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

There are three important types of orders you can use for day trading:

“Buy me at any price! Now! ”

When you use market orders , you are asking your broker to immediately buy or sell the stock for you at any cost. Let me repeat that: at ANY cost. If you place a market order, it will be filled at the current price, whatever that happens to be. A limit order, on the other hand, allows you to specify the maximum or minimum price you will accept.

In market orders, essentially, you are getting filled at the bad side of bid-ask spreads. A market order buys at the ask (high side) and sells at the bid (low side). The problem with using market orders is that the market can quickly change, and so then does the bid-ask spread, and thus you may get your order filled at a very bad price. For example, if the bid-ask spread is $10.95-$10.97, market orders should buy immediately at $10.97 for you, right? When your market orders come to the Exchange, the market can quickly change to $11.10-$11.15, and therefore your buy market order will be filled at $11.15. That is a slippage of 18 cents. And that is really bad.

Market makers and many professional traders make a good living from filling market orders. I discourage traders from placing market orders at any time. A market order is like a blank check. Most of the time a market order will be filled very closely to the quoted bid or ask price, but sometimes you will get a nasty surprise.

Use limit orders whenever possible.

“Buy me at this price only! Not higher! ”

A limit order , in contrast to a market order, limits the price you are willing to pay for the stock. You specify the number of shares you want to buy and the price you are willing to pay. For example, in the Level 2 screenshot below, marked as Figure 5.3, you will see I have two limit orders. I asked my broker to buy me 100 shares of TEVA at $34.75, and another 100 shares at $34.74. You’ll recall from before, “SIZE” is the number of lots of shares, with one standard lot equaling 100 shares. As you can see, my orders are now sitting in Level 2, waiting to get filled. There is no guarantee that I will get filled at those prices. If the price moves higher, I will never get filled and my order will stay in the Level 2 until the price moves back down. Sometimes the order will come back partially filled because the price of the stock moved up too quickly .

Just as an aside, swing traders commonly use limit orders.

“Buy me now, but up to this price! Not higher! ”

The most important type of order for day traders is a marketable limit order . Marketable limit orders, once sent, will immediately give you as many shares as possible within the price range you have set. In marketable limit orders, you ask your broker to buy or sell stock for you immediately, but you specify the highest price you are willing to pay. For example, in the above Figure 5.3, the Level 2 for TEVA, you can ask your broker to buy 100 shares at “ask price + 5 cents”. Your broker will go to the ask and try to fill your order. As you can see in the top three highlighted rows on the right-hand side of Figure 5.3, there are currently 1,100 shares offered at ask ([4+4+3 = 11] ×100). Therefore, you should get filled immediately (like a market order). But, if the ask price moves up quickly before you get filled, you have already authorized your broker to buy TEVA for you at a higher price as well, up to $34.82 (ask of $34.77 + 5 cents). Therefore, your broker will try to buy 100 shares of TEVA for you at a cost of no more than $34.82.

A similar example is also true for selling or short selling on the bid. In selling on the bid, you specify the range you are willing to sell at. For example, if you ask your broker to sell at “the bid – 5 cents”, it means that you are not willing to sell at a price lower than the bid minus 5 cents .

I use marketable limit orders for all of my day trades. I typically buy at the “ask+5 cents” and sell at the “bid-5 cents”. In the next section, I will show you details of my order Hotkeys.