How to Day Trade for a Living: Tools, Tactics, Money Management, Discipline and Trading Psychology

Chapter 1:

Introduction

2020 Hindsight

The first version of this book was published in the summer of 2015 and, as of today, has been an international best seller for five consecutive years. It has also been published thus far in five languages (English, Japanese, Chinese, Vietnamese and Portuguese). The book remains a most “wished-for” on Amazon and various other platforms in several categories related to online trading, strategy, business and finance, as well as trading and investment analysis.

The answer is found in Google Trends, as shown in Figure 1.1 below. As the COVID-19 pandemic struck, the stock market began to sell off as the reality of an economic meltdown and global recession set in. The sell off of the stock market, growing unemployment and a looming recession were in the news every single day. After eleven years of a straight “bull market” (since the 2007/2008 financial crisis), the 2020 pandemic recession became the first “bear market” many traders and investors had ever experienced. And that is why I was receiving so many emails and requests for help. People were at home, often locked down, and had more time on their hands. The financial meltdown was in the news and people were curious to know more about it. Many were reading and learning about the markets. Even if one does not work in a bank or have a brokerage account, virtually everyone’s life is in some way connected to Wall Street and the other international financial markets.

I find the most interesting observation in the above figure to be that as the stock market crashed, and its drop made the news, people wanted to learn more about the stock market. This correlation is in fact visible in almost every previous stock market crash, including the 2007/2008 financial crisis and the 2000 dot-com bubble, the latter being when the excessively exaggerated and mostly overvalued prices of the majority of Internet and tech companies burst.

The spring 2020 market volatility of course arose from the COVID-19 pandemic, which resulted in a horribly painful global recession, as shown by Figure 1.2 above, a comparison between the 2019 bull market and the 2020 bear market. It is during bear markets that stock markets usually hit the news headlines.

As I studied the inquiries I was receiving from new traders in March and April 2020, and as I continue to receive emails from readers in the late spring of 2020 as I am writing and editing these very words, some common themes have emerged. Are the tools and brokers you have recommended in your previous books still valid? Have you changed the strategies you are using or, if not, do they still work in these volatile markets? What do you think about some of the new brokers and commission-free apps such as Robinhood that it seems almost everyone has an account with now?

These are all valid, fair and straight-to-the-point questions and concerns, and I knew that I needed to address them in this new edition of my book. The timing of this revisit of How to Day Trade for a Living also very nicely complemented my personal life. I am an avid traveler, runner and climber and have spent much of my time in the last few years traveling the world as a trader/explorer, with a laptop and several portable screens always near at hand. In recent years, I have traded from everywhere, ranging from my hometown of Vancouver, Canada to the most remote hills of Papua New Guinea while climbing Mount Giluwe (14,327 ft or 4,367 m), the highest volcano in Oceania. By late 2019, I was on a mission to climb the highest volcanoes in all seven continents, a challenge known to climbers and alpinists as the Volcanic Seven Summits . However, with the pandemic, most borders were closed and I, like everyone else, had to stay close to home.

I had a lot of free time, and although I was working on improving my personal trading as well as writing and finalizing a few new publications, I also had time to review How to Day Trade for a Living . Publication of a book involves many back-and-forths between myself, my assistant writer, and my editor. While I am waiting for one or both of them to get back to me with the first edit of a new book, I am able to work on reediting and redrafting the older versions of my books! That led me to look into a new edition of How to Day Trade for a Living while my amazing editor was tidying up what I was trying to say in drafts of other material he was working on. He is a genius! He writes what I am trying to say! He receives a mess from me and reworks it to read just as I want it to read.

Some of the material in the earlier editions of this book was now outdated and I therefore deleted it. For example, I used to publish all of my trades and the strategies used in a blog, with screenshots posted to it. I decided to adapt to newer technology and instead of writing blogs, I moved to online tools for journaling and keeping track of my trades. Good journaling and record-keeping is an important element for success in any endeavor, and that is certainly true in trading. How many doctors or surgeons do you know who memorize the names of all of their patients, their prescribed medications, their medical history, and a summary of each appointment they’ve ever had? None. They all have excellent record-keeping tools, some mandated by their profession and some personally chosen. A successful and consistently profitable trader is the one who keeps excellent records about their trading.

In the last five years, I have mentored many new traders who have become successful. As a way to encourage novice traders, I felt it was important to reach out to some of my students and share their success stories in this new edition.

In this updated version of my book, I explain the fundamentals of day trading and how day trading is different from other styles of trading and investing. In the process, I also describe important trading strategies that many traders use each day. This book is deliberately short so readers will actually finish reading it and not get bored halfway through and put it to one side. We are all distracted by Internet diversions; emails; notifications from Facebook , Snapchat , Instagram and TikTok ; as well as the dozens of other apps that we have on our smartphones and tablets. Therefore, this book is concise and it is practical.

Whether you have recently begun trading, or are someone who is interested in starting a career in trading, or perhaps just someone who is sheltering in place under a stay-at-home order with time on their hands and an inquiring mind, this book will equip you with an understanding of where to start, how to start, what to expect from day trading, and how you can develop your own strategy. Simply reading this book will not make you a profitable trader. Profits in trading do not come from reading one or two books, but, as I will explain later, profits can come with practice, the right tools and software, and proper ongoing education.

I have again included at the back of this latest edition of my book a handy and helpful glossary of the most common terms you will come across in day trading. If, as you are reading this book, you come across a term or phrase that you don’t recall the meaning of, please go and have a look at its definition in the glossary. I’ve used easy to understand language to explain the “lingo” of day traders.

Intermediate traders, those who have prior trading and investing experience in the markets, may benefit from this book’s overview of some of the classic strategies that the majority of retail traders use effectively. If you don’t consider yourself a novice trader, then you may wish to jump ahead and start reading at Chapter 7 for an overview of these important day trading strategies. However, I encourage you to skim through the earlier chapters as well. Becoming a consistently profitable trader will not require you to master complicated new trading strategies every day. The strategies described in Chapter 7 are ones that traders have been successfully using for more than a decade now. They have worked so far and need to be mastered. Work on simple, well-known strategies, but adjust them over time to complement your own personality and whatever the current market conditions are. Success in trading is not a revolution, it is an evolution.

The market has changed, and it’s changing even now as you read this book. In 2016, a day trader of over twenty years named Kem emailed me and asked for some guidance. She was a more experienced trader than I was, but she always traded a certain basket of stocks every day, and with the growing prevalence of algorithms and high frequency trading (abbreviated by many to “HFT”), she needed to adapt to the “new” market and learn a new style of day trading for a living, taking into account all of the social and technological changes that were unfolding. Figure 1.3 below is the review she wrote in 2016 for the first edition of How to Day Trade for a Living .

“I’m a very experienced day trader of over 20 years. With the coming of HFT and other changes, it has been necessary to adjust my methodology. Scanning for stocks in play and trading unknown stocks is an approach I have resisted for my entire career but I think I have to go there now. I won’t do it without a solid method/plan and a hard set of rules. I’m not too proud to look at a “beginner” book to figure out how to do this. This book is exceptional. It gave me what I wanted and I will build on the information using what I already know. The author is an engineer and being of a methodical/mechanical mindset myself, I was happy with the way he laid it all out. There is also good information on other topics for real beginners such as the importance of risk management, emotional control which are important.

“I will recommend this book to people who ask me how to begin day trading. ”

This brings you to my first rule of day trading:

Rule 1: Day trading is not a strategy to get rich quickly.

Stay away from anyone who thinks the stock market is a get-rich-quick scheme. In light of the 2020 COVID-19 pandemic and social distancing guidelines, Figure 1.4 below shows two particularly important social distancing directives. One protects your health; the other protects your wealth! Stay away from anyone who think stocks are designed to help you get rich overnight!

A very common misconception that people have about day trading is that it is easy: just “Buy low and sell high! ” or “Buy the dip, sell the rally! ”. Again, day trading looks deceptively easy, but it is not. If it were that simple, everyone would be a successful trader and each year we would not see such a high failure rate amongst active traders. You must always remember that day trading is difficult and will not make you rich quickly. If you have this misconception, and if you want to get rich quickly and easily in the stock market, you should stop reading this book right now and spend the savings that you put aside for day trading on a nice family vacation. It would be much more satisfying to spend your money that way, rather than losing it in the stock market.

Having mentioned all of these points, day trading can be a profitable profession. But keep in mind that it’s a highly demanding professional career and most definitely not a casual activity for beginners. It takes time to become a consistently profitable trader. Many traders will fail in the long and at times fatal day trading learning curve.

Chapter 10 focuses on the real actionable steps you must take to successfully enter the world of day trading but, again, be aware that day trading demands a brutal learning curve. Although there are many things that you can do to speed it up, you unfortunately cannot make it disappear. Trading in a simulator account is expediting your learning curve exponentially. One day of trading in a simulator can be worth weeks of training in real accounts or offline.

Often I am asked how long it takes to start making money as a trader. You may have heard it can take a year. Some professional traders may say it is not possible to make money for two years. I have found that most of the better traders in our community consistently make money before the end of their sixth month. But for others it can take a year. On average, it usually takes from six to eight months. It always amuses me to see books and online educational courses that advertise teaching a simple strategy to make you money from “day one” or after a week or even after just one month. I am always intrigued to meet people who actually believe that advertising and are willing to pay for those products. Placing buying and selling orders in front of a screen, where all of the images and variables are moving exceptionally quickly, demands the highest levels of concentration and discipline. But, unfortunately, day trading attracts some of the most impulsive and gambling prone people out there.

With that said, the times have changed to the benefit of retail traders. Commissions used to be very high and it’s been only recently that brokerage firms have reduced their commissions significantly. Direct-access software and other important technology which permit the fast execution of trades used to be available only to the Wall Street elites. “Normal” traders such as you and I did not have access to either the proper technology nor the proper education and training necessary to be a profitable active trader. This has definitely changed in the last decade. More affordable technology, including platforms and scanners, as well as discount brokers (also known as direct-access brokers), are now available at a significantly lower cost for everyone.

No one really knows the exact statistics, but some (now dated) reports from brokerage houses noted that only 10% of traders made money after two years. I shared just a few pages ago a 16% success rate disclosed in court records in the state of Massachusetts. Although a 90% (or 84%) failure rate is scary and disappointing, it is not uncommon in business. According to several published studies, the failure rate of startups and new businesses is at or around 90% after four years of operation. Even in typical and standard careers such as engineering or law, a great number of graduates move to other fields for better career growth and opportunity. I found out at a 2019 reunion of my alma mater’s Chemical Engineering class that only 15% of the students I graduated with were still practicing chemical engineering. 15%! 85% have moved to other areas not related directly to our undergraduate education. We may not call this a failure for graduates per se, but it obviously shows that training in classical chemical engineering does not mean a lifetime career for all graduates. I myself have not practiced engineering for over seven years now, primarily because this profession did not provide sufficient financial support for my family.

In day trading, you will be competing with the sharpest minds in the world. You have to consider the market as a massive group of traders, situated all around the world, some experienced and some novice, some working from their homes and some working for large firms, all wanting to keep their money, and all wanting to help themselves to your money.

This leads to my second rule of day trading:

Rule 2: Day trading is not easy. It is a serious business, and you should treat it as such .

Day trading is not a hobby. It’s not a weekend pursuit. You need to study and prepare to enter the world of day trading as seriously as a student would study while in university or trade school. And, once you begin trading with your real money, you need to treat it as your career. You need to get up early, get dressed, and be seated in front of your trading station, just as if you were getting ready to go to any other job. You can’t be casual about it. You can be successful, but in order to succeed, you have to be better prepared than many of the other traders who you are competing against. A significant part of achieving that success is to learn how to control your emotions. You need to enter each trade with a well-thought-out plan and then stick to it. As I am fond of saying, 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.

You cannot be an emotional person when trading. You have to be “calm, cool and collected” as the saying goes. You have to somehow find a way to control your emotions. I personally believe you must start developing the discipline of a winner, and I’ll expand upon that thought more in Chapter 8 when I share with you a lunchtime walk I took along Wall Street in New York City back in 2014.

So, then, what is day trading? In reality, day trading is a profession, very much like medicine, law and engineering. Day trading requires the right tools and software, education, patience and practice. In order to learn how to trade with real money, you will have to dedicate countless hours to reading about trading styles, observing experienced traders, and practicing in simulator accounts. An average successful day trader can make between $500 and $1,000 every day. That’s equal to $10,000 to $20,000 a month (based on about twenty trading days in a month), and that equals some $120,000 to $240,000 a year. Why would anyone expect a job that pays this well to be easy? Doctors, attorneys, engineers and many other professionals go through years of school, practice, hard work and examinations to earn a similar income. Why should day trading be any different?

And therefore, if it isn’t easy, and it doesn’t make you rich quickly, why would you ever want to day trade?

What makes day trading attractive is the lifestyle. You can work from home, work only for a few hours each day and take days off whenever you wish to. You can spend as much time as you want with your family and friends without requesting vacation time from a boss or manager. You are the boss. Since day trading is a form of self-employment, you are the CEO and you make the executive decisions for your business. I mentioned my love of traveling earlier in this chapter. I was able to travel to twenty-seven countries in 2019, and most of those times I was able to trade with my laptop and a few portable screens. I did not need to request time off, bank my vacations or ask permission from my manager.

The lifestyle is extremely attractive and, of course, if you master the profession of day trading, you can potentially make thousands of dollars every day, far more than in most other professions. I personally know some traders who average over $2,000 every day. Some days are lower and some days are higher, but over the long term they have a profit of over $2,000 every day. No matter where you live and how you live, $2,000 a day is a substantial amount of money and can contribute to a very satisfying lifestyle. If you learn how to day trade properly, your reward is the trading skills to trade profitably in any market, from anywhere, and for the rest of your trading career. Essentially, it is a license to print money. But it takes time and experience to develop skills for this new career. How much you can expect to make is also correlated directly to how much capital you have available for trading. If you have a small amount of capital for trading, such as $5,000, you cannot expect a $2,000 return per day. It may be possible in one or two lucky days, but it certainly is not realistic nor sustainable. It is hard to make a living with such a small account.

If you want to own your own business, day trading is a simple place to start. Take a moment and compare day trading with opening a pizza shop or a restaurant. If you want to open a restaurant, you’ll have to spend large amounts of money on rent, equipment, staff hiring and training, insurance and licenses - and you still won’t be guaranteed to earn money from your restaurant. Many businesses are like that. Day trading, on the other hand, is very easy to set up and start. You can open a trading account today, at no cost, and then start trading tomorrow. Of course you should not do that until you educate yourself, but the logistics of commencing day trading are extremely easy compared to many other businesses and professions.

Day trading is also an easy business to manage the cash flow of. You can buy a stock, and, if things go badly, you can immediately sell it for a loss. Compare that to people who have import-export businesses and are importing goods from other countries. There are plenty of things that can go wrong when purchasing shipments of goods to sell in your own country - problems with vendors, transport, customs, distribution, marketing, quality and customer satisfaction - plus, your money is locked in for the entire process. Unless everything goes well, you can’t do anything about it. At times you cannot even accept a small loss and easily step away from your business. With day trading, if things go wrong, you can come out of the trade in a few seconds with an action as quick and simple as a click (and, of course, a small loss). It is easy to start over in day trading and that is a highly desirable aspect of any business.

Closing a day trading business is also easy. If you think day trading is not for you, or if you don’t make money from it, you can immediately stop trading, close your accounts and withdraw your money. Aside from the time and money that you have already spent, there are no other costs or penalties. Closing other professional offices or businesses are not nearly as straightforward. You cannot as easily close your store, office or restaurant, lay off your staff and walk away from your lease and equipment .

Why then do most people fail in day trading?

I will explain specific reasons behind this important question in Chapters 8 and 10 but, overall, in my opinion, the most common reason that people fail in day trading is that they do not regard it as a serious business. They instead treat it as a form of gambling that will quickly and easily make them rich.

Others decide to become involved in trading because they think it will be fun or entertaining, or an interesting hobby of some kind. They might be drawn to trading because they consider it a “cool” thing to do, something that will bring them prestige or perhaps make them more attractive to others.

Losing amateurs trade for the thrill of short-term gambling in the markets. They play around a little bit in the market but never commit themselves to acquiring a proper education or an in-depth awareness of day trading. They may get lucky a few times and make some money, but eventually the market will punish them.

This is actually my own story. At the beginning of my trading career, a company then called Aquinox Pharmaceuticals Inc. (ticker: AQXP) announced some positive results for one of its drugs, and its stock jumped from $1 to over $55 in just two days. I was a beginner at the time. I purchased 1,000 shares at $4 and sold them at over $10. I was thrilled. What looked like a very good thing however, turned out to be very bad. I had made over $6,000 in a matter of minutes. And on my first day of trading with real money! I was left with the impression that making money in the market was easy. It took me time and several severe losses to get rid of that very mistaken notion.

It was pure luck. I honestly had no idea what I was doing. In just a few weeks I lost that entire $6,000 by making mistakes in other trades. I was fortunate because my first stupid trade was my lucky one. For many people, their first mistake is their last trade because they blow up their account and have to desperately say goodbye to day trading.

New day traders should never lose sight of the fact that they are competing with professional traders on Wall Street and other experienced traders around the world who are very serious, highly equipped with advanced education and tools, and most importantly, committed to making money.

Never forget Rule 2: day trading is a business, and it’s an intensely serious one. You have to wake up early in the morning, do your preparations every day on the stocks that you plan to trade, and be thoroughly prepared before the market opens. Imagine for a moment that you have opened a restaurant. Can you afford not to be ready for your customers when you open your doors? You can’t close the restaurant at lunchtime because you aren’t feeling well or you’re not in the mood or you didn’t have time to order enough groceries for the kitchen staff to prepare meals with. You must always be ready. The day trading business is no different .

Day trading requires the proper tools, software and education. As with any business, you must have the right tools to succeed. So, what are the basic tools you need for your day trading business?

Some of these tools must be paid for every month. Just as other businesses have monthly bills for electricity, software, licenses and leases, you have to be able to pay your Internet provider’s monthly bills, your broker’s commissions, scanner costs (if not sharing someone else’s) and trading platform fees. If you are part of a paid chatroom or community, you can add the cost of that membership to this list too.

It is also important to mention that most of the strategies and other information in this book are geared toward day trading in the U.S. stock market. The U.S. stock market is the most volatile and most liquid stock market in the world. Day trading is really hard, if not impossible, in markets that do not have much volatility or are not regulated. Several other international markets are also available to trade in though, including Canada’s Toronto Stock Exchange, the Shanghai Stock Exchange, the London Stock Exchange, and Germany’s Deutsche Börse AG. I personally do not trade them, and do not have much information available about them. I only actively trade in the U.S. market and most tools in this book are really only appropriate for that market. I in fact recommend that you only day trade in the U.S. market. However, you do not need to be a resident of the United States to be able to trade in that market. Almost all brokers open brokerage accounts for people of any nationality. As I wrote earlier, I am Canadian and live in Canada, but I am easily able to trade in the U.S. market. If, like me, you are not resident in the United States, do reach out to the brokerage firm of your choice and they will more than likely open up a suitable account for you.