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Day Trading For Dummies, 3rd Edition

Book Description

In an ever-changing market, get the advantage of trading for yourself

Day trading is undoubtedly the most exciting way to make your own money. Before you begin, you need three things: patience, nerves of steel, and a well-thumbed copy of Day Trading For Dummies.

This plain-English guide shows you how day trading works, identifies its all-too-numerous pitfalls, and gets you started with an action plan. From classic and renegade strategies to the nitty-gritty of daily trading practices, it gives you the knowledge and confidence you'll need to keep a cool head, manage risk, and make decisions instantly as you buy and sell your positions.

  • Expanded coverage of day trading resources and sites available

  • Help choosing an online broker in the current market

  • New trading products

  • Updated information on SEC rules and regulations (and tax laws)

  • New investment options

  • Updated examples that reflect current market and economic conditions

  • Read Day Trading For Dummies and get the tips, guidance, and solid foundation you need to succeed in this thrilling, lucrative, and rewarding career!

    Table of Contents

      1. Introduction
        1. About This Book
        2. Foolish Assumptions
        3. Icons Used in This Book
        4. Beyond the Book
        5. Where to Go from Here
      2. Part I: Getting Started with Day Trading
        1. Chapter 1: So You Want to Be a Day Trader
          1. It's All in a Day's Work: Defining Day Trading
            1. Speculating, not hedging
            2. Understanding zero-sum markets
            3. Being disciplined: Closing out each night
          2. Committing to Trading As a Business
            1. Trading part-time: An okay idea if done right
            2. Trading as a hobby: A bad idea
          3. Defining the Principles of Successful Day Trading
            1. Working with a small number of assets
            2. Managing your positions
            3. Focusing your attention
          4. Identifying the Personality Traits of Successful Day Traders
            1. Independence
            2. Quick-wittedness
            3. Decisiveness
          5. Seeing What Day Trading Is Not
            1. It's not investing
            2. It's not gambling
            3. It's not dangerous — if you use risk capital
            4. It's not easy
          6. Looking at Success Rates
        2. Chapter 2: Planning to Succeed As a Day Trader
          1. Planning Your Trading Business
            1. Setting your goals
            2. Finding volatility
            3. Fixing hours, vacation, and sick leave
            4. Getting yourself set up
            5. Investing in your business
            6. Evaluating and revising your plan
          2. Planning Your Trades
            1. What do you want to trade?
            2. How do you want to trade?
            3. Figuring out when to buy and when to sell
            4. Setting profit goals
            5. Setting limits on your trades
            6. What if the trade goes wrong?
          3. Closing Out Your Position
            1. Swing trading: Holding for days
            2. Position trading: Holding for weeks
            3. Investing: Holding for months or years
          4. Maxims and Clichés That Guide and Mislead Traders
            1. Pigs get fat, hogs get slaughtered
            2. In a bear market, the money returns to its rightful owners
            3. The trend is your friend
            4. Buy the rumor, sell the news
            5. Cut your losses and ride your winners
            6. You're only as good as your last trade
            7. If you don't know who you are, Wall Street is an expensive place to find out
        3. Chapter 3: Deciding What to Trade and How to Trade It
          1. Defining a Good Day-Trading Asset
            1. Looking for liquidity
            2. Homing in on high volatility
            3. Staying within your budget
            4. Making sure you can use margin
          2. Trading Types of Securities
            1. Stocks
            2. Bonds
            3. Exchange-traded funds (ETFs)
          3. Cashing In with Currency, the Big Kahuna
            1. How currency trades
            2. Where currency trades
          4. Considering Commodities and How They Trade
          5. Dealing in Derivatives
            1. Getting to know types of derivatives
            2. Buying and selling derivatives
        4. Chapter 4: Defining Trading: Risk, Reward, and T iming
          1. Understanding Risk and Return
            1. What is risk, anyway?
            2. Getting rewarded for the risk you take
            3. Market efficiency in the real world
          2. Differentiating Trading, Investing, and Gambling
            1. Investing is slow and steady
            2. Trading works fast
            3. Gambling is nothing more than luck
          3. Managing the Risks of Day Trading
            1. It's your business
            2. It's your life
        5. Chapter 5: Regulation and the Modern Trader
          1. Looking Back on the Road to Regulations
          2. Reviewing the Regulators
            1. Stock and corporate bond market regulation
            2. Treasury bond market regulation
            3. Derivatives market regulation
            4. Foreign exchange (forex) regulation
          3. Working with Brokers’ Rules
            1. Gauging suitability
            2. Making sure the money is legit
            3. Following special rules for pattern day traders
            4. Reporting taxes
          4. Watching Out for Insider Trading
          5. Preparing for Rule Changes in Crisis Conditions
          6. Taking on Partners
      3. Part II: Exploring Popular Day-Trading Strategies
        1. Chapter 6: Managing Your Money and Positions
          1. Setting Your Earnings Expectations
            1. Finding your expected return
            2. Determining your probability of ruin
          2. Gaining Advantage with a Money-Management Plan
            1. Minimizing damage while increasing opportunity
            2. Staying in the market longer
            3. Getting out before you lose everything
            4. Accounting for opportunity costs
          3. Examining Styles of Money Management
            1. Limiting portions: Fixed fractional
            2. Protecting profits: Fixed ratio
            3. Sticking to 10 percent: Gann
            4. Finding the ideal percentage: Kelly Criterion
            5. Doubling down: Martingale
            6. Letting a program guide you: Monte Carlo simulation
            7. Considering past performance: Optimal F
          4. Seeing How Money Management Affects Your Return
          5. Planning for Your Profits
            1. Compounding interest
            2. Pyramiding power
            3. Making regular withdrawals
        2. Chapter 7: Technical Analysis 101
          1. Comparing Research Techniques Used in Day Trading
            1. What direction is your research?
            2. Fundamental research
            3. Technical analysis
          2. Using Technical Analysis
            1. First things first: Should you follow a trend or deviate from it?
            2. Finding trends
            3. Those ever-changing trends
          3. Reading the Charts
            1. Wave your pennants and flags
            2. Not just for the shower: Head and shoulders
            3. Drink from a cup and handle
            4. Mind the gap
            5. Grab your pitchforks!
          4. Considering Different Approaches to Technical Analysis
            1. Dow Theory
            2. Fibonacci numbers and the Elliott Wave
            3. Japanese candlestick charting
            4. The Gann system
          5. Avoiding Technical-Analysis Pitfalls
            1. If it's obvious, there's no opportunity
            2. Overanalyzing the data
            3. Success may be the result of an upward bias
        3. Chapter 8: Following Market Indicators and Tried-and-True Day-Trading Strategies
          1. Psyching Out the Markets
            1. Betting on the buy side
            2. Avoiding the projection trap
          2. Taking the Temperature of the Market
            1. Pinpointing with price indicators
            2. Volume
            3. Volatility, crisis, and opportunity
          3. Measuring Money Flows
            1. Accumulation/distribution index
            2. Money-flow ratio and money-flow index
            3. Short interest ratios
          4. Considering Information That Crops Up during the Trading Day
            1. Price, time, and sales
            2. Order book
            3. Quote stuffing
            4. News flows
          5. Identifying Anomalies and Traps
            1. Bear traps and bull traps
            2. Calendar effects
          6. Building on Some Standard Strategies
            1. Range trading
            2. Contrarian trading
            3. News trading
            4. Pairs trading
          7. Developing a Program
        4. Chapter 9: Increasing Risk and Potential Return with Short Selling and Leverage
          1. The Magic of Margin
            1. Making margin agreements
            2. Understanding the costs and fees of margin
            3. Managing margin calls
            4. Enjoying margin bargains for day traders
          2. The Switch-Up of Short Selling
            1. Selling short
            2. Choosing shorts
            3. Losing your shorts?
          3. Leveraging All Kinds of Accounts
            1. In stock and bond markets
            2. In options markets
            3. In futures trading
            4. In foreign exchange
          4. Borrowing in Your Trading Business
            1. Taking margin loans for cash flow
            2. Borrowing for trading capital
            3. The costs of free riding
          5. Assessing Risks and Returns from Short Selling and Leverage
            1. Losing your money
            2. Losing your nerve
        5. Chapter 10: Looking for Easy Profits: Navigating the Tricky World of Arbitrage and High-Frequency Trading
          1. Arbitrage and the Law of One Price
            1. Understanding how arbitrage and market efficiency interact
            2. Taking advantage of price discrepancies
            3. Reducing arbitrage opportunities: High-frequency trading
          2. Scalping, the Dangerous Game
          3. Those Pesky Transaction Costs
          4. Risk Arbitrage and Its Tools
            1. Arbitrating derivatives
            2. Levering with leverage
            3. Short selling
            4. Creating synthetic securities
          5. Arbitrage Strategies for Day Traders
            1. Convertible arbitrage
            2. ETF arbitrage
            3. Fixed income and interest-rate arbitrage
            4. Index arbitrage
            5. Merger arbitrage
            6. Option arbitrage
        6. Chapter 11: All About Accounts
          1. Choosing a Brokerage
            1. Getting proper pricing
            2. Evaluating types of platform
            3. Opening an account
          2. Brokers for Day Traders
            1. Brokers for stocks and a bit of the rest
            2. Brokers for options and futures
            3. Brokers for foreign exchange
      4. Part III: Necessities and Niceties for Successful Day Trading
        1. Chapter 12: Equipping to Day Trade
          1. Setting Up Your Trading Laboratory
            1. Where to sit, where to work
            2. Counting on your computer
            3. Seeing it on the big screen
            4. Connecting to the Internet
            5. Staying virus- and hacker-free
            6. The department of redundancy department: Backing up your systems
          2. Getting Mobile with the Markets
        2. Chapter 13: Researching Research Services
          1. The Trade of Trading
            1. Enjoying freebies from the exchanges and the regulators
            2. Hitting the road for conferences
            3. Taking training classes
          2. Getting the Research You Need
            1. (Price) Quote me on that
            2. Charting your strategy
            3. News, newsletters, gurus, and strategic advice
          3. Doing Your Due Diligence
            1. Where to start your research
            2. Questions to ask
        3. Chapter 14: Stress Management in the Trading Day
          1. Heeding Tales of Those Who Failed
            1. Jesse Livermore
            2. Steve Perkins
            3. Knight Capital
          2. Controlling Your Emotions
            1. Dealing with destructive emotions
            2. Having an outlet
            3. Setting up support systems
            4. Watching your walk-away money
          3. Managing Stress with Your Trading Plan
            1. Avoiding problems following your plan
            2. Revising and troubleshooting your trading plan
        4. Chapter 15: Taxes for Traders
          1. Getting the Lay of the Land: What You Need to Know Based on What You Trade
            1. Commodities and futures
            2. Currency trading
            3. Options
            4. Stock trading
          2. Hiring a Tax Adviser
            1. The many flavors of tax experts
            2. Questions to ask a prospective adviser
          3. Doing Your Taxes Yourself
            1. Finding out everything you want to know
            2. Making it easier with tax-preparation software
          4. Income Categories You Need to Know
            1. Earned income
            2. Investment income
            3. Capital gains and losses
            4. Miscellaneous income
          5. Tracking Your Investment Expenses
            1. Qualified and deductible expenses
            2. What you can't deduct
            3. Naturally, there are limitations!
          6. Top Secret Tax Information for IRS-Qualified Traders Only
            1. Mark-to-market accounting
            2. Greater deductibility of business expenses
          7. Other Important Tax Info: Forms and Deadlines
            1. Using the right tax forms
            2. Paying all year: The joy of estimated taxes
          8. Using Self-Directed IRAs
        5. Chapter 16: But Did You Make Money? Testing, Tracking, and Evaluating Performance
          1. Before You Trade: Testing Your System
            1. Backtesting
            2. Simulation trading
            3. Backtesting and simulation software
          2. During the Day: Tracking Your Trades
            1. Setting up your spreadsheet
            2. Pulling everything into a profit and loss statement
            3. Keeping a trading diary
          3. After You Trade: Calculating Overall Performance
            1. Reviewing types of return
            2. Calculating returns
            3. Determining the risk to your return
            4. Using benchmarks to evaluate your performance
        6. Chapter 17: Day Trading for Investors
          1. What Investors Can Learn from Traders
            1. Being disciplined
            2. Dealing with breaking news and breaking markets
            3. Setting targets and limits
            4. Judging execution quality
          2. Applying Momentum
            1. Earnings momentum
            2. Price momentum
            3. For investors only: Momentum-research systems
          3. When an Investor Considers Trading
            1. The idea has a short shelf life
            2. Your research shows you some trading opportunities
            3. You see some great short opportunities
      5. Part IV: The Part of Tens
        1. Chapter 18: Ten Good Reasons to Day Trade
          1. You Love Being Independent
          2. You Want to Work Anywhere You Like
          3. You're Comfortable with Technology
          4. You Want to Eat What You Kill
          5. You Love the Markets
          6. You Have Market Experience
          7. You've Studied Trading Systems and Know What Works for You
          8. You Are Decisive and Persistent
          9. You Can Afford to Lose Money
          10. You Have a Support System
        2. Chapter 19: Ten or So Good Reasons to Avoid Day Trading
          1. You Want to Learn Investing by Day Trading
          2. You Love Fundamental Research
          3. You're Short on Time and Capital
          4. You Like Working As Part of a Group
          5. You Can't Be Bothered with the Details of Running a Business
          6. You Crave Excitement
          7. You're Impulsive
          8. You Love Going to the Casino
          9. You Have Trouble Setting Boundaries
          10. You Want to Get Rich Quick
          11. The Guy on the Infomercial Said It Would Work
        3. Chapter 20: Ten Common Day-Trading Mistakes
          1. Starting with Unrealistic Expectations
          2. Starting without a Business and Trading Plan
          3. Ignoring Cash Management
          4. Failing to Manage Risk
          5. Not Committing the Time and Money to Do It Right
          6. Chasing the Herd
          7. Switching between Research Systems
          8. Overtrading
          9. Sticking Too Long with Losing Trades
          10. Getting Too Emotionally Involved
        4. Chapter 21: Ten Tested Money-Management Techniques
          1. Taking Money off the Table
          2. Using Stops
          3. Applying Gann's 10 Percent Rule
          4. Limiting Your Losses with the Fixed Fractional System
          5. Increasing Returns with the Fixed-Ratio System
          6. Following the Kelly Criterion Formula
          7. Figuring the Amount to Trade with Optimal F
          8. Measuring Risk and Sizing Trades with Monte Carlo Simulation
          9. Taking a Risk with the Martingale System
          10. Throwing It to the Fates
      6. Appendix: Additional Resources for Day Traders
        1. Great Books for Great Trading
          1. Basic trading guides
          2. Technical analysis guides
          3. Schools of price theory
          4. Trading psychology
          5. History and memoir
        2. The Trader's Internet
        3. Other Mainstream Media
      7. About the Author
      8. Cheat Sheet
      9. More Dummies Products