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How to Start Day Trading?

Many people would like to learn trading, but often don’t know where to start, or they start by making some very dangerous mistakes.

Some new traders start with the wrong trading platform: a software or platform that does not support Hotkeys or that does not have access to real time NASDAQ data. They cannot get in and out of trades quickly and they lose money, and wonder how experienced traders can be trading so fast.

Many new traders use platforms or brokers that do not offer them important trading indicators such as the Volume Weighted Average Price or VWAP. They lose their money because they cannot analyze the market properly during the day…

Some traders start trading alone in their home office and do not seek any support from a mentor or a community of like-minded traders. They do not know where to ask their questions. The emotional pressure of trading will overwhelm them and eventually they are forced to give up their dream.

Often people start trading with real money from day 1, without any previous practice in simulators. They take a bad loss and lose all of their hard-earned family savings. They take a large position on a very volatile stock and blow up their account (meaning lose it all), because they did not practice proper entry, stop loss, and position sizing in a simulator. They have to say good-bye to trading before they even have a chance to grasp its potential.

I personally lost thousands of dollars because of a lack of these: a systematic education, practice in a simulator and the support of a like-minded community at the beginning of my trading career. One of the reasons I launched BearBullTraders is to help you not to suffer the same brutal experiences that I did.

Remember: There is more than one way to learn trading, and there is definitely more than one correct way. The following is my suggested approach for starting a career in day trading. You may of course find different correct ways to learn trading from others.

Education

  • What to Expect from Day Trading?
  • How to Set Up Day Trading as a Business
  • Learn Important Day Trading Strategies

Trade in a Simulator

  • Become Familiar with Your Platform
  • Practice Execution of Trades with Hotkeys
  • Learn Money and Risk Management

Join a Community of Traders

  • Learn from Experienced Traders
  • Ask Your Questions While Learning
  • Learn my If-Then Statements for Each Trade

Trade with Real Money

  • Start with Small Size: 100 shares
  • Beware of Feelings and Emotions
  • Slowly Increase Your Share Size

Education

Below are some of the strategies I use every day in our chatroom

ABCD Pattern
The ABCD Pattern starts with a strong upward move. Buyers are aggressively buying a stock from point A and making constantly new highs of the day (point B). You want to enter the trade, but you should not chase the trade, because at point B it is very extended and already at a high price. In addition, you cannot say where your stop loss should be. You must never enter a trade without knowing where your stop is. At point B, traders who bought the stock earlier start slowly selling it for profit and the price comes down. You should still not enter the trade because you do not know where the bottom of this pull back will be. However, if you see that the price does not come down from a certain level, such as point C, it means that the stock has found a potential support. Therefore, you can plan your trade and set up stops and a profit taking point. The above screenshot is of Ocean Power Technologies Inc. (ticker: OPTT) at July 22, 2016, when they announced that they had a new $50 million contract to build a new ship (there’s a fundamental catalyst!). The stock surged up from $7.70 (A) to $9.40 (B) at around 9:40 a.m. I, along with many other traders who missed the first push higher, waited for point B and then a confirmation that the stock wasn’t going to go lower than a certain price (point C). When I saw that point C was holding as a support and that buyers would not let the stock price go any lower than $8.10 (C), I bought 1,000 shares of OPTT near C, with my stop being a break below point C. I knew that when the price went higher, closer to B, buyers would jump on massively. As I mentioned before, the ABCD Pattern is a very classic strategy and many retail traders look for it. Close to point D, the volume suddenly spiked, which meant that many more traders were jumping into the trade.
Bull Flag
This pattern 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 starts 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.
Bottom Reversal
A Bottom Reversal Strategy has four important elements: 1. At least five candlesticks on a 5-minute chart moving downward. 2. The stock will have an extreme 5-minute RSI indicator (Relative Strength Index). An RSI above 90 or below 10 will pique my interest. These two elements demonstrate that a stock is really stretched out, and you must pay close attention to your scanner for all of these data points. I have configured my scanner to highlight RSIs lower than 20 and higher than 80 so I can very quickly recognize them. You must simultaneously look for a certain RSI level and a certain number of consecutive candles. 3. The stock is being traded at or near an important intraday support or resistance level. 4. When the trend is coming to an end, usually indecision candles, such as a spinning top or Doji, form. That is when you need to be ready. 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.
Top Reversal
A Top Reversal is similar to a Bottom Reversal, but on a short selling side. To summarize my trading strategy for the Top Reversal Strategy: 1. I set up a scanner to highlight stocks with four or more consecutive candlesticks moving upward. When I see the stock hit my scanner, I quickly review the volume and daily level of support or resistance near the stock to see if it will be a good trade or not. 2. I wait for confirmation of a Top Reversal Strategy: (1) formation of a bearish Doji or indecision candle or, instead, a very bearish candlestick, (2) the stock is being traded at or near a significant resistance level at high volume, and (3) the RSI must be higher than 90. 3. When I see the stock make a new 5-minute low, I consider this as a sign of weakness. I start short selling the stock if I have shares available to short. 4. My stop will be the high of the previous candlestick or simply the high of the day. 5. My profit target is either (1) the next level of support, or (2) VWAP or 9 EMA or 20 EMA moving averages (whichever is closer), or (3) when the stock makes a new 5-minute high, which means the buyers are once again gaining control and the sellers are exhausted.
Moving Average Trend Trading
Some traders use moving averages as potential entry and exit points for day trading. Many stocks will start an upside or downside trend after the morning session (around 11 a.m. New York time) and you will see their moving averages in 1-minute and 5-minute charts as a type of moving support or resistance line. Traders can benefit from this behavior and ride the trend along the moving average (on top of the moving average for going long or below the moving average for short selling). Let’s take a look at this chart for Direxion Daily Gold Miners Bull 3x Shrs ETF (ticker: NUGT) to see how you could trade based on 9 EMA on a 1-minute chart. As you can see, at 15:06 p.m. I noticed NUGT had formed a Bull Flag. I saw that a consolidation period was happening on top of 9 EMA. As soon as I saw that 9 EMA was holding as the support, I jumped on the trade and rode the trend until the price broke the moving average at 15:21 p.m. I’ve marked my entry and exit points on the chart. Moving Average Trends can happen in any intraday time frame. I monitor prices on both 1-minute and 5-minute charts and make my trades based only on these two time frames.
VWAP Trading

Volume Weighted Average Price, or VWAP, is the most important technical indicator for day traders. Definitions of VWAP can be found in both Wikipedia and many other online resources. I will skip explaining it in detail for the sake of keeping this guide short, but essentially, VWAP is a moving average that takes into account the volumes of the shares being traded at any price. Other moving averages are calculated based only on the price of the stock on the chart, but VWAP also considers the number of shares in that stock that are being traded on every price. Your trading platform should have VWAP built into it and you can use it without changing any of its default settings. VWAP is an indicator of who is in control of the price action – the buyers or the sellers. When stock is traded above the VWAP, it means that the buyers are in overall control of the price and there is a buying demand on the stock. When a stock price breaks below the VWAP, it is safe to assume that the sellers are gaining control over the price action. To summarize my trading strategy for VWAP trading:

1. When I make my watchlist for the day, I monitor the price action around VWAP at the Open. If a stock shows respect toward VWAP, then I wait until a confirmation of the VWAP break (for short selling) or VWAP support (for going long).

2. I usually buy as close as possible to VWAP to minimize my risk. My stop will be a break and a close 5-minute close below VWAP. For short selling, I short near VWAP with a stop loss of a close above the VWAP.

3. I keep the trade until I hit my profit target or until I reach a new support or resistance level.

4. I usually sell half-positions near the profit target or support or resistance level and move my stop up to my entry point or break-even.

Support or Resistance Trading
To summarize my trading strategy for support or resistance trading: 1. Each morning, after I make my watchlist for the day, I quickly look at the daily charts for that watchlist and find the areas of support or resistance. 2. I monitor the price action around those areas on a 5-minute chart. If an indecision candle forms around that area, that is the confirmation of that level and I enter the trade. I usually buy as close as possible to the support level to minimize my risk. Stop will be a break and a close of a 5-minute candlestick under the support level. 3. I will take profit near the next support or resistance level. 4. I keep the trade open until I hit my profit target or I reach a new support or resistance level. 5. I usually sell half-positions near the profit target or support or resistance level and move my stop up to my entry point for break-even. 6. If there are no next obvious support or resistance levels, I will consider closing my trade at or near half-dollar or round-dollar levels. A similar approach will also work when you sell short a stock below a resistance level.
Red-to-Green Trading
Red-to-Green is another easy to recognize trading strategy. One of the indicators I have on my chart is the previous day close level. The previous day close is a powerful level of support or resistance and traders should trade toward it when there is rising volume. 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. A similar approach will work equally as well when you short a stock for a Green-to-Red Strategy.
Opening Range Breakouts
Another well-known trading strategy is the so-called Opening Range Breakout (ORB). This strategy signals an entry point, but does not determine the profit target. You should define the best profit target based on other technical levels. Later on, you will notice that I list further possible profit targets. The ORB is an entry signal only, but remember, a full trading strategy must define the proper entry, exit and stop loss. 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. 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. My strategy above was for a 5-minute ORB, but the same process will also work well for 15-minute or 30-minute opening range breakouts.

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