequently in my trading career I have wanted to quit, and at times I have actually believed the myth that day trading is impossible. But I did not quit. I really wanted to be a successful trader and to have the lifestyle and the freedom that come with it. So I paid the price for my mistakes, focused on my education, and eventually survived the very difficult learning curve of trading.

Success in trading comes with skill development and self-discipline. Trading principles are easy, and day trading strategies are very simple. I have a PhD in chemical engineering and have worked as a research scientist at a world-class facility. I have published numerous scholarly publications in high impact and respected scientific journals on my nanotechnology and complicated molecular level research. Believe me, I had to study and understand extremely more difficult concepts, so I can assure you that day trading, in theory at least, is easy.

What makes day trading, or any type of trading for that matter, difficult is the discipline and self-control that you need. You have no chance to make money as a trader without discipline, no matter your style, the time you commit to trading, the country you live in, or the market you are trading in.

Professional institutional traders often perform significantly better than private retail traders. Most private traders are university-educated, literate people. They are often business owners or professionals. In contrast, typical institutional traders are loud 20-something-year-old cowboys who used to play rugby in college and haven’t read a book in years. How’s that for a generalization! Why do these guys outperform private traders year after year? It’s not because they are younger or sharper or faster. And it’s not because of their training or platforms, because most retail traders have almost the same gear as they do. The answer is the strictly enforced discipline of trading firms.

Some successful institutional traders have gone out on their own after asking themselves, “Why am I sharing my profits with the firm when I know how to trade and could be keeping all of the profit for myself?” Most of them end up losing money as private traders. Even though they work with the same software and platforms, trade the same systems, and stay in touch with their contacts, they still fail. After a few months, most of them are back at a recruiting office, looking for a trading job. Why could those traders make money for their firms, but not for themselves?

The answer is self-discipline.

When institutional traders quit their firm, they leave behind their manager and all of the strictly enforced risk control rules. A trader who violates risk limits is fired immediately. Traders who leave institutions may know how to trade, but their discipline is often external, not internal. They quickly lose money without their managers because they have developed no self-discipline.

We private retail traders can break any rule and change our plan in the middle of a trade. We can average down to a losing position, we can constantly break the rules, and no one will notice. Managers in trading firms, though, are quick to get rid of impulsive people who break any trading rule for a second time. This creates a serious discipline problem for institutional traders. Strict external discipline saves institutional traders from heavy losses and deadly sins (such as the averaging down of a losing position), which quite often will destroy many private accounts.

Discipline means you execute your plan and honor your stop loss as you set it out, without altering it in the middle of a trade. Discipline is executing your detailed plan every single time. If your plan is to buy a stock at VWAP and your stop loss is if it fails to hold VWAP, then you must accept the loss immediately and get out of the trade if the stock fails to hold the VWAP.

Do not be stubborn about your decision if you are wrong. The market does not reward stubbornness. The market is not interested in how you wish stocks would trade. Traders must adapt to the market and do what the market demands. And that is the way day trading works and that is how it will always work.

There are going to be days when you follow your plan, and then the stock will go back up and trade above VWAP after you were stopped out. In fact, there will be many times such as this in your trading career. But consider these two points: (1) Do not judge your trading strategy based upon one trade. Executing your plan, and being disciplined, will lead to long-term success. Many times your plan will be fine and solid, but a hedge fund manager out of nowhere will decide to liquidate a position in a stock that you are trading, the price will drop suddenly, and you will get stopped out. You did not do anything wrong; it is the nature of the market that is unpredictable. At times, the uncertainty of the market will leave you in the red. (2) A professional trader accepts the loss and gets out of the trade. You then re-evaluate and plan another if-then scenario (please see the Glossary at the back of this book for a brief description if you are not familiar with this term). You can always get back into the stock. Commissions are cheap (for most of the brokers), and professionals often take several quick stabs at a trade before it will start running in their favor.

Trading teaches you a great deal about yourself, about your mental weaknesses and about your strengths. This alone ensures that trading is a valuable life experience.