If you require a reminder of the importance of patience in trading, here it is.

There are plenty of traders out there who are making the error of overtrading.

Overtrading can mean trading 20, 30, 40, or even 60 times a day. You’ll be

commissioning your broker to do each and every one of those trades, so you are

going to lose both money and commissions. Many brokers charge $4.95 for each

trade, so for 40 trades, you will end up paying $200 per day to your broker. That

is a lot. If you overtrade, your broker will become richer, and you will become,

well, broker! Remember, your goal is to trade well, not to trade often.

Another problem with overtrading is risk. While you're in a trade you are

exposed to risk, and that’s a place you don’t want to be in unless you have

proven that there is a setup in the strategy worth trading.

Here is my next golden rule:

Rule 8: Experienced traders are like guerrilla soldiers. They jump out at just the

right time, take their profit, and get out.

My trade size depends on the price of the stock and on my account size and risk
management rule (Chapter 3), but 800 shares is my usual size if I am trading in the
$10-$50 price range.

1. I buy 400 shares.

2. If the trade goes in my favor, I add another 400 shares (note that I add into my
winning position, not into a losing one).

3. I sell 400 shares in the first target, bringing my stop loss to breakeven (my entry
point).
4. I sell another 200 shares in the next target point. 5. I usually keep the last 200
shares until I am stopped out. I always retain some shares in case the prices keep
moving in my favor.

I’m going to illustrate this strategy with a few examples so that you can see

exactly what to look for. Figure 7.8 below is an example of what it looks like to

find a stock that has sold off really hard right after the market opens. Moves like

this are extremely hard to catch for the short side, because when you find the

stock, it is already too late to enter the short selling trade. But please, remember

the mantra: what goes up, must come down. Therefore, you have the option of

waiting for a reversal opportunity

John Wooden (or as some call him, the Wizard of Westwood), the famous

American basketball player and coach, once said, “By failing to prepare, you are

preparing to fail.” Indeed

Often new traders will think that trading strategies can be reduced to a few rules

that they must follow to be profitable: always do this or always do that. Wrong.

Trading isn't about “always” at all; it is about each single trade, and each

situation. Every trade is a new puzzle that you must solve. There is no universal

answer to all of the puzzles in the market. Therefore, you need to make a plan

for each trade as early as when you are doing your pre-market scanning. Before

making a trade, you must create a plan for your trades or a series of “if-then”

statements. Develop some plans as to when you might take a position in one of

your stocks on your watchlist. If you see the x scenario, then you will buy at this

price. Continue creating “if-then” scenarios for each outcome.

Mike Bellafiore, co-founder of SMB Capital (a proprietary trading firm in New

York City), writes in his book One Good Trade that the professional traders at

his firm video record all of their trades during the day. In their afternoon session

they sit around their conference room tables, enjoy a lunch catered by the firm,

review their trades and groupthink about better ways to take your money.

Trading is a full contact sport and anything less than your complete focus is

disrespectful to the game and will certainly knock you out of the game.

Profitable traders constantly evaluate their trading system. They make

adjustments every month, every day, and even intraday.

Andrew’s 11 Rules of Day Trading

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

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

Rule 3: Day traders do not hold positions overnight. If necessary, you must sell
with a loss to make sure

you do not hold onto any stock overnight.

Rule 4: Always ask, “Is this stock moving because the overall market is moving, or
is it moving because it

has a unique fundamental catalyst?”

Rule 5: Success in day trading comes from risk management - finding low-risk
entries with a high potential

reward. The minimum win:lose ratio for me is 2:1.

Rule 6: Your broker will buy and sell stocks for you at the Exchange. Your only
job as a day trader is to

manage risk. You cannot be a successful day trader without excellent risk
management skills, even if you
are the master of many effective strategies.

Rule 7: Retail traders trade only Stocks in Play, high relative volume stocks that
have fundamental catalysts

and are being traded regardless of the overall market.

Rule 8: Experienced traders are like guerrilla soldiers. They jump out at just the
right time, take their profit,

and get out.

Rule 9: Hollow candlesticks, where the close is greater than the open, indicate
buying pressure. Filled

candlesticks, where the close is less than the open, indicate selling pressure.

Rule 10: Indicators only indicate; they should not be allowed to dictate.

Rule 11: Profitable trading does not involve emotion. If you are an emotional
trader, you will lose your

money
For a long position (you’ll recall “buying long” means you buy shares at one

price and hope to sell them at a higher price), my buy orders are in blocks of

400, 200 and 100 shares. I use a marketable limit order to buy at the ask price +

5 cents. My “sell” Hotkeys are marketable limit orders to sell my half or full

positions on the bid price - 5 cents. When selling, I will accept the bid price and

a price no more than 5 cents lower, to ensure my order gets filled immediately.

The DAS platform will automatically calculate what half of my position equals

in number of shares. The computer will also calculate the current bid and ask

prices and place my order at the price I specify.

Similarly, for short positions (you’ll recall “short” is when you borrow shares

from your broker, sell them, and hope to later buy back the shares at a lower

price for return to your broker), I short sell on the bid price or on a price no more

than 5 cents lower. My “buy to cover shorts” Hotkeys are marketable limit

orders to buy my half or full positions on the ask price + 5 cents. I am willing to

pay higher prices (up to 5 cents) to asks, just to get my orders filled immediately.

Rule-10: indicators only indicate; they should not be

allowed to dictate.

Plan a trade, and

trade the plan.

Trade the Best, Leave the Rest

As part of the algorithmic trading by computer systems, the majority of the

stocks will trend with the overall market unless they have a reason not to. So, if

the market is moving up, the majority of stocks will be moving up. If the overall

market is going down, the prices of the majority of stocks will also go down.

But, remember, there will be a handful of stocks that will buck the trend of the

market because they have a catalyst. These are the Stocks in Play. This is what

retail traders are looking for - that small handful of stocks that are going to be

running when the markets are tanking, or tanking when the markets are running.
Float means the number of shares
available for trading. Apple Inc., for example, as of July 2016, had 5.3
billion

shares in the market that are available for buying and selling. Apple is

considered a “mega cap” stock. These stocks usually don’t move much during

the day because they require significant volume and money to be traded, so

Apple shares might on average change by only one or two dollars each day.

They are not very volatile and therefore day traders don’t like trading them. Day

traders look for volatility

On the other hand, there are some stocks that have very low float. For example,

Cesca Therapeutics Inc. (ticker: KOOL) has only a 1.2-million-share float. This

means that the supply of shares of KOOL is low and therefore a large demand

can very quickly move the price of the stock. Low float stocks can be volatile

and move very fast. Most of the low float stocks are under $10 because they are

early stage companies which for the most part are not profitable. They hope to

grow, and by growing further, they issue more shares and raise more money

from the public market and slowly become mega cap stocks. These low float

stocks are also called “small cap” or “micro-cap” stocks. Day traders love low

float stocks. Now let’s return to those three categories.

NASDAQ Level 2 and Bid-Ask

As part of your data feed package, you will have access to NASDAQ Level 2.
Level 2 can provide important insight into a stock's price action, including what
type of traders are buying or selling a stock and where the stock is likely to head in
the near term. Level 2 is known to be a “leading indicator”, which means it shows
activity before a trade happens. Moving averages, charts and most of the other
indicators are known as “lagging indicators”, meaning they provide information
after the trades take place. Level 2 is essentially the order book for NASDAQ
stocks. When orders are placed, they are placed through many different market
makers and other market participants. Level 2 will show you a ranked list of the
best bid and ask prices from each of these participants, giving you detailed insight
into the price action. Knowing exactly who has an interest in a stock can be
extremely useful, especially if you are day trading.

1. I buy 400 shares. 2. If the trade goes in my favor, I add another 400 shares (note
that I add into my winning position, not into a losing one). 3. I sell 400 shares in
the first target, bringing my stop loss to breakeven (my entry point). 4. I sell
another 200 shares in the next target point. 5. I usually keep the last 200 shares
until I am stopped out. I always retain some shares in case the prices keep moving
in my favor

To summarize my trading strategy for the ABCD Pattern:

1. When I observe with my scanner or I’m advised by someone in our chatroom
that a stock is surging up from point A and reaching a significant new high for the
day (point B), I wait to see if the price makes a support higher than point A. I call
this point C. I do not jump into the trade right away. 2. I watch the stock during its
consolidation period (I’ll explain this term in the next strategy). I choose my share
size and stop and exit strategy. 3. When I see that the price is holding support at
level C, I enter the trade close to the price of point C in anticipation of moving
forward to point D or higher. 4. My stop is the loss of point C. If the price goes
lower than point C, I sell and accept the loss. Therefore, it is important to buy the
stock close to point C to minimize the loss. Some traders wait and buy only at
point D to ensure that the ABCD Pattern is really working. In my opinion, that
approach basically reduces your reward while at the same time increasing your
risk. 5. If the price moves higher, I sell half of my position at point D, and bring
my stop higher to my entry point (break-even). 6. I sell the remaining position as
soon as my target hits or I sense that the price is losing steam or that the sellers are
acquiring control of the price action. When the price makes a new low on my 5-
minute chart, it is a good indicator that the buyers are almost exhausted.
Strategy 2: Bull Flag Momentum
In day trading, Bull Flag is a Momentum Strategy that usually works very

effectively on low float stocks under $10 (Chapter 4). This trading strategy is

difficult to manage the risk in and requires a fast execution platform.

This pattern, shown above in Figure 7.3, is named Bull Flag because it resembles

a flag on a pole. In Bull Flag, you have several large candles going up (like a

pole), and you also have a series of small candles moving sideways (like a flag),

or, as we day traders say, “consolidating”. Consolidation means that the traders

who bought stocks at a lower price are now selling and taking their profits.

Although that is happening, the price does not decrease sharply because the

buyers are still entering into trades and the sellers are not yet in control of the

price. Many traders who missed buying the stock before the Bull Flag started,

will now be looking for an opportunity to take a trade. Wise traders know that it

is risky to buy a stock when the price is increasing significantly. That’s called

“chasing the stock”. Professional traders aim to enter the trade during quiet times

and take their profits during the wild times. That, of course, is the total opposite

of how amateurs trade. They jump in or out when stocks begin to run, but grow

bored and lose interest when the prices are, shall I say, sleepy

Chasing the stocks is an account killer for beginners. You must wait until the

stock finds its high point, and then you must wait for the consolidation. As soon

as the price start breaking up in the consolidation area, you can begin purchasing

stocks. Patience truly is a virtue.

Usually a Bull Flag will show several consolidation periods. I enter in only

during the first and second consolidation periods. Third and higher consolidation

periods are risky because the price has probably been very extended in a way
that indicates that the buyers will soon be losing their control.

To summarize my Bull Flag Momentum trading strategy:

1. When I see a stock surging up (either on my scanner or when advised by
someone in our chatroom), I patiently wait until the consolidation period. I do not
jump into the trade right away (you will recall that is the dangerous act of “chasing
the stock”). 2. I watch the stock during the consolidation period. I choose my share
size and stop and exit strategy. 3. As soon as prices are moving over the high of the
consolidation candlesticks, I enter the trade. My stop loss is the break below the
consolidation periods. 4. I sell half of my position and take a profit on the way up.
I bring my stop loss from the low of the consolidation to my entry price
(breakeven). 5. I sell my remaining positions as soon as my target hits or I sense
that the price is losing steam and the sellers are gaining control of the price action.
The Bull Flag is essentially an ABCD Pattern that will happen more often on low
float stocks. However, in a Bull Flag Strategy for stocks under $10, many traders
buy only at or near the breakout (opposite to the ABCD Pattern for medium float
stocks). The reason for this is because moves in low float stocks are fast and they
will fade away very quickly. Therefore, Bull Flag is more or less a Momentum and
Scalping Strategy. Scalpers buy when a stock is running. They rarely like to buy
during consolidation (during that waiting and holding phase). These types of stocks
usually drop quickly and brutally so it is important to jump in only when there is a
confirmation of breakout. Waiting for the stock to break the top of a consolidation
area is a way of reducing your risk and exposure time in low float stocks. Instead
of buying and holding and waiting, which increases exposure time, scalpers just
wait for the breakout and then send their order. Get in, scalp, and get out quickly.
That’s the philosophy of momentum scalpers: Get in at the breakout Take your
profit Get out of the way The Bull Flag Pattern is found within an uptrend in a
stock. The Bull Flag is a long-based strategy. You should not short a Bull Flag. I
personally don’t trade much momentum. It is a risky strategy and beginners should
be very careful trading these. If you choose to, trade only in a small size and only
after sufficient practice in simulators. You will also need a super-fast execution
system for scalping

Strategies 3 and 4: Reversal Trading

In a Bottom Reversal, when you’ve had a long run of consecutive candles

making new lows, the first candle that makes the new high near an important
support level is very significant. That’s my entry point. There are times when I’ll

use the 1-minute chart, but typically I’ll wait for the 5-minute chart because it is

a much better confirmation. The 5-minute chart is cleaner. The first 5-minute

candle to make a new high near an intraday support level is the point at which I

enter the reversal, with a stop at the low of the day.

Once you’re in one of these trades, your exit indicators are quite simple. I take

profit when the price reaches a moving average (either 9 EMA, 20 EMA or

VWAP) or reaches another important intraday level.

In a Bottom Reversal, if the stock pops up and then suddenly moves back down,

I stop out for a loss. If I jump in long, buying stock and hoping the price will go

higher, and instead the price ends up just going sideways, it’s a sign that I am

probably going to see a consolidation for another move down, and that is an

indication that the price is probably going to continue to drop. If I get in and I

hold for a few minutes and the price stays flat, I get out, no matter what happens

after that. I may be wrong, but I don’t like to expose my account to the

unknown. I need to be in the right setup, and if it is not ready yet, I’m out. If I

get into the profit zone, I can start adjusting my stop, first to break-even, and

then to the low of the last 5-minute candle. I will then keep adjusting my stop as

I move up.

In Reversal Strategies, one of the main tasks of a trader is to watch stocks that

are running up or down, while simultaneously identifying possible support or

resistance levels and areas that could provide a good reversal opportunity on

daily charts. This allows you to resist being impulsive and rushing into the trade.

Instead, you wait for the areas of stagnation. You take your time and watch the

trade develop and wait for the reversal to begin.

Horizontal support or resistance trading is my favorite
style of trading. My years
of experience have taught me that the market only remembers price levels,

which is why horizontal support or resistance lines make sense, but diagonal

trend lines are subjective and open to self-deception. In fact, trend lines are

among the most deceptive of all tools in trading. I therefore avoid trend lines.

To summarize my trading strategy for Red-to-Green

trading:
1. When I make my watchlist for the day, I monitor the price action

around the previous day close.

2. If a stock moves toward the previous day close with high volume, I

consider going long with the profit target of the previous day close.

3. My stop loss is the nearest technical level. If I buy near VWAP, my

stop loss will be the break of VWAP. If I buy near a moving

average or an important support level, my stop loss will be the

break of moving average or support level.

4. I usually sell all at the profit target. If the price moves in my favor,

I bring my stop loss to the break-even and do not let the price turn

against me.

Red-to-Green moves should work immediately

For another example, let’s take a look at Figure

7.28, the 5-minute chart for

Barracuda Networks, Inc. (ticker: CUDA) on January 10, 2017. The same price

action can be seen at the Open. CUDA gapped up in the pre-market because of a
good earnings report. At the Open, it was sold off heavily, perhaps because

overnight shareholders and long-term investors started to sell their shares for a

profit. The stock tested the VWAP for about twenty minutes and then sold off in

a high volume toward the previous day close of $23.81. Its price bounced back

later, during Mid-day, toward the VWAP, after it could not break the previous

day close. Later, in the early afternoon, the price sold off again toward the

previous day close for another Red-to-Green trade before it bounced back yet

again.

In this example too, the previous day close level of $23.81 acted as a strong

support level. In both morning and afternoon trading, a short sell opportunity

was possible from VWAP at around $24.40 to $23.81. I did not take this trade as

I was trading another stock around the same time that day.

To summarize my Opening Range Breakout Strategy:

1. After I build my watchlist in the morning, I closely monitor the

shortlisted stocks in the first five minutes. I identify their opening

range and their price action. How many shares are being traded? Is

the stock jumping up and down or does it have a directional upward

or downward movement? Is it high volume with large orders only,

or are there many orders going through? I prefer stocks that have

high volume, but also with numerous different orders being traded.

A stock that has traded 1 million shares, but those shares were only

ten orders of 100,000 shares each, is not a liquid stock to trade.

Volume alone does not show the liquidity; the number of orders

being sent to the Exchange is as important.

2. The opening range must be significantly smaller than the stock’s

Average True Range (ATR). I have ATR as a column in my Trade

Ideas scanner.

3. After the close of the first five minutes of trading, the stock may

continue to be traded in that opening range in the next five minutes.

But, if I see the stock is breaking the opening range, I enter the trade

according to the direction of the breakout: long for an upward

breakout and short for a downward move.

4. My stop loss is a close below VWAP for the long positions and a

break above VWAP for the short positions.

5. My profit target is the next important technical level, such as: (1)

important intraday daily levels that I identify in the pre-market, (2)

moving averages on a daily chart, and/or (3) previous day close.

6. If there was no obvious technical level for the exit and profit target,

I exit when a stock shows signs of weakness (if I am long) or

strength (if I am short). For example, if the price makes a new 5-

minute low, that means weakness and I consider selling my position

if I am long. If I am short and the stock makes a new 5-minute high,

then it could be a sign of strength and I consider covering my short

position.

The Seven Fundamentals for Day Trading

To become a consistently profitable trader you need to follow these seven

fundamental steps before entering into the world of trading. Some of them you

should do before and after each and every single trade you make:

1. Education and simulated trading

2. Preparation
3. Hard work

4. Patience

5. Discipline

6. Mentorship and a community of traders

7. Reflection and review

Stocks in Play can be found in two ways: Pre-market
morning watchlist Real time intraday scans Let me
explain how each day I find my Stocks in Play for trading.
Pre-Market Gappers Experienced traders are sensitive to
being in the right stocks at the right time. As I mentioned,
traders are just as good as the stocks they trade. I and the
traders in my community use a scanner every morning
that I program to find Stocks in Play based on the
following criteria: Stocks that in the pre-market gapped
up or down at least 2% Stocks that have traded at least
50,000 shares in the pre-market Stocks that have an
average daily volume of over 500,000 shares Stocks that
have Average True Range of at least 50 cents (how large
of a range a stock has on average every day) There is a
fundamental catalyst for the stock As a rule, I do not trade
stocks with an enormous short interest higher than 30%
(the short interest is the quantity of stock shares that
investors or traders have sold short but not yet covered or
closed out)

Why these criteria? When there are some fundamental

catalysts, there will be unusual pre-market activity and a
Stock in Play will have gapped up or down before the
market opens with a significant number of shares being
traded (such as 50,000 shares). I look for highly traded
stocks, so that buying and selling 1,000 shares won’t be a
problem. That is why I am looking at stocks with an
average daily volume of over 500,000 shares. I also am
looking for stocks that usually move in a good range for
trading. That is why I look at Average True Range (ATR).
ATR means how large of a range a stock has on average
every day. If ATR is $1, then you can expect the stock to
move around $1 daily. That is a good number. If you have
1,000 shares, you may profit $1,000 from the trade. But if
ATR is only 10 cents, then that trading range is not
attractive for me.