I was betwen jobs in 2015 and decided to take a Day Trading course. The focus of the course was to teach you how to trade E-Mini S&P 500 futures which are the most liquid futures in the stock market. While I attended the training and opened and funded my margin account with $5,000, I never actually risked any actual money. Instead, I "paper traded" in a simulator with actual stock market pricing in real-time.
One point of the S&P 500 futures (symbol ES00) is worth $50. You decide if you think the market is going to go up (long) or down (short) and either buy a point for $50 (long) or sell a point for $50 (short). If you bought an ES point and the S&P 500 goes up 10 points, when you sell your ES point you will receive $500. If the S&P 500 instead goes down 10 points, when you sell your ES point, you will need to pay an additonal $450 on top of the $50 you already paid. Conversely, if you sell an ES point (going short) and the S&P 500 goes down 10 points, you will make $500. If you go short and the market goes up 10 points, you will lose an additional $450. Most day traders cash out at the end of the day because the market gaps up or down each morning. Say you were going long and some big news story happened over night that causes the S&P 500 to go down 100 points. In this case, you will lose $5,000 which is all of the money in your margin account and you will be left broke.
I attended real-time trading sessions over the Internet where we monitored the 3-minute candlestick chart for ES00. At the end of each bar, the instructor would talk about the shape of the bar and whether or not we should take action and whether or not we should go long, short or sit tight. Occasionally the instructor would be correct with their prediction, and many times the instructor would be non commital, and sometimes the instructor was wrong. At the end of the day, I felt very stressed knowing that one bad trade could wipe out my margin account. I felt like the amount of money required to be on deposit in the margin account could have been used to simply buy shares in the S&P 500 directly and I wouldn't need to worry about blowing up my margin account. Needless to say, I decided that day trading was not for me.
The day trading course was not a total loss however, I did learn some things.
- Closet index - A portfolio of more than 15-20 stocks returns about the same as the index it represents. In order to outperform the index, you need to pick the winners from the index ahead of time.
- Gaps - The market gaps up or down every morning from the previous day's close. This means the market opens at a different price than it closed at on the previous trading day. The only way to profit from a gap is to be invested long when the market goes up, or invested short when the market goes down. The most volatile time of the trading day is the first and last half hours the market is open. If the market moves against you, it is very easy to lose large sums of money day trading. Day traders are typically in cash at the end of the day and thus can't take advantage of markets gapping up or down. Day traders can catch the gap by not selling their position at the end of the day, however it is extremely risky.
- Long / Short - Money can be made when the market goes up with a long position. Money can be made when the market goes down with a short position.
- Key Times - The price action of the first hour of trading generally determines the outcome for the rest of the day. Daily trend reversals tend to happen at these times: 10:30am 2pm 3pm (+/- 15 minutes) Lunch time is usually the least volitile time of the day.
- Days to Avoid - Avoid day trading on days where big announcements are being made. Do your homework before the market opens.
- Sizing - Size your trade with 2% of your account balance and adjust for the amount of risk you are taking. You can't win all of your trades, so you must not bet the farm and risk losing everything.
- Stop Loss - Always set a stop loss order to prevent excess loss when the market goes down. Beware of stop loss orders because institutional traders may "run your stops" by selling a large position in your investment. Investing in ES futures (S&P 500) is safer because it is much harder for an institutional trader to manipulate the price of the S&P 500.
- Technical indicators - There are a slew of technical indicators that signal what may happen next in the market. (price, volume, pivot points, simple moving average, exponential moving average, Keltner channels, Fibonacci retracements, Sharpe ratio, Bollinger bands, MACD, etc.)
- Pivot Point - The pivot point of a security can be used to determine support and resistance for a security. Prices are based on previous trading day.
pivot point = high + low + close
- Support & Resistance - Securities tend to trade in a range with a support price at the bottom and a resistance price at the top. When the security breaks lower or higher a new trend is forming.
- Trends - Beginning day traders should avoid trying to pick bottoms and tops for entry / exit points. Instead, trade in the direction of the intraday trend. The trend is your friend.
- NYSE TICK Index - The New York Stock Exchange has a TICK index that measures the number of stocks that are increasing in price minus the number of stocks that are decreasing in price. This can be used to gauge overall market sentiment at a point in time.
- Candlestick price patterns - Stock price data points on a candlestick chart form a bar that looks like a candle with a wick. The four pieces of data that form each bar are high, low, open and close for the time period of the chart, which could be 1, 3, 5, 15, 30, etc. minutes. Some bars are bullish / bearish inside vertical bars, outside vertical bars or haramis. These price patterns indicate demand for a security and can be used with other indicators like the current trend, support levels and pivot points to predict where price may move next.
- Consolidation - When the market is moving sideways, the trading range will typically become smaller before the market breaks out strong either up or down.
- Emotions - There is a psychological component to trading. Base your trades on data and pre-define where you will sell a security before you buy it. (stop loss + upper limit)
- Strategies - While strategies for day trading are based on 3, 5 or 30 minute candlestick charts, they also apply to longer time frames like 1, 3, 6 week / month charts to capture longer term trends.
This list isn't intended to teach you how to day trade, it is intended to give you a high level overview and a starting point for concepts to research. I am thinking about applying these concepts to longer term trends to see if it will help me make better trades.