Principles of Stock Trading

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What is a Stock? 

A stock is a type of tradable investment (sometimes called a “security”) that represents a partial ownership in a company. When you buy a stock, you are buying a small piece of the company. This small piece is called a share. When you own shares in a company you are known as a “shareholder”. Being a shareholder entitles you to certain rights such as voting on business decisions or electing members to the company’s board of directors. 

In a publicly traded company you can purchase stock shares easily on open marketplaces known as “Exchanges”. You will need to access these exchanges through a broker. 

When a company decides it needs to raise capital they can choose to “go public” by competing in an event called an initial public offering (IPO). For example, when Target went public in 1967, they completed an IPO at $34.00 per share. Upon completion of the IPO, the public is now able to purchase shares in the company at the current market price.  

Dividends

As a stockholder, since you own a portion of the company, you now receive a portion of the company’s earnings. That portion is called a Dividend. For example, the retail giant, Target, pays a quarterly dividend of $0.66 per share. So if you owned 100 shares of Target (TGT) you would earn $66.00 every quarter. 

Stock Settlement (T+1, T+2, T+3)

Before you can be paid a dividend, however, the stock has to be settled. 

When a stock is purchased, there is a settlement date. Every security has to go through a settlement process when transferring from a seller to a buyer. You might see T+1, T+2, or T+3. The T is the transaction day, and the +1,2,3 is the number of business days it takes for the stock to settle after the transaction day. So, if you purchased a stock on Monday that is a T+3 stock settlement, then on Thursday, the stock would have settled. This is most important when trying to buy a stock to take advantage of a dividend. The stock has to be settled in order for you to receive the dividend. 

Why Stocks Move Over the Long Term

Stock prices change over time because individual buyers and sellers decide the stock is worth more or less at any given time.

Through a tug of war between buyers and sellers a price is agreed upon in a moment.

This price is not fixed but can change as buyers and sellers decide to value the stock more or less for different reasons.

If you look at the stock price of Target today, you will notice it’s worth a lot more than $34.00. The price is much higher due to several factors including growth of the company, prospects for future growth, industry growth, potential for future acquisitions and many other factors. This will dictate the law of supply and demand.

The price of Target shares moved higher since there was more demand to own shares of the company.  Each publicly traded company has a supply of shares available issued to the public for investors to trade; this is known as the float.  When a company’s market share grows or indicates they will be growing, it increases the demand from the public to own shares.

On the other hand, when a company does not meet expectations for growth, or negative news is released indicating an impairment for future growth, the stock price will go lower since current investors are likely to sell and new investors are not as interested in purchasing shares. In other words, when there are more buyers than sellers, the stock price will increase. When there are more sellers than buyers, the stock price will decrease.

With financial instruments, the price a buyer is willing to pay for the shares is called the bid.  The price a seller is willing to sell is called the ask (offer).  Once they agree on a price, the transaction is finalized.

Now that we have touched on the basics of what is a stock, we will discuss the different types of stock trading available.

Types of Traders

There are 4 main types of traders we will be reviewing. The main difference between each type of trader is the time they plan to hold on to the position. 

Scalp Trader

First, A scalp trader is generally the most aggressive form of trader. They look for trading opportunities that may last a few seconds to a few minutes. They often look for smaller percentage returns so their position size can be quite large. 

Day Trader

The day trader is the next most aggressive form of trader.  They normally hold positions that will last for minutes or throughout the duration of the trading day, not holding positions overnight.

Swing Trader

The swing trader holds positions from days to months. 

Long Term Trader

Also known as an investor, a long term trader will usually hold stocks for an indefinite period of time. 

In summary all the types of traders have different qualities about them. Think about what kind of trader fits your personality the best. For example the scalp and day trader usually do not hold any positions overnight where as the swing and long term trader are subject to the overnight risk. It is also key to think about how your position size correlates with how long you plan to hold the trade. 

When Does Trading Happen? 

Available trading hours

Well, the stock market’s regular trading hours also known as (RTH) are 9:30 AM EST until 4:00 PM EST, Monday through Friday except on New York Stock Exchange (NYSE) holidays. There are what they call Extended trading hours (ETH). Extended hours are from 4:00 AM EST until 9:30 AM EST also known as Pre-market and from 4:00 PM EST until 8:00 PM EST also known as After hours. 

The most important trading hours for active traders are when the most shares are traded. When more shares are traded there is more movement in the market, thus bringing more opportunity to traders. We’ll explain why this is significant later in the course. This increased activity typically happens in the first 90 minutes and the last hour of regular trading hours. These times are sometimes referred to as “Power Hour”

How We Analyze the Markets (Charting)

What is a Chart?

A chart is a graphical representation of current and historical price action where the horizontal axis (X) represents the time scale and the vertical axis (Y) represents price.  

Line Chart

A line chart is a graphical representation of an asset’s historical price action that connects a series of data points with a continuous line. This is the most basic type of chart used in finance and typically only depicts a security’s closing prices over time. Line charts can be used on any timeframe, but most often use day-to-day price changes.

Bar Chart

A bar chart shows bars that correlate with a time frame and price. Each bar will exhibit some or all of the open, close, low, and high of that specific time frame. If the bar is red, this means the price went down during its period. If the bar is green, the price went up during that time frame. The left and right horizontal lines on each price bar represent the open and close prices.

Japanese Candlesticks

A candlestick is a type of price chart used that displays the high, low, open, and closing prices of a security for a specific period. The wide part of the candlestick is called the “real body” and tells traders whether the closing price was higher or lower than the opening price (black/red if the stock closed lower, white/green if the stock closed higher).  The body of the candle will frequently have “wicks” on top and bottom, these wicks represent the high and low price of that candle.

Heikin – Ashi Candles

Heikin Ashi (HA) candles are based on two moving averages. Because these bars are not created from OHLC (Open, High, Low and Close) like Japanese Candlesticks are, they don’t show the exact open and close prices for a particular time period. HA candles are better used in conjunction with other indicators. The HA chart has a smoother appearance, making it easier to spots trends and reversals.

Doji Candles

A doji candle represents where price has opened and closed at essentially the same level. Doji candles look like a cross or a plus sign.  Doji candles are known to be neutral or indecisive in nature.  Some traders interpret a doji candle as a reversal of a trend (when the buyers and sellers are equivalent in pressure); this is normally observed in a longer time frame (i.e. 60 minutes).

Hammer Candle and Wicks

The Hammer candle is also known as a reversal candle. The body is small with a long lower wick, and this candle is found at the bottom of a downtrend. It shows that sellers came in with increased volume, and once they were done selling, buyers came in and pushed the price higher near the open price of the candle. 

There is also an Inverse Hammer that is the exact opposite. Having a large wick on top of a small body, an Inverse Hammer is usually found at the top of an uptrend, indicating a reversal.  An inverse hammer shows that buyers came in with increased volume, and once they were done buying, sellers came in and pushed the price lower near the open price of the candle.

Bullish Engulfing Pattern

The bullish engulfing pattern is when a candle engulfs its previous candle. A Bullish Candle’s opening price is the same or lower than the previous candle’s closing price and it’s closing price is above the previous candle’s opening price.  This makes the Bullish Candle’s length longer than the previous candle, thus, engulfing it. This pattern normally occurs in a down trend and is commonly thought to signal a trend reversal and the beginning of a new bullish trend.

Bearish Engulfing Pattern

The bearish engulfing pattern is when a candle engulfs its previous candle.  A Bearish Candle’s opening price is the same or higher than the previous candle’s closing price AND it’s closing price is below the previous candle’s opening price.  This makes the Bearish Candle’s length longer than the previous candle, thus, engulfing it.  This pattern normally occurs in a up trend and is commonly thought to signal a trend reversal and the beginning of a new bearish trend.

Morning Star Pattern

The morning star pattern is indicative of a strong reversal.  This pattern consists of three candlesticks and forms following a downward trend, indicating the start of an upward climb.

This pattern can be used intraday but works best on a daily chart with gaps between the three candles. 

Evening Star Pattern

The evening star pattern is indicative of a strong reversal.  This pattern consists of three candlesticks and forms following an upward trend, indicating the start of a downward climb.

This pattern can be used intraday but works best on a daily chart with gaps between the three candles. 

Support and Resistance

Support and resistance are the most common attributes discussed when reading charts. This concept is critical and used across all time frames.

What is Support?

So what is support? Support are the price levels seen on a chart where the stock can be expected to pause due to a concentration of demand.  When support is found in a stock, the price usually stabilizes and may begin to rise.  The more frequently the stock bounces off of a support level, the stronger the support level becomes. 

What is Resistance?

Resistance is the price levels seen on a chart where the stock can be expected to pause due to a concentration of supply.  When resistance is realized in a stock, the price usually stabilizes and may begin to decline.  The more frequently price bounces off of a resistance level, the stronger the resistance level becomes. 

As you see support and resistance levels are critical, once they are breached, they become just as effective in the opposite direction (support becomes resistance and resistance becomes support).

As you see support and resistance levels are effective in both directions. When a stock breaches a resistance level it becomes support and when it fal

Open High Low Close (OHLC)

Traders also use the Open, High, Low and Close (OHLC) prices to find intraday levels. 

Moving Averages, Simple and Exponential

Some additional support and resistance levels are the Simple Moving Average (SMA) and the Exponential Moving Average.  For example, one of the most commonly used across all timeframes is the 200 SMA, normally calculated by adding the closing price of the last 200 candles then dividing it by 200. SMAs can be on any time frame. 

Additional SMAs used are the 20 and the 50. Oftentimes traders will use a 20 SMA on their intraday chart and a 200 SMA on the daily chart to assist in identifying support and resistance areas.

Exponential Moving Averages (EMA) are calculated the same way as an SMA, except it places a heavier weight on the recent price in the time series for the average. This smooths out the average and some traders prefer to use the EMAs on the intraday charts.

Volume Weighted Average Price (VWAP)

VWAP, or Volume Weighted Average Price, is a trading indicator used by traders that displays the average price that a stock has traded throughout the day.  This indicator is based on both volume and price.  VWAP provides traders with insight into the trend of the stock. This indicator is commonly used as a benchmark for institutional investors when trading.

Fundamental and Technical Analysis

A trader can evaluate a stock in two ways, fundamentally or technically.

Fundamental analysis attempts to measure a stock’s intrinsic value and reviews factors that could influence the price of the security in the future by examining economic and financial factors, including the financial statements, company initiatives and industry trends to name a few.  

Technical analysis is the examination of predicting price movements based on the stocks chart history. Traders look for chart patterns to try and predict future price movements.

Basics of Trading

Buying and Selling Stocks

Bid and Ask

The bid is the highest price a buyer is willing to pay for a stock.  The ask (or the offer) is the lowest price the seller is willing to accept.  A trade takes place when the Buyer and the Seller agree on a price.

Spread

The “spread” is the difference between the best bid and the best ask.  At times this can be as little as $0.01 and depending on the liquidity of the stock, this could be well over $1.00. As an example, when the best bid is $26.00 and the best ask is $26.05, this would mean the spread is $0.05. 

Trade Share Size

When placing an order to buy or sell a stock, the share size (number of shares being bought or sold) must be specified.  

Level 1

The Level 1 screen displays the most basic information about a stock’s activity, including the best bid and ask, high and low of the day and the open/close prices.  Level 1 also includes the volume accumulated throughout the day and the last price traded.

Level 2

The level 2 screen provides additional real time access to quotes across all market participants, including the number of shares over several tiers of the bid and ask.  It will also display the exchange’s abbreviation at each price level.

Time and Sales

In the Times and Sales window you can see the trade executions as they occur; this is also frequently referred to as the “Tape” or order flow.  You will be able to see the last time and price of the executed trade and by the color that it is displayed, you are able to derive if this trade has taken place on the bid (red), the ask (green) or in between (pink).

Order Entry Screen (OES)

In the Order Entry Screen window, the trader will be able to input all the information regarding the trade to be executed. These include the Quantity (share size), Price, the order type (limit, stop limit, trailing stop among others), the Exchange to which the order will be routed to (Nasdaq, Arca, Edge, Bats, etc), along with the buttons to enter or close the trades.

Long Trade (Bullish) 

Going Long

When you are buying stock, it is called “Going Long.” Also, common among traders, this would be called a bullish trade. The trader expects the stock price to increase from his entry price keeping the difference between the entry and sale price as profit.

Entering a Long Position

The buyer places a bid with a specific price and quantity to buy shares. If they want to buy the stock immediately, they will agree to the best price being offered (ask).  Please note in certain situations the share size being bought could be higher than the share size being offered on the ask.  In these situations, the buyer has to decide to either wait to see if the order is filled at the  original price or increase the price to match the next seller’s price.

Exiting a Long Position

For the trader to close the long position, they must offer to sell their shares at a specific price.  If they want to close (exit) the trade immediately, they will place their asking price directly in line with the bid price. They will get filled immediately (as long as the size of the bid matches or is higher than the amount of shares being offered for sale), meaning the order they placed is completed. Now they are flat the position and no longer own the stock.

Sell Short Trade (Bearish) 

Going Short

When you are selling a stock short, it is called “Going Short.” Also, common among traders, this would be called a bearish trade. The trader expects the stock price to decrease from his entry price. 

When shorting a stock, the trader is borrowing available shares from their broker to sell, expecting to buy the shares back also called Covering, at a lower price keeping the difference between the sale (short) price and the purchase (cover) price.  

Entering a Short Position

In order to enter a short position The seller places an offer with a specific price and quantity to open the sell short trade. If they want to sell short the stock immediately, they will agree to the best available bid price.  Please note in certain situations the share size being sold short could be higher than the share size being bid.  In these situations, the short seller has to decide to either wait to see if the order is filled at his original offer price or decrease the price to match the next bid price. In certain situations, when the stock is down over a certain percentage for the day (normally 10%), when initiating a short position, the traders are not allowed to start a short position by selling to the bidders. In these cases, the only way to have an order filled would be by sending your order to join the asking price, so a buyer must actually “take” your trade. This is known as the Uptick Rule.

Exiting a Short Position (Cover)

In order to close a sell short position, the trader will be required to buy the shares back, this is known as covering the sell short position.  

Risks of Going Long vs Going Short

The risk of loss when going long is the amount paid for the position, or 100% of the total amount invested.  The risk of loss when going short is theoretically unlimited.  As an example, a trader buys 1,000 shares of a stock at $10.00, the total capital invested is $10,000.00, this is the total amount at risk since the stock can go to zero.  The same trader sells short 1,000 shares of a stock at $10.00. In theory, the risk is unlimited since the stock has no price ceiling and can increase an unlimited amount.

Order Types

There are several ways to initiate a trade. The most common order types used are market, limit and stop orders.

Market order

A market order guarantees execution but not price.  This type of order can be very damaging to your trading account balance.  This order type should only be used by advanced traders who can gauge the share size of the trade they are placing against the stock’s available bid or ask (offer) size.

Once a market order is placed it will be filled at any price available until the order quantity is fulfilled.  It does not matter if the price is $0.01 or any amount away, it will be filed at any available price immediately. 

Limit Order

A limit order specifies the price the buyer or seller requires for the order to be executed and is visible to all market participants.  This type of order will fill the price at the limit order placed or better.  While placing a limit order will guarantee the price, it does not guarantee the execution of the order if the market moves away from the limit price specified.  It is possible to have a fraction of your quantity filled leaving you with a portion of your order completed at the limit price specified.  If this occurs you would need to decide whether to change your limit order price or continue to wait for full execution, when or if that occurs.

Stop Orders

A stop order directs your broker to place a trade once a trigger price defined by the trader has been reached.  Once the predefined trigger price has been reached, the order becomes a market order and execution is guaranteed, but not price.  Stop orders are not visible to market participants.  A common strategy used by traders is to enter a Stop Loss order.  This is an order that will trigger once a stock’s price has reached the prespecified price and will immediately generate a market order, guaranteeing execution.

There are various type of stop orders;

  • Buy Stop – this triggers a market order to buy shares once a predefined price trigger has been reached.  This type of stop order protects short positions.  
  • Sell Stop (Stop Loss) – this triggers a market order to sell shares once a predefined price trigger has been reached.  This type of stop order protects long positions.
  • Stop Limit – this triggers a limit order once a predefined price trigger has been reached and enters the order limit price that was previously defined for the trade.  This order type can be used for both buying and selling shares.

Getting Stopped Out

Stopped out is a term used referencing the execution of a stop loss order.  This usually means the stock price has reached a predefined price where the trader has decided to flatten the trade and take a loss.

As an example, a trader has a long position at $101.00.  The trader enters a stop loss order, defining the stop loss price as $100.00, if the stock price trades at this price level, a stop loss order will be triggered and a market order then guarantees execution at the best possible price.  

Buy Stop – Using a Stop Order to enter a Position

A trader may decide to use a buy stop order to enter a position.  The buy stop order will be triggered once price hits a predetermined level and the order will be executed at the market price.

Special Orders

One Cancels the Other Order (OCO)

An OCO order combines a stop market order with a limit order on a trading platform.  When either the stop or limit price is reached and the order is executed, the other order is cancelled automatically as the orders are linked.

If you were in a long position at $101.00 and the current market price is at $100.50 you might put an OCO order with the stop order at $100.00 and your limit order (to sell) at $103.00. This way if the stock hits $103.00 your limit order will get filled, and your stop market order is canceled automatically. If the stock goes below $100.00, then your stop market order will go live, and your limit order at $103.00 will get cancelled. 

Please make sure the trading platform in use automatically adjusts partial fills if they occur on each side of the OCO orders.

Trailing Stop

A trailing stop order can be set at a defined percentage or dollar amount away from the current stock price.  For a long position, the trader enters a trailing stop loss below the current market price, allowing the trade to continue higher until the predefined percentage or price level has been reached. When the trader is short shares, they will place the trailing stop order above the current market price.

All About Volume

Importance of Volume

A stock with high volume of shares traded at any given time is said to be liquid. A highly liquid stock allows traders to enter and exit with ease, without significant slippage.

Common Indicators

Relative Strength Index (RSI)

The relative strength index is a technical indicator used in the analysis of financial markets. It is intended to chart the current and historical strength or weakness of a stock based on the closing prices of a recent trading period.

This indicator displays when a stock is overbought or oversold and is commonly used as a reversal strategy.  RSI is based on a scale from 0 to 100 with the common levels to determine extremes located at 30 (oversold condition) and 70 (overbought condition).

Moving Average Convergence Divergence (MACD)

Moving Average Convergence Divergence (MACD) is another one you will hear quite often. This indicator helps traders understand the strength of the current trend. MACD takes the 26 EMA (Exponential Moving Average) and subtracts the 12 EMA. Some traders use the crossovers for buy and sell signals, while some like to use the distance between the two averages when it breaks above or below the baseline.

Average True Range (ATR)

The average true range is an indicator that measures market volatility by reviewing the entire range of a stock price over a predefined period of time.  ATR takes the difference between the high and low price of a day’s trading range then averages the last 14 trading days to derive the ATR.  This is an important indicator showing you the average price movement or volatility to expect.

Pivot Point

A technical analysis indicator essential to the TrueTrader.net reversal strategy is the Weekly, Monthly, and Quarterly pivot points. The longer the time frame, the stronger the pivot point.  These are used to determine the overall trend of prices over varying time periods.  Pivot points are a predictive indicator showing where the stock should find support or resistance. Pivot points are the average of the high, low and closing prices of the specified time frame.

Continuation Trades

There are three main ways traders can utilize chart patterns: Continuation, Breakout, or Reversal trades. When a trader is employing a continuation pattern, they will usually buy after the first move happens, but before the second move happens. This would be traded in the direction of the trend. For example, if a stock has been going up all day and has higher highs and higher lows, a trader would be buying the higher lows and selling the higher highs. The trader finds the best entry for the stock to continue its trend. Sometimes this means waiting for a stock that has made a large percentage move to consolidate. (This needs to be explained and have a definition of its own, with a hyperlink or bubble popup from this paragraph)

Breakout Trades

Playing a breakout is very similar to a continuation play. The trader wants the stock to continue the trend. Instead of trying to predict the movement of a move higher or lower, the trader is waiting for confirmation. Once the level of support/resistance is broken, the trader would enter the position expecting a continuation of the move.  

Reversal Trades

A reversal trade is when the trend is about to end and the price reverses direction.  This normally occurs when buyers or sellers have exhausted the current directional move their trading created.

Reversal trading is the primary strategy employed at TrueTrader.net.  In our opinion, this is the safest and highest probability trading strategy.

Double Top / Bottom

One of the more widely used patterns is the double top / bottom. This is when a stock repeatedly finds support or resistance at a specific price level.  These levels can be traded as a breakout, continuation, or a reversal. To employ the breakout strategy, the trader would wait for the price level to be breached, then expect the price to continue with the trend. If the trader is playing it as a continuation trade, they are looking for the price level to continue.  As a reversal, the trader is looking for the price to reverse. 

Cup and Handle

Another pattern is the Cup and Handle; this can be traded almost identically to a double top because it will most likely make a double top. A cup and handle is when a stock makes a move in one direction and pulls back with a retracement around 30-50 percent of the original move. Then, price creates a ‘cup’ back up to the high. Here it will break out, reverse, or consolidate. It is obvious how a reversal or break out trader will trade it, but the continuation play can be employed in two spots. The first is at the bottom of the retracement, anticipating price to increase back to the day’s high.  The second occurs once price reaches day’s high, and possibly consolidates.  When this occurs, the trader could get in on the consolidation (handle) to take advantage of the expected breakout. 

Bull / Bear Flag

A bull flag is a chart pattern that occurs when a stock is in a strong uptrend in price.  It is called a flag pattern since it looks like a flag on the chart.  When this occurs with price rising, it is a bull flag.

A bear flag is a chart pattern that occurs when a stock is in a strong decline in price.  It is called a bear flag pattern since it looks like an inverted flag on the chart.  

Channels

This is when the trend is clearly defined and the stock has created a channel, in which the trending price is almost entirely contained within two sloping lines. On the chart, it looks like the changing price is bouncing off both the top trend line and the bottom trend line, but either ascending or descending in one steady direction over time. This can be traded as a continuation, reversal, or break out. As a breakout, you would wait for the price to break out of the channel, then, the trader would enter the trade based on which side the price broke out. As a continuation, it would be the same play as a reversal, buying off the lower trend line and shorting or selling off the top trend line.  

Drawings

Trend lines are drawn on charts to visually depict support and resistance levels in a channel. They are angled up or down, connecting the bottom of the candles, thus showing the trend going higher or lower.  You can also use two trend lines.  Some platforms have channels that the trader can draw on the chart to help visualize the trend. 

Basics of Fibonacci

A popular analysis indicator is Fibonacci (retracements and extensions). Fibonacci retracements and extensions use a sequence of numbers identified by the mathematician Leonardo Fibonacci. It uses ratios that will be displayed as percentages when you draw the retracements and extensions. Fibonacci is used to assist in the identification of a continuation or reversal trade. After a significant move, the trader will draw the Fibonacci retracements or extensions vertically from the start of the move to the end.  The drawing tool will present horizontal lines at the Fibonacci ratios of 23.6%, 38.2%, 50%, 61.8%, and 100% for retracements.  For extensions, the drawing tool will present horizontal lines at 100%, 150%, 161.8% and 261.8%.  These Fibonnaci levels are defaults across many available charting platforms.

Using Indices as a Guide

Watching Exchange Traded Fund (ETF’s)

At TrueTrader.net we consistently monitor the SPY (S&P 500 Exchange Traded Fund) price level to ensure an overall awareness of the general market direction.

The SPY is the most liquid ETF that is available to trade. Some traders only trade SPY or SPY options. It is imperative to keep an eye on the SPY to know what markets are doing in general. If SPY is declining significantly, most of the stocks that are commonly traded will also be declining in price.  This can alert the trader to the general market sentiment at the time of placing or managing a trade.

For example, if SPY is going down but XYZ stock is going up or holding, the stock is showing that it has some strength relative to the markets. A lot of traders like to trade the direction of the trend because most likely XYZ stock will follow the general market.  A good resource many traders use  is Finviz.com.  On the home page, there is a stock exchange heat map. This map reports stocks based on gains or losses, coloring them red or green and organizing them by sector.

Traders should also keep an eye on other relevant ETFs.  The QQQ is the ETF compiled of the Nasdaq 100 composite index.  The IWM (iShares Russell 2000 index) is compiled of small-cap stocks. If the IWM is falling, you should be careful trading small cap stocks. The VIX, VXX, and UVXY are different ETFs that measure volatility of the broader stock market.

Watching Futures

Not only can you look at the ETFs of these indexes and funds, but you can look at index futures. Futures are contracts that are traded worldwide. Some directly relate to ETFs. For example, ES is the futures mini version of the S&P 500. NQ is another popular future to watch as it emulates the  Nasdaq 100. Depending on your trading interest, the trader can watch gold futures (GC) and crude oil (CL) futures. 

The trader can use a variety of these ETFs and Futures to help them understand why a particular stock might be moving up or down in a specific industry.

Following News and Research

How do traders get the news? 

Following the news is a crucial part of trading. Traders need to understand the underlying reason for the price movement, is it fear, excitement or news?  When there is news on a specific stock, support and resistance levels may become weaker than expected since news related events cause large price fluctuations, especially with the small caps. 

Many news sources can be unreliable. Traders do not watch CNBC or other news stations for trading ideas, tips, or warnings, as they use more accurate and timely news sources. 

At TrueTrader.net we have a relationship with one of the best trading news service providers in the industry, Trade the News.  Below is the link that will enable members an extended free trial and a discounted membership.

Trade the News https://www.tradethenews.com/ 

https://truetrader.net/product/trade-the-news-news-subscription/

Surprisingly, one of the best resources for news that can move the market is Twitter.  Following reputable resources on Twitter can assist traders in gaining valuable insight into a variety of stocks.

Which scanners do traders use? 

A stock scanner is a tool that searches the markets to find stocks that meet a list of predefined user selected criteria and metrics to identify possible trading candidates.

TrueTrader.net offers proprietary premarket and postmarket scanners as well as an intraday scanner.  

Research and Information

Traders use a variety of publicly available sources to research stocks.  This information can include company financial filings, ownership interest, short float percentage, outstanding shares, prospectus and registrations data to name a few.  The sites used by many TrueTrader.net members are listed below and are free for all to use:

www.bamsec.com

www.finviz.com

www.briefing.com

www.earningswhispers.com

Stock Splits, Reverse Splits and Halts

Reverse Stock Splits

A reverse stock split is when a company decides to decrease the number of shares outstanding to increase the stock price.  This is completed by dividing in a certain ratio the number of outstanding shares and then multiplying by that same ratio the current stock price.

As an example, a company with a 100 million share float trading at $0.25 decides to complete a reverse stock split with a ratio of 1 for 20.  After the reverse stock split is completed, the new outstanding shares will be 5 million with a post reverse split trading price of $5.00.

A current shareholder with 1000 shares of stock at $0.25 at the closing price before the reverse stock split would then own 50 shares at the post split adjusted price of $5.00, the value of their shares remains the same.  Current shareholders are not financially impacted by a reverse stock split.  A reverse stock split is normally viewed as a sign of weakness or distress in a company since they are unable to increase the stock price as a result of growth or expansion.

For companies to remain publicly traded, rules and regulations require a minimum share price of $1.00.  To accomplish this requirement, many companies elect to complete a reverse stock split ensuring the stock price will continue to trade over the minimum price required. 

Stock Trading Halts

A trading halt is a temporary suspension of trading for a particular security. Trading halts are normally experienced in the event of anticipated news, the correction of an order imbalance, the result of technical issues or due to regulatory concerns.  Recent modifications to the rules governing trading halts include that a significant percentage change in price will now trigger a trading halt for a specific amount of time.  

The most frequent type of stock trading halt is a circuit breaker halt.  These types of halts will occur when the price movement of a stock exceeds a certain percentage limit (up or down) within a minimum period of time.  

Traders are able to view the list of securities that are currently halted on the following website; https://www.nasdaqtrader.com/trader.aspx?id=TradeHalts

Exchange Trading Halts

An exchange trading halt is triggered when prices exceed predefined percentage limits related to the S&P 500 index.  There are three levels of halts; level 1 is when the S&P 500 falls 7% from the prior day close, level 2 is 13%, and level 3 is 20%.  At level 1 and level 2, all exchanges will pause for 15 minutes, if level 3 is reached, all exchanges will be closed for the remainder of the day. 

The halts are safeguards for the exchanges to prevent panic selling.  These measures were implemented using feedback received from major selloffs that have occurred in the past.

Earnings

Earnings Per Share (EPS) / Guidance

Public companies are required to announce earnings on a quarterly basis.   There are a multitude of metrics included in each of these reports.  Significant importance is placed on earnings per share (EPS) and future company earnings guidance.  EPS is calculated by the profit divided by the outstanding shares of stock over a given quarter. 

Companies also provide guidance as part of the quarterly earnings release.  This data is provided as an indication of future earnings.  Analysts will consider this metric when issuing a stock rating for investors.

During the quarterly earnings season, most companies report earnings over the span of several weeks.  An increase in volume and price volatility is expected during the time period.

Market Capitalization

Market Capitalization refers to the total dollar market value of a company’s outstanding shares of stock.  Commonly referred to as market cap, it is calculated by multiplying the total number of the company’s outstanding shares by the current market price of one share.

There are three main classifications of market caps. Small caps are $300 million to $2 billion. Mid-Cap is $2 billion to $10 billion and Large caps $10 billion and greater. This is especially important when you are trading because the market cap will correlate with the price and volatility. 

Large-cap and Mid-cap stocks are commonly known as safer stocks to trade, however a larger capital outlay will be required when trading.  Large-cap stocks are usually very easy to borrow for shorting.  

Small-Cap Stocks

Nuances of Small Caps

Float (Available Shares)

Small-Cap stocks are known to be volatile due to the limited amount of available shares to the trading public.  Since there are not many shares available for trading, this can easily influence the price of the stock.  With this volatility an opportunity exists for significant percentage returns when trading but also significant losses.

For example, stock ABC has a float of 100 million shares.  If buyers are interested in entering this stock (purchasing a total of 1 million shares) there is plenty of inventory available to fulfill their desired trading size, the stock price would not be significantly impacted.  On the other hand, imagine stock ABCD with a float of 1 million shares.  If the same amount of buyers (purchasing a total of 1 millions shares) as the ABC stock try to buy shares in ABCD, there will not be enough inventory available to fulfill their orders unless the buyers are willing to increase their offer, driving the stock price much higher in a very short period of time.

Easy to Borrow / Hard To Borrow

When short selling stocks, brokerages have a list of inventory that details easy to borrow (ETB) and hard to borrow (HTB) stocks for trading.  When a stock is identified as ETB, traders are able to initiate a short sale transaction immediately.  When a stock is hard to borrow, a trader is required to submit a request for shares (locate) and if the brokerage has available shares this will incur a locate fee on a per share basis valid for the current trading session.

Some stocks are unavailable for short sales, these are identified as none to borrow (NTB).

Short Squeeze

A short squeeze is when the price of a stock accelerates higher in a rapid manner due to a surge in buyers.  This surge can be induced by several factors.  Among them, short sellers may have shares “called in” by their brokers which means they have until the end of the current trading session to cover (buy in) their short position, otherwise their broker will force a buy in at prevailing market prices.  News events may also cause a short squeeze in prices as a result of shorts covering their positions as well as chat room mentions focusing on a particular stock.

Offerings

An offering is when a company uses the public markets to raise capital to invest in expansion or growth, other times for general corporate purposes , normally this includes an equity (and sometimes additional warrants) offering of a specific amount at a specific price.  In other cases, offerings can take place at the market (ATM) prices.

Options

Basic Options Trading Overview

What is an option?

Options are a financial derivative, where the value of the option contract is based on its underlying instrument.  Stock option contracts give the buyer the right but not the obligation to buy or sell the underlying stock at a specific price during a specific time period.

Trading options require an agreement between the trader and brokerage house.  There are several different levels of option approval based on your experience and risk tolerance.  Please ensure your approvals are completed with your broker before attempting to trade options.

Basic Option Concepts

We will be reviewing the most basic of option concepts, buying a call and buying a put.  There are dozens of additional option strategies available however our focus remains on these basic concepts.

The two basic types of stock options are calls and puts.  A call option allows the owner to buy the underlying asset at a specific price within a specific time period.  A put option is the opposite, allowing the owner to sell the underlying asset at a specific price within a specific time period.  The buyer of a call or put option pays a premium, this is the amount paid to enter into the contract.

One stock option contract represents 100 shares of underlying stock, this is known as the multiplier.  As an example, if a stock option call contract is trading at $1.50, the buyer of the contract would pay $150.00.  The risk associated with buying a call option or buying a put option is equal to 100% of the amount of premium paid plus the commissions associated with the trade.

As the buyer of a call option, the buyer believes the underlying value of the stock will rise, a bullish bet.  As the buyer of a put option, the buyer believes the underlying value of the stock will decline, a bearish bet.

Option Chain

The option chain is a listing of available option contracts related to a specific underlying stock.  In the example below, we are reviewing the option chain for Facebook (FB).  

Some of the specific information available on option chains include the following;

  • Option sections are grouped by expiration date (weekly, monthly and quarterly depending on the underlying stock).
  • Call information is on the left and Put information is on the right.
  • Last represents the last traded price of the specific option.
  • Net represents the price change of the option contract from the closing price the day before.
  • Implied Volatility is a measure of the likelihood of changes in price of the underlying security.
  • Open Interest is a measurement of the active contracts for a specific option and represents the number of contracts traded but not liquidated by an offsetting trade.
  • Size represents the available quantity of contracts at a given price level.
  • Bid represents the price a buyer is willing to pay for the option.
  • Ask represents the price a seller is willing to receive for the option.
  • Expiration represents the last valid contract date for the option.
  • Strike represents the price at which the owner of the option can buy (in the case of a call) or sell (in the case of a put) the underlying security when the option is exercised.

Day Trading Options

The benefits to day trading options is mainly related to the amount of capital required.  When buying a call or put option, the only capital necessary is the premium required.  Normally this is many times less than if you were buying the underlying stock.  Option trades completed in a cash account settle on an overnight basis.  All of the capital used, gained or lost will be available for options trading the next business day. 

From our option chain example above, to purchase 1 call option on Facebook, selecting the $195 strike price expiring on May 1st, the premium paid would be $525.00 (1 * 5.25 * 100).  To purchase an equivalent amount of stock, 100 shares with Facebook trading near $190.00 would require $19,000.00 ($100 * $190).  There are many different factors that will affect the option price however the capital required to purchase the call options is significantly less than the capital required to purchase the underlying stock.

Buying a put option is comparable to shorting a stock, even when the stock is not shortable or when the broker does not have shares available.

Trading options can add a valuable tool into your trading toolbox when they are used in accordance with your predefined risk parameters.

Option Selection

Call, Put, Expiration Date and Strike Price

When deciding to trade options the trader would have identified a basic thesis related to the price of the underlying stock, whether they believe the price will increase or decrease and the time expected for this price movement to occur.

Buying a call is a bullish strategy on the underlying stock while buying a put is a bearish strategy.  Selecting the expiration date is based on the traders belief of how long the expected price movement will take to occur.  Most option expirations occur weekly, monthly and quarterly, the option chain will list out the various expiration dates available for each contract.  

Time Decay

The longer the expiration date is from today, the trader will experience time decay of the option value.  Time decay is a measure of the rate of decline in the value of an options contract due to the passage of time.  The decline in the option value accelerates as the option nears its expiration date.

At the Money and In the Money

An at the money option contract is when the strike price of the contract is identical to the underlying market price of the stock.  Both calls and puts can be at the money.  In our FB example above, with the stock trading at approximately $190.00, both the $190.00 calls and puts are at the money.

An in the money contract is when an option has intrinsic value.  For a call option, this means the underlying market price of the stock is above the option contract strike price.  If FB was trading at $195.00 and our call option strike price was $190.00, we would be in the money by $5.00.

An out of the money contract is when an option has a strike price above the current underlying stock price (call option) or below the underlying stock price (put option).  For a call option, this means the underlying market price of the stock is below the option contract strike price.  If FB was trading at $190.00 and our put option strike price was $195.00, we would be out of the money by $5.00.

Open Interest

Open interest is a measurement of the number of outstanding contracts that have not yet been settled for a particular contract, a gauge of market activity.  Increasing open interest in an options contract represents new or additional investment flowing into the market for this option.

Risks of Shorting Options

Traders have the ability with the approval of their brokers to short options.  Shorting options, selling a call or selling a put has unlimited risk.  By selling calls and selling puts, you receive the premium paid by the buyer.

Brokerages

PDT RULE

What is the PDT rule? 

A pattern day trader (PDT) is a regulatory designation for those traders or investors that execute four or more day trades (trading stocks) during any five business day period using a margin account.  The PDT designation places restrictions on additional trading and is in place to discourage excessive trading.  To avoid PDT restrictions a trader must have an equity balance of at least $25,000.00.  If the equity balance in the trading account falls below this amount, PDT restrictions will be enforced by the brokerage company and trading will be restricted to closing positions for 90 days.

Alternatives to the PDT rule

There are multiple ways to navigate around the PDT rule:

  • If your account is over $25,000.00 then the PDT rule would not apply to your trading account and the restrictions will not be enforced. 
  • Trading in a cash account.  The PDT rule only applies to Margin accounts. Using a cash account for trading alleviates the PDT restrictions although you will have to ensure your trades are fully settled and your funds are available before additional trades can be placed.
  • Trade Futures. There are no PDT restrictions when trading futures.  Normally, a trader would be required to open a seperate trading account specifically for trading futures.
  • Open multiple brokerage accounts.  The trader can open multiple brokerage accounts, each account would be allowed to trade up to 3 days trades every 5 days.  
Offshore Brokers

An alternative to PDT restrictions is to use offshore brokers.  Opening an account with an offshore broker is inherently risky since they are not regulated by the SEC and FINRA.  Since offshore brokers are not regulated, they do not impose the PDT restrictions on their customers’ accounts.  This alternative is not recommended since history has shown many offshore brokers go out of business no notice or return of client funds..

Types of Accounts

Cash Account

A cash account is a type of brokerage account where the investor must pay the full amount for all securities purchased.  The cash account owner is not allowed to borrow funds from the brokerage in order to pay for the transactions in the account.  There are no PDT restrictions for cash accounts and stock trades executed in a cash account normally settle in a T+2 fashion, meaning trading day plus 2 business days.  Cash accounts do not allow traders to short sell stocks and there is no margin available to increase your day trading buying power.

Margin Account

A margin account is a type of brokerage account where the broker lends the customer cash to purchase stocks. If the account is designated as a pattern day trading account, the day trading buying power in a margin account is normally set to 4 to 1.  This means if the account has a cash balance of $25,000.00, the buying power would be set to $100,000.00 for intraday purchases.

Using a margin account, the trader’s intraday buying power is updated immediately after a trade is completed, the money settles immediately and is instantly available. A margin account is a valuable tool to most active traders.  Margin accounts allow for options trading as well as short selling.

Margin accounts also incur fees from the brokerage company.  When a trader holds a position overnight the brokerage company changes daily interest for the money loaned on the position over and above the cash value of the account.  

Margin accounts must maintain a certain margin ratio at all times.  When the value of the accounts falls below a predefined limit, the trader is issued a margin call; this is a demand for deposit of cash or securities within a specific period of time to ensure the account value returns to the required balance.

IRA Account

An Individual Retirement Account (IRA) is an account that allows an individual to save for retirement with tax-free growth.  An IRA can not be a margin account, only the cash balance can be used for trading and no additional buying power would be granted to an IRA account.

Types of Brokers

Full-Service Brokers

A full service broker is a licensed financial broker-dealer firm that provides a variety of services to clients, including research and investment advice.  These companies charge commissions, these are charges incurred by the trader when executing a trade.  Commissions are usually highest at full service brokers given the range of services offered and available to traders.  

Discount Brokers

A discount broker completes buy and sell orders at a reduced or zero commission rate.  These brokers do not provide investment advice or perform analysis on a client’s behalf.  Examples of a discount broker are TD Ameritrade, Charles Schwab or Etrade.  These brokers offer an online trading platform with little to no costs.  They make their money by getting paid for order flow, which is routing your trade executions to a third party firm such as a high frequency trading firm (HFT) that will compensate the brokerage firm for this order flow from it’s customers.

Direct Access Brokers

A direct access broker is a firm that specializes in speed of order execution.  The trading platform used by direct access brokers allows clients to trade directly with an exchange via an Electronic Communication Network or ECN.

Examples of direct access brokers include; Cobra Trading, Lightspeed Trading, Speedtrader and Centerpoint. Using their trading platforms, traders are able to select which Electronic Communication Network (ECN) route their orders will be routed through; this is direct access trading.  Most direct access brokers charge low commissions in addition to their trading platform and data fees.

Standard commission rates start at $0.045 cents per share, if the trader is using large quantities, they can elect a per trade commission rate that may be more favorable.  ECN fees are also incurred when trading depending on which ECN route is selected.  Most direct access brokers have proprietary auto-routing, although many traders elect to use NSDQ or ARCA as their ECN route. ECN fees are around $0.01 to $0.03 cents per share in addition to the commissions charged by the brokerage, unless the trader decides to add liquidity to the market.

Adding or Taking Liquidity

Each time a market order is placed this is taking (removing) liquidity from the market.  Market orders to buy execute at the best available offer (ask) price.  Market orders to sell execute at the best available bid price.  When a trader enters a limit order to buy a stock below the best available offer price, they are adding liquidity, when a trader enters a limit order to sell a stock above the best available bid price, they are adding liquidity.  As we have previously discussed, market orders guarantee execution but not price, whereas limit orders guarantee price but not execution.

When a trade takes liquidity from the market they will incur an ECN fee per share, based on the ECN route that was selected by the trader. Conversely, when a trader elects to add liquidity to the market, most ECNs will rebate a portion of the fees and credit the traders’ execution.  If a trader is constantly adding liquidity to the market via ECN routes, they are able to reduce the overall cost of trading executions and the commissions charged.

Platforms and Reliability 

A significant difference between a discount broker and a direct access broker is the trading platform. Most discount brokers will have a proprietary trading platform, and at times, these platforms can become unstable or completely unavailable, especially during high volatility periods in the market; namely the market open at 9:30 AM EST or immediately following any large news event.  

Direct access brokers are much more sensitive to execution speed and reliability of their platforms; this is what traders are paying them for.  Oftentimes, direct access brokers will offer more than one option of trading platforms to customers.  Popular direct access trading platforms are Sterling Trader, DAS Trader and Lightspeed Trading.  Each platform will have different fees associated with their use.  Most of these platforms offer specialized trading setups where hotkeys may be used.  Hotkeys are arguably the fastest way to place a trade. You can customize your keyboard to complete certain functions such as “buy 100 shares of a stock at the bid price”, with the click of one key. 

Most direct access platforms offer a free trial where the trader is able to ensure a level of comfort with the many features available to a specific platform.  It is essential that active traders have access to real time data and a Level II order entry system.

Internet Speed and Computer

Internet Speed

A reliable and fast internet connection is recommended when actively trading stocks.  A wired connection directly to your internet provider’s modem is preferred when trading.  The faster the internet speed, the lower latency you will experience in placing your trades and receiving real time data.  

Computer Setup

Active trading setups vary dramatically, as each trader has to be comfortable and knowledgeable about their own setup before starting to trade.  Ideally, traders will have a computer system that is able to support multiple monitors, a significant CPU (i.e. Intel i7 or i9 series) with at least 8 Gigabytes of RAM, preferably more.  Ensuring your trading setup is capable of providing the best tools and fastest speeds is money well spent.

PC or Mac? 

Generally speaking, PC’s are a bit more trader friendly when it comes to supporting the available trading platforms and tools required, especially for direct access brokers.  There are some available trading platforms currently supporting iOS on Mac, but not nearly as many as those for PCs.  The preference here is certainly up to the trader and what systems they are most comfortable with using.

Psychology

Why is Psychology Important

Learning to trade is not simply memorizing all of the sections in this guide.  When we are financially invested in a trade, several emotions are triggered and experienced.  

The fear of financial loss generates complex emotions that are not easily understood or controlled.  Understanding and embracing the emotions felt during trading is essential to long term consistency and success.  

Let’s say for example you work for a company.  When your day starts, no matter what your mood is or how you feel, at the end of each day you still earn your income.  With trading, you can spend a large part of the day doing everything correctly, by the book, and still lose money.  We are wired to gauge our worth on what our activity yields in the form of financial gain.

When it comes to trading, we need to learn to separate those expectations.  We must separate our value of time from the expectation of financial gain for that same time period.  The ability to manage these emotions sets apart successful traders. 

Becoming a Consistent Trader

How do you become a consistent trader? 

Among all successful traders, one aspect that they all have in common is a proven successful strategy.  A strategy that is repeatable and has consistent outcomes, time and time again.  This result can only be achieved by spending a considerable amount of time, not just finding a strategy with a high probability of success, but just as important, finding the strategy that will meet the personality traits of each individual.  In other words, this strategy has to not only make sense, but you have to be comfortable with it, confident in its outcome, and you must trust it.

The TrueTrader.net edge is waiting for the stock price to come to the trader’s expected level and waiting for a significant price extension moving into one or multiple pivot levels.  This presents a high probability setup that the stock will reverse its trend, giving the ‘True Trader’ their edge. As a trader you are building and running a business, all the normal rules apply.  The better trading plan and strategy traders have, the more consistent their trades will be.

Obstacles to Overcome 

Recency Bias

A common pitfall of many traders is recency bias.  This is when a trader allows a recent outcome to influence their decisions going forward.

As an example, when trading a strategy that is proven highly successful, when a loss is recently realized, before the trader places the next trade, the memory of the recent loss will instinctively be at the forefront of their memory and sometimes prevent them from actually entering the next trading opportunity, fearing the recent loss may be repeated. 

Recency Bias can go both ways. You might feel you are losing every trade, or you might feel you are invincible and winning every trade. A trader needs to be mindful of themselves as every possible trade presented should be seen as a new opportunity, regardless of past outcomes, constantly reminding themselves that the system has an expected probability of success and that percentage will never be 100.

Fear of Missing Out (FOMO)

A common issue among traders is fear of missing out, FOMO.  This is usually caused by a recent bias of missing a profitable trade or getting out of a trade too early, thereby limiting the potential of the profit. This creates FOMO and may also lead to additional unhealthy trading habits like overtrading and revenge trading.

Over Trading

Over trading is a common problem across new traders.  This occurs when trades are entered without the high probability of success experience from following your proven trading strategy.  Traders will often find themselves bored during the trading day and start taking trades that vary from their normal trading patterns. 

Revenge Trading

When a trader experiences a trading loss, it is natural to desire an immediate resolution to the loss by entering another trade, specifically, to regain what has just been lost.  Many times, these revenge trades do not meet the criteria specified by high probability trading strategies.  Engaging in this type of trading activity usually results in even larger losses.

Overcoming Emotions and Bad Habits

Overall, the number one way to control emotions is by making sure the trader is comfortable with the position size of the trade.  Traders must ensure that they have a defined risk tolerance including a risk to reward ratio.  Some traders ensure their risk profile is adhered to by using stop loss orders, guaranteeing execution if price fails to achieve their expectations.

Trading Plan

To become a successful trader you need to create a trading plan that includes a defined set of rules that match your selected strategy.  Those sets of rules can only be decided by each individual, as there is not a ‘one size fits all’ trading plan.  Following a trading plan will increase the likelihood of success coupled with a highly profitable strategy.

What would be the basics for a consistent trading plan?  These questions should be asked by every trader.  This needs to be broken into two sections;

Strategy

  • Where should my entries be placed?
  • If the trade does not work in my favor, do I immediately exit the trade or will I only be entering trades where multiple entry levels have been identified?
  • How many positions am I willing to manage at the same time?
  • Do I have the required conviction to ensure I remain in the trade according to my specific strategy given expected price fluctuations?

Money Management

  • How much am I willing to risk on each trade?  Define a specific loss limit where you will stop trading for the day.
  • Do I have clearly defined profit targets for each trade?
  • What percentage of my account will I be investing in each position?

It is critical to adhere to the trading plan that has been created.  If an entry is missed, the trader should always remind themselves the next opportunity is right around the corner.

Trading Goals

Setting goals in trading is recommended.  Each trader will have varying goals that they want to achieve.  Some will define daily, weekly, monthly and yearly monetary achievements while others will simply strive for consistency and not breaking their own rules.  Goals should be set to ensure they can be reached and become a reality. 

Following Other Traders

A critical component to every trader’s success is to ensure they follow only their own trading plan.  Following other traders will not benefit your own success in the long run.  Once you identify a strategy that works for you and your personality, your journey to consistency can begin.

Utilizing a trading chat room can be beneficial to provide an electronic gathering place of people who share the same or similar interests.  The goal at TrueTrader.net is to share our strategy with each of our members to help them on their journey towards success.

Daily Routine

How to start your day

Many successful traders have a specific daily routine they follow regardless of the previous day’s results.  Getting up at a specific time each morning, meditation, having breakfast, going out for a run, reviewing the news, etc. Each trader should define a daily routine specific for themselves.  

We recommend having a set time every morning to arrive at your trading desk, ready to study, review the overnight and latest news and get prepared for the market open. Start up your trading platform, review the overnight futures (including ES, NQ, Oil) and watch the TrueTrader.net scanner to determine stocks that are gapping or falling in price.  Ensure you are aware of intraday news events and companies that may have reported earnings that morning or after regular trading hours the previous day.  This routine will assist you in developing your trading edge, the benefit of being prepared to engage once trading begins each day will play a large role in your consistency.

Daily Journaling

Creating and maintaining a daily trading journal is highly recommended.  Daily journaling will help you develop your system and find out where you need to improve and reinforce what is working in your trading.  There are many free trading journaling sites available or you can simply keep track of your trades in a spreadsheet.  Make sure to be honest with yourself and include all of your trades, both winners and losers, why you entered and why you exited each trade, your emotional status and any other information that would be beneficial.  After reviewing the journal, trends will develop and you will be able to modify your strategy or routine to improve your results.

There are countless things you can keep track of, but some of the important ones are; the time of the day, which strategies you are using, your emotional state, environmental factors, which day of the week you do worst/best. Maybe on the big volatile days, you tend to overtrade so you should avoid those periods. 

How To Practice Trading

Paper accounts

A paper trading account (simulation) is beneficial for practicing. TOS has a great free platform you can use to do paper trading. Watch the TOS tutorials here.  The best tip for using a paper account is to treat it as real as possible. For example, if you have $5,000.00 to fund into an account, trade your paper account with the same amount and use the same position sizes as you would in a real account.  Using the paper trading account, no emotions will be involved, it is not real money.  

Small Position Sizing

For some people, paper trading is not very effective. Once traders start using real money, emotions take over and oftentimes, results are much different from when the paper trading account was used.  

Using a small position size is recommended when starting to trade.  This will allow the trader to experience the actual emotions of being in a trade while limiting risk and being able to practice all of the nuances involved in trading execution.  With discount brokers now offering commission free trading, a trader can practice with a small position size and work their way up.   

Beginner’s Checklist

Before you begin trading, you must understand the basics of trading. You do this by investing in your education and studying, “Learn before you earn.” 

Traders must understand as much as possible about trading; 

  • Trading Education (Decide what type of trader you want to be.)
  • Computer Setup
  • Rules and Regulations (PDT, Uptick Rule, Understanding Halts…)
  • Charting Platform Selection
  • Trading Platform Selection (Direct Access vs. Discount Broker)
    • Upon deciding, fund account
  • Begin trading only the strategy previously practiced with small size to ensure emotional control.  It is essential to master one strategy before trying others.