The Compleat Guide to Day Trading Stocks

"The fact is that there are no magical methods or secret weapons for beating the markets. If you seek success as a day trader you'll have to make your money the good old-fashioned way-you'll have to do some work."
-Jake Bernstein The Compleat Guide to Day Trading Stocks

Jake Bernstein has been a trader, market analyst, and author for over 30 years. He understands what's necessary to beat the markets. Now, in The Compleat Guide to Day Trading Stocks, Bernstein applies his highly researched technical analysis and trading skills to today's fast-paced world of stock day trading.

The tools he teaches are impressive! Basic enough to help novice day traders learn the ropes-yet with enough detail for the most demanding market veterans-The Compleat Guide to Day Trading Stocks delivers techniques and strategies that include:

Categories of trading systems-trend-following, market patterns, breakouts, and more that are ideally structured for trading stocks
Practical considerations-starting capital, hard, ware, software, risk versus reward, and more
Easy-to-follow rules-modified from their use in the futures market-for trading price gaps
Historically back-tested ways to increase accuracy and sensitivity with moving average indicators-while overcoming MA limitations
Basic methodology and operational procedures for using one-hour breakouts (OHB) to day trade active stocks
Formulas and procedures for spotting "clean" signals using moving average convergence/ divergence (MACD)
Operational and objective rules for monitoring stocks-and spotting trading signals-via the momentum divergence method
Psychological aspects, including the dangers of forecasting and ways to recognize and break destructive trading habits

Jake Bernstein is experienced enough to know there is never one right answer for every trader or trading situation. To account for different trader temperaments, tastes, likes, and dislikes, The Compleat Guide to Day Trading Stocks provides a wide variety of stock day trading techniques and tools. The result is the first book to blend valuable and specific stock day trading rules and strategies into a single volume-one you can follow to create your own style and system, and carve out your own rewarding career as a stock day trader.

Contents

Preface xi
Acknowledgments xvii

Introduction

1. To Trade or Not to Trade 7

Don't Assume Day Trading Is as Easy as You've Heard 7
Facts to Consider 8

2. Let the Game Begin 12

A Brief History of Day Trading in Stocks 12
Preliminaries: Defining a Few Terms 13
The Lure of Day Trading 20
The Realities of Day Trading in Stocks 21
Day Trading in Stocks as an Offshoot of Day Trading in Futures 22
How S&P 500 Futures Helped Create the Stock Day-Trading Frenzy 23
Why the Day-Trading Game Continues 24
Yesterday and Today 25
A Basic Overview of Day-Trading Goals and Objectives 25
An Overview of Day-Trading Mechanics 26
Advanced Computer Hardware and Software Technology 28
Electronic Trading and Its Influence on Day Trading 29
How Commission Costs Have Affected Day Trading 29
The Internet as a Tool for Day Traders 30
The Future of Day Trading in Stocks 30
Summary 31

3. Big Movers, Big Winners, Big Losers 32

Who Benefits and Who Loses from Large Moves in Stocks? 32
Large Moves in High-Priced Stocks 34
Small Moves in Low-Priced Stocks 35
Examining the Profit Potential 35
Evaluating the Risks 36
The Reality of Risks and Rewards 37
How Long Will It Take? 37
What Causes Large Intraday Price Swings in Stocks? 38
The Good News and the Bad News About Trend-Following Systems and Methods 39
Fundamental Versus Technical Analysis 43
The Focus of This Book 50
Summary 54

4. The Technical Approach: Timing Indicators, Systems, and Methods 55

Timing Indicators, Systems, and Methods 56
An Examination of Basic Timing Indicators and Their Applicability to the Day Time Frame 60
Moving Average (MA) Indicators: Traditional and Advanced 61
Variations on the Theme of Moving Averages 63
Stochastic Indicator (SI) and Relative Strength Index (RSI) 64
Chart Patterns and Formations 66
Parabolic Indicator 67
Directional Movement Indicator (DMI) and Average Directional Movement Index (ADX) 69
Momentum/Rate of Change (ROC) 70
Accumulation Distribution and Its Derivative 72
Other Technical Indicators 77
Elements of an Effective Stock Trading System 80
Support and Resistance Concepts 80
Summary 83

5. Gap Methods for Day Trading 84

What Does a Gap Look Like? 84
Simplicity and the Gap Trade 85
What Causes Gaps? 86
Origin of the Gap Trade 88
How a Basic Gap Buy Signal Is Established 90
A Few More Details 91
Results and Expectations 91
Other Variables of the Gap Trade 92
The Best Gap Trades 97
Pragmatic Considerations in Trading Gaps 97
Period of Gap Comparisons-Multiple-Day Gap Signals 98
Intraday Follow-up of Gap Trends 101
Summary 105

6. Intraday Application of Stochastics 107

Stochastics: Basic Explanation 107
The Basic Stochastic Indicator 108
Intraday Stochastic Pop: Definition 112
Hit-and-Run Trading Using the SP 116
Summary 118

7. The Open Versus Close Oscillator 119

Oscillator Defined 119
Opens Versus Closes 122
Construction of the O/C for Day Trading in Stocks 129
Summary 132

8. One-Hour Breakout (OHB) 133

Basic OHB Signals and Parameters 133
Tips and Suggestions for Using the OHB 137
Summary 137

9. Computerized Short-Term Trading with Support and Resistance 138

The Traditional Method 139
The 3/3 High/Low Channel 142
Summary 147

10. Grabbing Small but Consistent Intraday Moves with the MAC 148

The Intraday MAC Method 151
Capturing the Small Moves with Surgical Timing 152
Summary 154

11. Day Trading with the MACD 133

Calculations and Formulae 156
Using the MACD 160
Summary 160

12. Developing Your Own System(s) 161

A Rational Approach to System Development 162
How to Develop Your Own Stock Day-Trading Systems Using State-of-the-Art Software 163
The Do's and Don'ts of Day-Trading System Development 165
Categories of Systems 165
Why Test Trading Systems? 172
Optimization: The Assets and Liabilities 175
Summary 176

13. Momentum Divergence 177

Spotting Divergence 178
Importance of Exiting at the End of the Day 183
Beyond the Day Time Frame 185
Trading for a Profit Target 187
Stop Loss 188
Summary 189

14. Practical Considerations of Stock Day Trading 190

Starting Capital 190
Brokerage Account 191
Computer Hardware and Software 191
Live Quotes 192
Media 192
Time 192
Risk 193
What Stocks to Day Trade 193
Margin and Margin Calls 194
Summary 194

15. The Psychology of Day Trading 195

The Dangers of Forecasting 195
Fallen Heroes 197
How to Break Destructive Trading Habits 198

16. Putting Your Knowledge into Action 200

At the Push of a Button 200
In Conclusion 201

Glossary of Day-Trading Terms 203