A
Alpha stock: a Stock in Play, a stock that is moving independently of both the overall market and its sector, the market is not able to control it, these are the stocks day traders look for.
Angel: an Angel is a low float stock (usually less than twenty million shares) that has gapped up significantly due to important fundamental news, the stock will be trading heavily in the pre-market with often over one million shares before the Open, with low float stocks the trading volume is the key, if the stock does not have much volume, no matter how much it has gapped up, or what the float really is, you should stay away from it.
Ask: also called the offer, the price sellers are demanding in order to sell their stock, it’s always higher than the bid price.
Average daily volume: the average number of shares traded each day in a particular stock, I don’t trade stocks with an average daily volume of less than 500,000 shares, as a day trader you need sufficient liquidity to be able to get in and out of the stock without difficulty.
Average True Range/ATR: how large of a range in price a particular stock has on average each day, I look for an ATR of at least 50 cents, which means the price of the stock will move at least 50 cents most days.
Averaging down: adding more shares to your losing position in order to lower the average cost of your position, with the hope of selling it at break-even in the next rally in your favor, as a day trader, don’t do it, do not average down, ever, a full explanation is provided in this book, to be a successful day trader you must avoid the urge to average down.
B
Bear: a seller or short seller of stock, if you hear the market is bear it means the entire stock market is losing value because the sellers or short sellers are selling their stocks, in other words, the sellers are in control.
Bearish candlestick: a candlestick with a big filled body demonstrating that the open was at a high and the close was at a low, it tells you that the sellers are in control of the price and it is not a good time to buy, the right-hand side of Figure 5.1 includes an image of a bearish candlestick.
Bearish Engulfing Pattern: occurs at the end of an uptrend and may signal an important reversal, a Bearish Engulfing Pattern is formed by two candlesticks, the first candlestick consists of a small body, the second candlestick opens higher than the previous candlestick’s close and closes lower than the previous bar’s open, thus engulfing the first candlestick, Figure 5.8 demonstrates a Bearish Engulfing Pattern.
Bid: the price people are willing to pay to purchase a stock at a particular time, it’s always lower than the ask (or offer) price.
Bid-ask spread: the difference between what people are willing to pay to purchase a particular stock and what other people are demanding in order to sell that stock at any given moment, it can change throughout the trading day.
Block order/block trade: an order or trade submitted for the sale or purchase of a large quantity of shares being traded at an arranged price between two parties, sometimes outside of the open markets to lessen the impact on the price of the stock, in general, 10,000 shares of stock and more, not including stocks lower than $10, or $200,000 worth of stocks, are considered a block trade, block trades often happen at the previous day close price.
Bracket order: allows you to set both a stop loss and a target price and then, when one of the prices is triggered, the other order is cancelled, the first part of the order (the stop loss) is set below the market price while the second part (the profit target) is set above the market price, this is a great way to let a trade pan out without having to actively manage it, it can also be referred to as a One-Cancels-the-Other order (OCO) or as a Stop Range order.
Broker: the company who buys and sells stocks for you at the exchange, for day trading, because you require fast order execution, you really must use what is called a direct-access broker, conventional online brokers, also known as full-service brokers, provide considerably more investment advice, tax tips, retirement planning and such, but generally do not offer the necessary fast order execution, and are therefore more suited for investors and retail swing traders.
Bull: a buyer of stock, if you hear the market is bull it means the entire stock market is gaining value because the buyers are purchasing stocks, in other words, the buyers are in control.
Bull Flag: a type of candlestick pattern that resembles a flag on a pole, you will see several large candles going up (like a pole) and a series of small candles moving sideways (like a flag), which day traders call consolidating, you will usually miss the first Bull Flag but your scanner will alert you to it and you can then be ready for the second Bull Flag, you can see an example of a Bull Flag formation in Figure 6.20.
Bullish candlestick: a candlestick with a large body toward the upside, it tells you that the buyers are in control of the price and will likely keep pushing the price up, the left-hand side of Figure 5.1 includes an image of a bullish candlestick.
Bullish Engulfing Pattern: forms when a candlestick bar opens lower than the previous candlestick’s close and closes higher than the previous candlestick’s open, as shown conceptually in Figure 5.7, the pattern begins with a candlestick bar that has a small body and is followed by a candlestick bar whose body “engulfs” the previous candlestick’s body, this pattern represents a major defeat so to speak for the sellers and/or short sellers (the bears).
Buying long: buying a stock in the hope that its price will go higher.
Buying power: the capital (money) in your account with your broker plus the leverage they provide you, for example, my broker gives me a leverage of 4:1, if I have $25,000 in my account, I can actually trade up to $100,000.
Buyout gap: very common in the market but not tradeable, when one company acquires another company the price is determined and usually there is no longer any volatility in the price for you to trade on, for example a company may close one day trading with a share price of $8, it will be acquired later that day at an acquisition price of $10 and start trading the next day at around $10, that is a 25% buyout gap, but it’s not tradeable.
C
Candlestick: a very common way to chart the price of stocks, it allows you to easily see the opening price, the highest price in a given time period, the lowest price in that time period and the closing price value for each time period you wish to display, some people prefer using other methods of charting, I quite like candlesticks because they are an easy-to-decipher picture of the price action, you can easily compare the relationship between the open and close as well as the high and the low price, you can see examples of bearish and bullish candlesticks in Figure 5.1.
Chasing the stock: wise day traders never chase stocks, you chase a stock when you try to purchase shares while the price is increasing significantly, successful day traders aim to enter the trade during the quiet times and take their profits during the volatile times, when you see a stock surging up, you patiently wait for the consolidation period, patience truly is a virtue!
Chatroom: a community of traders, many can be found on the Internet, as a reader of this book you are welcome to join our www.BearBullTraders.com chatroom.
Choppy price action: stocks trading with very high frequency and small movements of price, day traders avoid stocks with choppy price action, they are being controlled by the institutional traders of Wall Street.
Circuit breaker halt: triggered by up or down moves outside of certain bands which are determined based on the price of the stock and its listing condition, the exact threshold varies for different stocks but typically a 15% rise in a company's share price over five minutes can cause a circuit breaker halt, although day traders love volatility in the market, this kind of volatility is dangerous for the market and most importantly for investors, at times when breaking news is released, volatility will increase significantly due to the confusion it has caused, to stabilize the market and to protect investors, the exchanges and the authorities may limit the excessive volatility of the price in either direction by temporarily halting trading of the individual stock, the U.S. Securities and Exchange Commission (SEC) has defined a “limit-up” and “limit-down” to determine the thresholds for acceptable trading, usually these halts are for 5 minutes and then trading is resumed but if volatility remains in the price, the exchange will continue to halt trading in the stock until the price volatility returns back into the acceptable threshold.
Close: the last hour the stock market is open, 3 to 4 p.m. New York time, the daily closing prices tend to reflect the opinion of Wall Street traders on the value of stocks.
Consolidation period: this happens when the traders who bought stocks at a lower price are selling and taking their profits while at the same time the price of the stock is not sharply decreasing because buyers are still entering into trades and the sellers are not yet in control of the price.
D
Day trading: the serious business of trading stocks that are moving in a relatively predictable manner, all of your trading is done during one trading day, you do not hold any stocks overnight, any stocks you purchase during the day must be sold by the end of the trading day.
Direct-access broker: day traders need a fast and flawless order execution as their entry and exit are often only literally one or two seconds apart, direct-access brokers concentrate on speed and order execution, they often use complicated computer software that allows traders to trade directly with stock exchanges such as the Nasdaq and NYSE, direct-access trading system transactions are executed in a fraction of a second and their confirmations are instantly displayed on the trader's computer screen.
Discretionary trading: discretionary traders evaluate potential trades based on their trading plan, using technical analysis to determine if each trade meets their requirements, although the discretionary trader’s rules are known, the trader decides to take or pass on trades based on their experience, the discretionary trader doesn’t follow a firm algorithm such as, “If A, then B”, instead they weigh all available information and then make a call.
Doji: an important candlestick pattern that comes in various shapes or forms but are all characterized by having either no body or a very small body, a Doji indicates indecision and means that a fight is underway between the buyers and the sellers, you can see examples of Doji candlesticks in Figure 5.2.
Dow Jones Industrial Average: also called the Industrial Average, the Dow Jones, the Dow 30, INDU$, DJIA or simply the Dow, it’s the most cited stock market index of all, it is one of several indices created by Wall Street Journal editor and Dow Jones & Company co-founder Charles Dow, it’s an index that tracks how thirty large publicly owned companies based in the United States have traded during a standard trading session in the stock market, the Industrial portion of the name is largely historical as many of the “modern” thirty companies that are indexed (such as Apple, Coca-Cola and Visa) have little or nothing to do with traditional heavy industry.
E
Emotional trading: a very broad term that can apply to a wide range of situations, it basically means basing trades on emotion rather than on rational thought, you need to enter each trade with a well-thought-out plan and then stick to it, you need to stick to your trading plans like glue, you cannot allow your emotions to get the better of you in the midst of a trade.
Entry point: when you recognize a pattern developing on your charts, your entry point is where you enter the trade.
Exchange-traded fund/ETF: an investment fund traded on the exchange and composed of assets such as stocks or bonds.
Exit point: as you plan your trade, you decide your entry point, where you will enter the trade, and you decide where you will exit the trade, if you do not exit properly you will turn a winning trade into a losing trade, whatever you do, don’t be stubborn, if a trade goes against you, exit gracefully and accept a loss, don’t risk even more money just to prove a point, the markets can be unpredictable.
Exponential Moving Average/EMA: a form of moving average where more weight is given to the most currently available data, it accordingly reflects the latest fluctuations in the price of a stock more than the other moving averages do.
F
Float: the number of shares in a particular company available for trading, for example, as of May 13, 2018, Apple Inc. had 4.92 billion shares available.
Forex: the global foreign exchange market where traders – but not day traders – trade currencies.
Former runner: a low float stock that makes significant price moves in the pre-market due to heavy volume, usually brought about because of a fundamental catalyst.
Full-service broker: conventional online brokers usually direct customer trade orders to market makers and other liquidity providers through pre-negotiated order flow arrangements, this multi-step process often takes time (from a few seconds to several minutes), these brokers often do not offer a super-fast execution as their services tend to place a greater emphasis on research and fundamental analysis functions over speed execution, full-service brokers provide research and advice, retirement planning, tax tips, etc., they’re usually well-suited for investors and retail swing traders but due to the lack of speed execution they are not a good choice for day traders.
Fundamental catalyst: this is what you as a day trader are looking for, some positive or negative news associated with a stock such as an FDA approval or disapproval, a restructuring, a merger or an acquisition, something significant that will impact the stock’s price during the trading day.
Futures: futures trading is when you trade a contract for an asset or a commodity (such as oil, lumber, wheat, currencies, interest rates) with a price set today but for the product to not be delivered and purchased until a future date, you can earn a profit if you can correctly predict the direction the price of a certain item will be at on a future date, day traders do not trade in futures.
G
Gappers watchlist: before the market opens, you can tell which stocks are gapping up or down in price, you then search for the fundamental catalysts that explain these price swings, and you build a list of stocks that you will monitor that day for specific day trading opportunities, the final version of your watchlist generally has only three to five stocks on it that you will be carefully monitoring when the market opens, also called simply your watchlist.
Guerrilla trading: what day traders do, it’s like guerrilla warfare, you wait for an opportunity to move in and out of the financial battlefield in a short period of time to generate quick profits while keeping your risk to a minimum.
H
Higher highs and higher lows: a powerful chart pattern, it’s comprised of two candlesticks, with the high of the second candlestick being higher than the high of the previous one, similarly, the low of the second candlestick is higher than the low of the previous one, as conceptually shown on the left-hand side of Figure 5.5, as a Higher Highs and Higher Lows Pattern unfolds, the buyers are more aggressive and constantly making new highs (compared to previous candlesticks), and the sellers are not strong enough to push the price any lower than the previous candlestick, it’s a very bullish trend.
High frequency trading/HFT: the type of trading the computer programmers on Wall Street work away at, creating algorithms and secret formulas to try to manipulate the market, although HFT should be respected, there’s no need for day traders to fear it.
High relative volume: what day traders look for in Stocks in Play, stocks that are trading at a volume above their average and above their sector, they are acting independently of their sector and the overall market.
Hotkey: a virtual necessity for day traders, Hotkeys are key commands that you program to automatically send instructions to your broker by touching a combination of keys on your keyboard, they eliminate the need for a mouse or any sort of manual entry, high speed trading requires Hotkeys and you should practice using them in real time in a simulator before risking your real money.
I
If-then statement/scenario: before the market opens and before you do an actual trade, you should create a series of if-then statements (or if-then scenarios) to guide you in your trade, for example, if the price does not go higher than ABC, then I will do DEF.
Indecision candlestick: a type of candlestick that indicates that the buyers and sellers have equal power and are fighting between themselves, it’s important to recognize an indecision candlestick because it may very well indicate a pending price change, you can see examples of indecision candlesticks in Figure 5.2, a Doji is one example of an indecision candlestick.
Indicator: an indicator is a mathematical calculation based on a stock’s price or volume or both, you do not want your charts too cluttered with too many different indicators, keep your charts clean so you can process the information quickly and make decisions very quickly, almost all of the indicators you choose to track will be automatically calculated and plotted by your trading platform, always remember that indicators indicate but do not dictate, Figure 2.4 is a screenshot of the type of chart I use with my indicators marked on it.
Institutional trader: the Wall Street investment banks, mutual and hedge fund companies and such, day traders stay away from the stocks that institutional traders are manipulating and dominating (I’ll politely call that ‘trading’ too!).
Intraday: trading all within the same day, between 9:30 a.m. and 4 p.m. New York time.
Investing: although some people believe investing and trading are similar, investing is in fact very different from trading, investing is taking your money, placing it somewhere, and hoping to grow it in the short term or the long term.
L
Lagging indicator: these are indicators that provide you with information on the activity taking place on a stock after the trade happens.
Late-Morning: 10:30 a.m. to 12 p.m. New York time, the market is slower but there is still good volatility in the Stocks in Play, this is one of the easiest times of the day for new traders, there is less volume compared to the Open but also less unexpected volatility, a review of my new traders’ trades indicates that they do the best during the Late-Morning session.
Leading indicator: a feature of Nasdaq Level 2, it provides you with information on the activity taking place on a stock before the trade happens.
Level 1: the top section of the Montage window in the DAS platform, information such as previous day close, volume, VWAP, daily range and last sale price can be found here, Figure 2.5 shows an example of the Montage window for Facebook, Inc.
Level 2: if you are planning to primarily day trade in the U.S. markets, to be successful you will require access to the real time Nasdaq TotalView Level 2 data feed, it provides you with the leading indicators, information on the activity taking place on a stock before the trade happens, important insight into a stock’s price action, what type of traders are buying or selling the stock and where the stock is likely to head in the near term, Level 2 is at times also referred to as market depth, Figure 2.17 is an image of a Level 2 quote.
Leverage: the margin your broker provides you on the money in your account, most brokers provide a leverage of between 3:1 to 6:1, a leverage of 4:1, for example, means if you have $25,000 in your account, you have $100,000 of buying power available to trade with.
Limit order: an instruction you give to your broker to buy or sell a specific stock at or better than a set price specified by you, there is a chance the limit order will never be filled if the price moves too quickly after you send your instructions.
Liquidity: successful day traders need liquidity, there must be both a sufficient volume of stock being traded in a particular company and a sufficient number of orders being sent to the exchanges for filling to ensure you can easily get in and out of a trade, you want plenty of buyers and plenty of sellers all eyeing the same stock.
Long: an abbreviated form of “buying long”, you buy stock in the hope that it will increase in price, to be “long 100 shares AAPL” for example is to have bought 100 shares of Apple Inc. in anticipation of their price increasing.
Lower lows and lower highs: a powerful chart pattern, it’s comprised of two candlesticks, with the low of the second candlestick being lower than the low of the previous one, similarly, the high of the second candlestick is lower than the high of the previous one, as conceptually shown on the right-hand side of Figure 5.5, as a Lower Lows and Lower Highs Pattern unfolds, the sellers are more aggressive and constantly making new lows (compared to previous candlesticks), and the buyers are not strong enough to push the price any higher than the previous candlestick, it’s a very bearish trend.
Low float stock: a stock with a low supply of shares which means that a large demand for shares will easily move the stock’s price, the stock’s price is very volatile and can move fast, most low float stocks are under $10, day traders love low float stocks, they can also be called micro-cap stocks or small cap stocks.
M
Margin: the leverage your broker gives you to trade with, for example, if your leverage is 4:1 and you have $25,000 in your account, your margin to trade with is $100,000, margin is like a double-edged sword, it allows you to buy more but it also exposes you to more risk.
Marketable limit order: an instruction you give to your broker to immediately buy or sell a specific stock within a range of prices that you specify, I use marketable limit orders when day trading, I generally buy at “ask + 5 cents” and I sell at “bid - 5 cents”.
Market cap/market capitalization: a company’s market cap is the total dollar value of its float (all of their shares available for trading on the stock market), for example, if a company’s shares are worth $10 each and there are 3 million shares available for trading (a 3 million share float), that company’s market cap is $30 million.
Market depth: if you are planning to primarily day trade in the U.S. markets, to be successful you will require access to the real time Nasdaq TotalView Level 2 data feed which is referred to by some as market depth and by others as Level 2, it provides you with the leading indicators, information on the activity taking place on a stock before the trade happens, important insight into a stock’s price action, what type of traders are buying or selling the stock and where the stock is likely to head in the near term, Figure 2.17 is an image of a market depth (Level 2) quote.
Market maker: a broker-dealer that offers shares for sale or purchase on the exchange, the firm holds a certain number of shares of a particular stock in order to facilitate the trading of that stock at the exchange.
Market order: an instruction you give to your broker to immediately buy or sell a specific stock at whatever the current price is at that very moment, I’ll emphasize the phrase “whatever the current price is”, the price might be to your benefit, it very well might not be though.
Market View: a window in the DAS platform, you can type in the names of the stocks you would like to monitor and you will see some information about them such as their % change and volume, I personally keep some market indices in my Market View window in order to be easily able to check in on the overall condition of the market, Figure 2.3 is a screenshot of my Market View window.
Mechanical system: trading strategies that a computer program can execute, the mechanical system is often based on technical inputs such as price and indicators, the strategies are usually programmed into a computer software program that can backtest them on historical market data to determine if they produce positive expectancy, rarely does a trader need to make a decision when using mechanical systems, institutional trading and high frequency trading and algorithms are all examples of mechanical systems based trading.
Medium float stock: a stock with a medium float of between 20 million and 500 million shares, I mostly look for medium float stocks in the range of $10 to $100 to trade, many of the strategies explained in this book work well with medium float stocks.
Mega cap stock: a stock with a huge supply of shares, for example, Apple Inc. had 4.92 billion shares available for trading as of May 13, 2018, their stock prices are generally not volatile because they require significant volume and money to be traded, day traders avoid these types of stocks.
Micro-cap stock: a stock with a low supply of shares which means that a large demand for shares will easily move the stock’s price, the stock’s price is very volatile and can move fast, most micro-cap stocks are under $10, day traders love micro-cap stocks, they can also be called low float stocks or small cap stocks.
Mid-day: 12 noon to 3 p.m. New York time, the market is generally slow at this time with less volume and liquidity, it’s the most dangerous time of the day to be trading.
Montage window: Montage is the most important window in your trading platform and much important information can be found in it, the top section of the Montage window in the DAS platform is called Level 1 and information such as previous day close, volume, VWAP, daily range and last sale price can be found here, the second section of the Montage window is called Level 2 or market depth and it provides you with the leading indicators, information on the activity taking place on a stock before the trade happens, important insight into a stock’s price action, what type of traders are buying or selling the stock and where the stock is likely to head in the near term, the next section of this window features the Hotkey buttons, and the bottom part of this window contains the manual order entry fields that traders can use to enter their orders manually if they choose not to use Hotkeys, Figure 2.5 shows an example of the Montage window for Facebook, Inc.
Moving average/MA: a widely used indicator in trading that smooths the price of a stock by averaging its past prices, the two basic and most commonly used MAs are the Simple Moving Average (SMA), which is the simple average of a stock over a defined number of time periods, for example 1-minute, 5-minute, or daily charts, and the Exponential Moving Average (EMA), which gives more weight to more recent prices, the most common applications of MAs are to identify the trend direction and to determine support and resistance levels, in general terms, the higher the moving average and the higher the time frame, the stronger the support and resistance level is, a 200 SMA on a daily chart is perhaps the strongest support and resistance level, I use 9 EMA, 20 EMA, 50 SMA and 200 SMA on all of my charts, your charting software will have most of the types of MAs already built into it.
N
Nasdaq: the second largest stock exchange in the world after the New York Stock Exchange, Nasdaq stands for National Association of Securities Dealers Automated Quotations, it’s based in New York City and in 2017 officially changed its acronym from NASDAQ to Nasdaq.
Nasdaq Composite: also known as COMP$, it’s a market index of the stocks listed on the Nasdaq Exchange, its composition is heavily weighted toward information technology companies and it represents the “high-tech” sector behavior of the overall market.
NITF order/No intention to fill order: this is an order made by market makers with the intention of deliberately misleading traders and manipulating the market, to distinguish between real orders and no intention to fill orders (fake orders), you have to see where they are placed in the market book, real orders are placed near the current bid and ask and are likely to get filled, no intention to fill orders are usually placed far from the current bid and ask and can be quickly and easily cancelled, their purpose is to give the impression that either an abnormally big buyer or an abnormally big seller is in the market.
O
Offer: also called the ask, the price sellers are demanding in order to sell their stock, it’s always higher than the bid price.
One-Cancels-the-Other/OCO order: allows you to set both a stop loss and a target price and then, when one of the prices is triggered, the other order is cancelled, the first part of the order (the stop loss) is set below the market price while the second part (the profit target) is set above the market price, this is a great way to let a trade pan out without having to actively manage it, it can also be referred to as a Stop Range order or as a Bracket order.
Open: the first 30 to 60 minutes that the stock market is open, from 9:30 up to 10:30 a.m. New York time.
Opening range: when the market opens, Stocks in Play will often experience what I call violent price action, heavy trading will impact the price of the stock, I recently have been leaning toward 15-minute and 30-minute opening ranges to determine what direction the price is heading and whether the buyers or sellers are winning, others will be equally successful waiting for a 5-minute or 60-minute opening range.
Over-the-counter (OTC) market: most day traders do not trade in the OTC market, it’s a specific market used to trade in such items as currencies, bonds and interest rates.
Overtrading: it’s a significant error in day trading, overtrading can mean trading twenty, thirty, forty, or even sixty times a day, you’ll be commissioning your broker to do each and every one of those trades so you are going to lose both money and commissions, many brokers charge $4.95 for each trade, so for forty trades you will end up paying $200 per day to your broker, if you overtrade, your broker will become richer and you will become broker (!), in addition, another problem with overtrading is risk, while you're in a trade your money is exposed to risk and that is a place you don’t want to be in unless you have proven that there is a setup in the strategy worth trading.
P
P&L: profit and loss, I find it the most emotionally distracting column in my trading platform, 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 I became greedy and sold my winning position too early while my profit target had yet to be reached according to my plan, do yourself a favor and hide your P&L column, trade based on technical levels and the plan you make, don’t look at how much you are up or down in real time.
Pattern Day Trade Rule: a regulation in the United States that requires day traders in the United States to have at least $25,000 in their account unless they use a non-U.S. based broker, it does not impact day traders who live in Canada, England, or any other country other than the United States, with that said, other countries might very well enforce similar rules and regulations, before commencing day trading you should contact your local brokers and ask about the minimum requirements for day trading in your jurisdiction.
Platform: a software that traders use for sending orders to the exchange, brokers will offer you a trading platform that is sometimes for free but often for a fee, platforms are either web-based or as a software that needs to be installed on your computer, your trading platform provides your charting and order execution platform, having a good trading platform is extremely important as it needs to be fast and able to support Hotkeys and excellent charting capabilities, I myself use and recommend DAS Trader, I pay a monthly fee to access their platform and real time data.
Position sizing: refers to how large of a position you can take per trade, it’s a technique and skill that new traders must develop but, please remember one of my rules, you should never risk more than 2% of your account in any given trade, with every single trade you make, you should always ensure that at least 98% of your account is protected.
Pre-market trading: trading that takes place before the market officially opens at 9:30 a.m. New York time, I personally avoid pre-market trading because since so few traders are trading, you have to trade in very small share sizes, if you are considering pre-market trading, you should check with your broker to see if they permit it, with all of that said though, it’s useful to keep an eye on pre-market trading, a stock that is gapping up or down by 2% or more in the pre-market definitely gets my attention and may make my watchlist for the day.
Previous day close/PCL: the price of a stock when the market closes on the previous day, knowing the previous day close of a stock is a useful tool for gauging if a stock may come into play the following day and it is a figure used in a number of strategies and patterns explained in this book.
Price action: the movement in price of a stock, I prefer using candlesticks to chart the price action of a stock, capturing its highs and lows and the relationship between the open and close, day traders look for volatile price action and avoid stocks with relatively flat price action.
Price chart: a window in the DAS platform, I use two time frames (1-minute and 5-minute charts) for each stock I am watching, Figure 2.4 shows an example of a 5-minute chart with all of the indicators and Studies I have marked on my charts.
PriceMarker: a Study in the DAS platform that automatically inserts four levels on the chart of any stock that you are watching: yesterday’s low price, yesterday’s high price, two days ago low price, and two days ago high price.
Profit target: as a day trader, you should have a daily profit target and once you reach it, don’t be greedy and risk it, you can turn off your computer and enjoy the rest of your day, in addition, for each trade you set up, you should have a specific profit target that your strategy is based upon.
Profit-to-loss ratio: the key to successful day trading is finding stocks that have excellent profit-to-loss ratios, these are the stocks with a low-risk entry and a high reward potential, for example, a 3:1 ratio means you will risk $100 but have the potential to earn $300, a 2:1 ratio is the minimum I will ever trade, also called risk/reward ratio or win:lose ratio.
R
Real time market data: to be a successful day trader, you need access to real time market data (that you usually must pay for), without any delay, as you will be making decisions and entering and exiting trades literally in minutes, swing traders on the other hand, who enter and exit trades within days or weeks, need only have access to end-of-day data, and that data is available for free on the Internet.
Relative Strength Index/RSI: a technical indicator that compares the magnitude of recent gains and losses in the price of stocks over a period of time to measure the speed and change of price movement, your scanner software or platform will automatically calculate the RSI for you, RSI values range from 0 to 100, an extreme RSI below 10 or above 90 will definitely catch my interest.
Resistance: a price level where sellers enter the market or old buyers dump their shares with enough force to keep the prices from going any higher, resistance is a significant reference point because many traders recognize resistance on charts and believe in its significance, therefore if all traders know there is a resistance nearby they start selling at that level because they are afraid the price might bounce back before they can sell for profit, short sellers also start selling at the resistance levels in the hope of the price dropping.
Retail trader: individual traders like you and I, we do not work for a firm and we do not manage other people’s money.
Revenge trading: what happens at times to some traders when they are in trouble, they’ll start pushing harder and taking bigger risks, trying to trade their way out of a hole, it never ends well, it virtually always ends with a loss of even more money, a better response to a series of losses is to step aside, go back to your simulator and evaluate the situation.
Risk management: one of the most important skills that a successful day trader must master, you must find low-risk trading setups with a high reward potential, each trading day you are managing your risk and limiting your losses.
Risk/reward ratio: the key to successful day trading is finding trading setups that have excellent risk/reward ratios, these are the trading opportunities with a low-risk entry and a high reward potential, for example, a 3:1 ratio means you will risk $100 but have the potential to earn $300, a 2:1 ratio is the minimum I will ever trade, also called profit-to-loss ratio or win:lose ratio.
Runner: a low float stock that makes significant price moves in one trading day due to heavy volume, usually brought about because of a fundamental catalyst.
S
Scalper: a scalper is a trader who looks mainly for small gains during the course of the day, you enter and exit trades and take small profits each time, and you do it very quickly, you must be very careful with your exit strategy though because one miscalculation can cost you all of your small profits.
Scanner: the software you program with various criteria to find specific stocks to day trade in, Figure 3.14 is an overview of the scanners I often use.
Short: an abbreviated form of “short selling”, you borrow shares from your broker, sell them, and hope that the price goes even lower so you can buy them back at a lower price, return the shares to your broker and keep the profit for yourself, to say “I am short AAPL” for example means you have sold shares in Apple Inc. and are hoping their price goes even lower.
Short selling: you borrow shares from your broker and sell them, and then hope the price goes even lower so you can buy them back at the lower price, return the shares to your broker and keep the profit for yourself.
Short Selling Restriction/SSR: a restriction placed on a stock when it is down 10% or more from the previous day’s closing price, regulators and the exchanges place restrictions on the short selling of a stock when its price is dropping, when a stock is in SSR mode, you are still allowed to sell short the stock, but you can only short when the price is going higher, not lower, intraday.
Short squeeze: occurs when the short sellers panic and are scrambling to return their borrowed shares to their brokers, their actions cause prices to increase quickly and dangerously, you want to avoid being stuck short in a short squeeze, what you do want to do is ride the squeeze when the price quickly reverses.
Simple Moving Average/SMA: a form of moving average that is calculated by adding up the closing price of a stock for a number of time periods and then dividing that figure by the actual number of time periods.
Simulator: it’s mandatory for new day traders who wish a successful career to trade in a simulator for several months, you should purchase a simulated account that provides you with real time market data and you should only trade in the share volume and with the amounts of money you will actually be trading with when you go live, simulators are an excellent way to practice using your Hotkeys, to practice creating if-then statements and to practice (and practice some more) your strategies.
Size: the “size” column on your Level 2 will indicate how many standard lots of shares (100 shares = 1 standard lot) are being offered for sale or purchase, a “4” for example means 400 shares.
Small cap stock: a stock with a low supply of shares which means that a large demand for shares will easily move the stock’s price, the stock’s price is very volatile and can move fast, most small cap stocks are under $10, some day traders love small cap stocks but do note that they can be really risky, they can also be called low float stocks or micro-cap stocks.
Standard & Poor's 500: often abbreviated as the S&P 500, SPX$, or just the S&P, it’s a market index based on 500 large companies listed on the NYSE or Nasdaq, it is one of the most commonly followed stock indices and many consider it one of the best representations of the U.S. stock market as well as a bellwether for the U.S. economy, many traders follow and trade an exchange-traded fund which closely tracks the S&P 500 index known as SPY or SPDR (pronounced spy or spider).
Standard lot: 100 shares, the “size” column on your Level 2 will indicate how many standard lots of shares are being offered for sale or purchase, a “4” for example means 400 shares.
Stock in Play: this is what you as a day trader are looking for, a Stock in Play is a stock that offers excellent risk/reward opportunities, it will move higher or lower in price during the course of the trading day and it will move in a way that is predictable, stocks with fundamental catalysts (some positive or negative news associated with them such as an FDA approval or disapproval, a restructuring, a merger or an acquisition) are often Stocks in Play.
Stop Limit order: a specific order you send to the market, it becomes a limit order once the trigger price is hit, should that happen the limit order is then filled at the specified limit price or better, this is useful for when prices are moving very fast with momentum, using a Stop Market order instead may cause you to be filled at a price much lower than the trigger price, a Stop Limit order is not guaranteed though to be filled if the price drops quickly below your limit price.
Stop loss: the price level when you must accept a loss and get out of the trade, the maximum amount you should ever risk on a trade is 2% of your account, for example, if your account has $20,000 in it, then you should never risk more than $400 on a single trade, once you calculate the maximum amount of money you can risk on a trade, you can then calculate your maximum risk per share, in dollars, from your entry point, this is your stop loss, your stop loss should always be at a reasonable technical level, in addition, you must honor your stop loss, do not change it in the middle of a trade because you hope something will happen, gracefully exit your trade and accept the loss, do not be stubborn and risk your account.
Stop Market order: a specific order you send to the market, it becomes a market order once the trigger price is hit, for example you can specify that you want to exit your position if the price of the stock falls $1 below your entry, if the stock then reaches that price a market sell order will be sent to sell the shares.
Stop Range order: a specific order you send to the market, it allows you to set both a stop loss and a target price and then, when one of the prices is triggered, the other order is cancelled, the first part of the order (the stop loss) is set below the market price while the second part (the profit target) is set above the market price, this is a great way to let a trade pan out without having to actively manage it, it can also be referred to as a One-Cancels-the-Other order (OCO) or as a Bracket order.
Support: a price level where buyers enter a trade or short sellers cover their shorts with enough force to keep the prices from going any lower, support is a significant reference point because many traders recognize support on charts and believe in its significance, therefore sufficient numbers of traders will not buy before the price reaches to the support level, short sellers also will not cover until that level.
Support and resistance level: this is the level that the price of a specific stock usually does not go higher than (resistance level) or lower than (support level), stocks often bounce and change the direction of their price when they reach a support and resistance level, as a day trader you want to monitor these levels because if your timing is correct you can profit from that rapid change in price direction, I provide some detailed commentary in this book on how to find support and resistance levels, the previous day close is one of the most powerful levels of support and resistance, the bottom half of Figure 4.21 is an example of a chart that I have drawn support and resistance lines on.
Swing trading: the serious business of trading stocks that you hold for a period of time, generally from one day to a few weeks, swing trading is a completely different business than day trading is.
T
Ticker: short abbreviations of usually one to five letters that represent the stock at the exchange, all stocks have ticker symbols, Apple Inc.’s ticker for example is AAPL.
Time and Sale window: part of the DAS platform, the Time and Sale window lets you see where each transaction happened, was it at the ask or above the ask, or was it happening between the bid and the ask, or was it happening below the bid, the way traders are actually making their trades shows what kind of attitude they have toward the current price and its future direction, it helps you to understand the psychology of the traders sending orders to the market.
Top List: a window in the DAS platform, it has six columns, with the first three columns for Nasdaq highest volume, highest gainers and highest losers, the other three columns are for the New York Stock Exchange and the NYSE American (formerly the American Stock Exchange/AMEX), Top List provides a good overview of the stocks that are in play that day, not all of the stocks that are on the Top List are necessarily tradeable for us day traders as companies like Apple Inc. and Facebook, Inc. are listed because their stocks are always being heavily traded by institutions and Wall Street, Figure 2.2 is a screenshot of my Top List window.
Trade management: what you do with your position when you enter a trade and before you exit it, you don’t just sit patiently in front of your computer screen with your fingers crossed for good luck and watch what happens, as you monitor and process the information that is changing in front of you, you must adjust and fine-tune the trade you are in, you must be actively engaged in your trade, the only practical way to gain experience in trade management is in a simulator, using the share volume and actual amounts of money you will one day be trading with live.
Trade plan/trading plan: the plan you develop before you actually enter a trade, it takes hard work to develop a solid trade plan and to then practice sufficient self-discipline to stick with the plan, see also the definition for if-then statement/scenario.
Trading platform: a software that traders use for sending orders to the exchange, brokers will offer you a trading platform that is sometimes for free but often for a fee, platforms are either web-based or as a software that needs to be installed on your computer, your trading platform provides your charting and order execution platform, having a good trading platform is extremely important as it needs to be fast and able to support Hotkeys and excellent charting capabilities, I myself use and recommend DAS Trader, I pay a monthly fee to access their platform and real time data.
Trailing Stop order: a specific order you send to the market, it acts as a moving stop loss to protect profits while also maximizing gains should the price continue going upward, it allows you to set a stop price at a fixed amount below the market price, called a trailing amount, if the market price rises, the stop price follows behind it, but if the stock price falls, the stop loss price does not change, think of it as a one-way stairway — the stop price can only take steps up, once the stop price is hit, the order becomes a market order.
Turbo Breakdown Scanner and Turbo Breakup Scanner: when a Stock in Play makes a new high of the day it is usually with extremely high relative volume, there are many stocks that make new highs or new lows of the day but often these moves are not happening with high relative volume, to filter only the important moves, the Turbo Breakdown filter finds Stocks in Play that are moving down to make a new low of the day with unusual 1-minute volume and the Turbo Breakup filter finds stocks that are making a new high of the day with unusual 1-minute volume.
V
Volume: the number of shares being traded in a company at any given time.
Volume Weighted Average Price/VWAP: the most important technical indicator for day traders, your trading platform should have VWAP built right into it, VWAP is a moving average that takes into account the volume of the shares being traded at any given price, while other moving averages are calculated based only on the price of the stock on the chart, VWAP considers the number of shares in the stock being traded at each price, VWAP lets you know if the buyers or the sellers are in control of the price action, VWAP is calculated by adding up the dollars traded for every transaction (price multiplied by number of shares traded) and then dividing by the total shares traded for the day.
W
Watchlist: before the market opens, you can tell which stocks are gapping up or down in price, you then search for the fundamental catalysts that explain these price swings, and you build a list of stocks that you will monitor that day for specific day trading opportunities, the final version of your watchlist generally has only three to five stocks on it that you will be carefully monitoring when the market opens, also called your Gappers watchlist.
Whipsaw: describes what happens when the price of a stock is moving in one direction and then quickly reverses and heads in the other direction.
Win:lose ratio: the key to successful day trading is finding stocks that have excellent win:lose ratios, these are the stocks with a low-risk entry and a high reward potential, for example, a 3:1 ratio means you will risk $100 but have the potential to earn $300, a 2:1 ratio is the minimum I will ever trade, also called profit-to-loss ratio or risk/reward ratio.