Successful Day Trading

Successful Day Trading Christopher M. Quigley B.Sc., M.M.I.I. Grad., M.A.

Judging from the contents of an increasing number of emails more and more investors inve stors are choosing to "actively" trade the market rather than simply "buy and hold" it. In the main, this is due to the fact that in a bear market the latter strategy creates losses that are d ifficult to accept long term. However another reason is that smart investors are realising the potential for "income generation" rather than capital gain from their investments. inv estments. Accordingly I set out below some parameters to help h elp these new "traders" avoid the worse pitfalls and hopefully guide them towards the mind-set required for long term success. (This article has some notes from earlier publications for ease of reference).

1. Start. Markets are rational. The best theory to gain this insight is Dow Theory (see note 1). Learn everything you can about Hamilton's and Dow's perceptions and make it part of your investment "macro-view". 2. Due to the growing complexity in financial reporting and the opportunity for abuse therein, with its concomitant risk, it may be advisable to trade through exchange traded funds (ETF') or Contracts for Difference (CFD's). These funds trade like stocks but offer exposure to equity sectors, commodities, currencies and interest rates. Thus you h ave better opportunity for diversification with less risk. (If you do not understand CFD's see not e 2 below). 3. When you enter a position know beforehand your exit point. Always place a sell stop thus limiting your potential loss. 4.

As your profits rise adjust your sell stop upwards thus locking in your profits.

5.

A trading platform offering discount commissions is absolutely vital.

6. Technical analysis data is vital to judge your entry and exit points. Get a good system that offers "real time" streaming providing one minute, five minute, ten minute and one hour ticker readings in addition to the regular daily dail y timelines. I prefer the five minute screen for active da y trading. 7. Using too many technical indicators creates "paralysis by analysis". Get to know the indicators that work for you and stick to them. Consistency will bring greater reward. I like MACD (moving average convergence divergence, 10 and 20 DMA's (daily moving averages) and purchase volume. For price p rice I use the candlestick format rather than the simple line as it gives more information on the market psychology of actual price movement. (See note 3 below).

8. You must adopt a trading strategy. If you do not have one find one. If you are new to trading use the many simulation packages available online to test and retest your knowledge knowled ge and approach. Do not start to spend a major part of your capital until you have proven to yourself that you can consistently make good investment decisions in real time. It is better to be losing time rather than time and money. For me the best strategy to successfully day trade is a  Momentum Strategy . This strategy highlights only top Growth Stocks with high Price Earnings Ratios . A good BUY indicator is a BULLISH ENGULFING  candlestick moving up through a significant DMA on high volume. ideally with a MACD changing from negative to positive. A good SELL indicator is a BEARISH ENGULFING  candlestick moving down through a significant DMA, ideally with MACD moving from positive to negative. 9. The holy grail of trading is patience . If you do not have a trade that has a good  probability to work profitably for you the best place to be is in cash. This is hard to learn but is absolutely essential. 10. If you think trading is gambling you have missed the point and need to be re-educated. Go back to start and get your thinking rational. ----------------------------------------------------------------------------------------------------------------Read Christopher M. Quigley’s decade of published essays on Trading & Investment at MarketOracle.Co.UK.

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-----------------------------------------------------------------------------------------------------------------Day Trading Strategies Taught At Wealthbuilder.ie: --------------------------------------------------------------------------1.

Straddle Trade.

2.

Wall Street & German DAX: Interactive Arbitrage/Confirmati Arbitrage/Confirmation on Trade. (Charts: Wall St./DAX: 3 min/60 min/24 hour).

3.

Momentum Trade. A. Price Consolidation Break B. Moving Average & Bullish Engulfing Cross C. Moving Average & Bearish Engulfing Cross D. VIX/McClennan Oscillator Trend Confirmation

4.

Swing/Continuation Trade. Price Action Formation Patterns.

A. B. C. D.

Triangle/Wedge Flag/Pennant Double Top/Bottom Head & Shoulders

5.

Bollinger Band Volatility Squeeze Trade.

6.

Channel/Range (Slow Stochastic)Trade.

7.

Candlestick Pattern/Scalp Trade. A. Hammer & Spinning Top B. Shooting Star &Hanging Man C. Doji D. Bullish Engulfing E. Bearish Engulfing

Wealthbuilder’s Day Trading Strategies Explained: -------------------------------------------------------------------------Straddle Trade. Straddle trades take advantage of major market moving news events. Once the trend is identified, following news release, the negative side of the trade is closed (or allowed stop out) and the positive side is allowed to run until a sell candlestick or consolidation t echnical trigger is received or profits are banked by personal preference. Arbitrage Trade The Arbitrage Trade seeks to activate trades t hat have a high probability of success by utilizing early bearish or  bullish movement on the Wall St DBT to trade the German DAX or vice versa. Momentum Trade. With the momentum strategy one aims to enter a strong trend and remain in the position as long as technicals are supportive. Swing/Continuation Pattern Trade. Flag/Pennant Formation. The objective of this strategy is to identify high probability swing or continuation pattern trades. The flag pattern forms what looks like a rectangle. The rectangle is formed by two parallel trend lines that act as support and resistance for the price until the price breaks out. In general, the flag will not be perfectly flat but will have its trend lines sloping. The pennant forms what looks like a symmetrical a symmetrical triangle, where triangle, where the support and

resistance trend lines converge towards each other . Swing/Continuation Pattern Trade. Descending Triangle Formation. The descending triangle is a bearish formation that usually forms during a downtrend as a continuation patt ern. No one can tell for sure how long it will last. There are instances when descending triangles form as reversal patterns at the end of an uptrend, but they are typically continuation patt erns. Regardless of where they form, descending triangles are bearish patterns that indicate distribution.

Bollinger Band Trade The Bollinger Band Squeeze occurs when volatility falls to low levels and the Bollinger Bands narrow. Periods of low volatility are often followed by periods of high volatility. Therefore, a volatility contraction or narrowing of the  bands can foreshadow a significant advance or decline. decline. Once the squeeze play is on, a subsequent band break signals the start of a new move. Channel/Range Trade. In the context of technical analysis, anal ysis, a channel/range is defined as the t he area between two parallel lines and is often taken as a measure of a trading range. The upper trend line connects price peaks (highs) or closes, and the lower trend line connects lows or closes. An example of a channel/range is shown below. Breakout below. Breakout points in channels indicate bullish (on upward trends) or bearish (on downward trends) signals. Candlestick Pattern Trade Formation: Hammer. Candlestick pattern trades seek to “scalp” profits through trading highly recognizable candlestick formats. The hammer pattern normally appears when a short term doen trend is about to change. The longer the length lengt h of the taper the better. Formation: Bullish Engulfing. Candlestick pattern trades seek to “scalp” profits through trading highly recognizable candlestick formats. The longer the candle with the bullish engulfing formation pattern the higher the probability that the bull trend it indicates will persist. Formation: Bearish Engulfing. Candlestick pattern trades seek to “scalp” profits through trading highly recognizable candlestick formats. The longer the candle with the bullish engulfing formation pattern the higher the probability that the bear trend it indicates will persist.

Formation: Shooting Star. Candlestick pattern trades seek to “scalp” profits through trading highly recognizable  candlestick formats. The shooting star pattern normally appears when a short term up-trend is about to change. The longer the length of the taper the better. Formation: Doji. Candlestick pattern trades seek to “scalp” profits through trading highly recognizable candlestick formats. The Doji pattern normally appears when there is complete indecision as to future trend. The next significant candle that appears normally indicates the future micro trend.

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Read Christopher M. Quigley’s decade of published essays on Trading & Investment at MarketOracle.Co.UK.

http://www.marketoracle.co.uk/UserInfo-Christopher_Quigley.html ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Note 1: Dow Theory

The Dow theory has been around for almost 100 years. Developed by Charles Dow and refined by William Hamilton, many of the ideas put forward by these two men have become axioms of Wall Street.

Background: Charles Dow developed the Dow theory from his analysis of market price action in the late 19th. Century. Until his death in 1902, Dow was part owner as well as editor of the Wall Street Journal. Even though Charles Dow is credited with initiating Dow theory, it was S.A. Nelson and William Hamilton who later refined the theory into what it is today. In 1932 Robert Rhea further refined the analysis. Rhea studied and deciphered some 252 editorials through which Dow and Hamilton conveyed their thoughts on the market.

Main Assumptions: 1.

Manipulation Manipulati on of the primary trend as not being possible is the primary assumption of the Dow

theory. Hamilton also believed that while individual stocks could be influenced it would be virtually impossible to manipulate the market as a whole.

2.

Averages discount everything. This assumption assumptio n means that the markets reflect all known

information. Everything there is to know is already reflected in the markets through price. Price represents the sum total of all the hopes, fears and expectations of all participants. The un-expected will occur, but usually this will affect the short-term trend. The primary trend will remain unaffected. Hamilton noted that sometimes the market would react negatively to good news. For Hamilton the reason was simple: the markets look ahead, this explains the old Wall Street axiom "buy on the rumour and sell on the news".

Even though the Dow Theory is not meant for short-term trading, it can still add value for traders. Thus no matter what your time frame, it always helps to be able to identify the primary trend. According to Hamilton those who successfully applied the Dow Theory rarely traded on too regular a basis. Hamilton and Dow were not concerned with the risks involved in getting exact tops and bottoms. Their main concern was catching large moves. They advised the close study of the markets on a daily basis, but they also sought to minimise the effects of random movements and recommended concentration on the primary trend.

Price Movement: Dow and Hamilton identified three types of price movement for the Dow Jones Industrial and Rail averages:

A.

Primary movements

B.

Secondary movements

C.

Daily fluctuations

A.

Primary moves last from a few months to many years and represent the broad underlying trend

of the market.

B.

Secondary or reaction movements last for a few weeks to many months and move counter to

the primary trend.

C.

Daily fluctuations fluctuation s can move with or against the primary trend and last from a few hours to a few

days, but usually not more than a week.

Primary movements, as mentioned, represent the broad underlying trend. These actions are typically referred to as BULL or BEAR trends. Bull means buying or positive trends and Bear means negative or selling trends. Once the primary trend has been identified, it will remain in effect until proven

otherwise. Hamilton believed that the length and the duration of the trend were largely undeterminable. undeterminable. Many traders and investors get hung up on price and time targets. The reality of the situation is that nobody knows where and when the primary trend will end.

The objective of Dow Theory is to utilize what we do know, not to haphazardly guess about what we do not. Through a set of guidelines. Dow Theory enables investors to identify the primary trend and invest accordingly. Trying to predict the length and duration of the trend is an exercise in futility.

Success according to Hamilton and Dow is measured by the ability to identify the primary trend and stay with it. Secondary movements run counter to the primary trend and are reactionary in nature. In a bull market a secondary move is considered a correction. In a bear market, secondary moves are sometimes called reaction rallies. Hamilton characterized secondary moves as a necessary phenomenon to combat excessive speculation. speculation. Corrections and counter moves kept speculators in check and added a healthy dose of guess work to market movements. Because of their complexity and deceptive nature, secondary movements movements require extra careful study and analysis. He discovered investors often mistake a secondary move as the beginning of a new primary trend.

Daily fluctuations, while important when viewed as a group, can be dangerous and unreliable individually. getting too too caught up in the movement of one or two d ays can lead to hasty decisions that are based on emotion. To invest successfully it is vitally important to keep the whole picture in mind

when analysing daily price movements. In general they agreed the study of daily price action can add valuable insight, but only when taken in greater context. context.

The Three Stages of Primary Bull Markets and Primary Bear Markets . Hamilton identified three stages to both primary bull and primary bear markets. The stages relate as much to the psychological state of the market as to the movement of prices.

Primary Bull Market Stage 1.

Accumulation Accumulatio n

Hamilton noted that the first stage of a bull market was largely indistinguishable from the last reaction rally in a bear market. Pessimism, Pessimism, which was excessive at the end of the bear market, still reigns at the beginning of a bull market. In the first stage of a bull market, stocks begin to find a bottom and quietly firm up. After the first leg peaks and starts to head down, the bears come out proclaiming that the bear market is not over. It is at this stage that careful analysis is warranted to determ determine ine if the decline is a secondary movement. If is a secondary move, then the low forms above the previous low,  a quiet period will ensue as the market firms and then an advance will begin. When the previous peak is surpassed, the beginning of the second leg and a primary bull will be confirmed.

Stage 2.

Movement With Strength

The second stage of a primary bull market is usually the longest, and sees the largest advance in prices. It is a period marked by improving business conditions and increased valuations in stocks. This is considered the easiest stage to make profit as participation participation is broad and the trend followers begin to participate.

Stage 3.

Excess

Marked by excess speculation and the appearance of inflationary pressures. During During the third and final stage, the public is fully involved in the market, valuations are excessive and confidence is extraordinarily extraordinarily high.

Primary Bear Market Stage 1.

Distribution Distributio n

Just as accumulation is the hallmark of the first stage of a primary bull market, distribution marks the beginning of a bear market. As the "smart money" begins to realise that business conditions are not quite as good as once thought, and thus they begin to sell stock. There is little in the headlines to

indicate a bear market is at hand and general business conditions remain good. However stocks begin to lose their lustre and the decline begins to take hand. After a moderate decline, there is a reaction rally that retraces a portion of the decline. Hamilton noted that reaction rallies during a bear market were

quite swift and sharp. This quick and sudden movement would invigorate the bulls to proclaim the bull market alive and well. However the reaction high of the secondary move would form and be lower

than the previous high. After making a lower high, a break below the previous low, would confirm that this was the second stage of a bear market.

Stage 2.

Movement With Strength

As with the primary bull market stage two of a primary bear market provides the largest move. This is when the trend has been identified as down and business conditions begin to deteriorate. Earnings estimates are reduced, shortfalls occur, profit margins shrink and revenues fall.

Stage 3.

Despair

At the final stage of a bear market all hope is lost and stocks are frowned upon. Valuations are low, but the selling continues as participants seek to sell no matter what. The news from corporate America is bad, the economic outlook is bleak and no buyers are to be found. The market will continue to decline until all the bad news is fully priced into the stocks. Once stocks fully reflect the worst possible outcome, the cycle begins again. Signals:

A.

Identification Of The Trend

The first step in the identifying the primary trend is to analyse the individual trend of the Dow Jones Industrial Average and the Dow Jones Transport Average. Hamilton used peak and trough analysis to ascertain the identity of the trend. An uptrend is defined by prices that form a series of rising peaks

and rising troughs [higher highs and higher l ows]. In contrast, a downtrend is defined by prices that form a series of declining peaks and declining troughs [lower highs and lower lows]. Once the trend has been identified, it is assumed valid until proven otherwise. A downtrend is considered valid until a higher low forms and the ensuing advance off the higher low surpasses the

previous reaction high. Conversely, an uptrend is considered in place until a lower low forms.

B.

Averages Must Confirm

Hamilton and Dow stressed that for a primary trend or sell signal to be valid, both the Dow Jones Industrial and The Transport averages must confirm each other. For example if one average records a new high or new low, then the other must soon follow for a Dow theory signal to be considered valid.

C.

Volume

Though Hamilton did analyse statistics, price action was the ultimate determinant. Volume is more important when confirming confirming the strength of advances and can also help to identify potential reversals. Hamilton thought that volume should increase in the direction of the primary trend. For example in a primary bull market, volume should be heavier on advances than during corrections. The opposite is true in a primary bear market. Volume should increase on the declines and decrease during the reaction rallies. Thus by analysing the reaction rallies and corrections, it is possible to judge the underlying strength of the primary trend.

D.

Trading Ranges

In his commentaries over the years, Hamilton referred many times to "lines". Lines are horizontal lines that form trading ranges. Trading ranges develop when the averages move sideways over a period of time and make it possible to draw horizontal lines connecting the tops and the bottoms. These trading ranges indicate either accumulation or distribution, but are virtually impossible to tell which until there was a clear break to the upside or the downside.

Conclusion The goal of Dow and Hamilton was to identify the primary primary trend and catch the big moves up and be out of the market the rest of the time. They well understood that the market was influenced by emotion and prone to over-reaction, both up and down. With this in mind, they concentrated concentrated on identification and following the trend. Dow theory [or set of assumptions] helps investors identify facts. It can form an excellent basis for analysis and has become the cornerstone for many professional traders in understanding market movement. Hamilton Hamilton and Dow believed that success in the markets required serious study and analysis. They realised that success was a great thing, but also realised that failure, while painful, should be looked upon as learning experiences. Technical Technical analysis is an art form and the eye and mind grow keener with practice. Study both success and failure with an eye to the future.

Note 2: Contracts for Difference

ONE of the most innovative financial instruments that have developed over the last decade decad e or so is the CONTRACT FOR DIFFENCE, better known as a CFD. The explosion in the use of this  product is one of the reasons why London, as opposed to New York, is becoming the financial location of preference for many financial managers mana gers and hedge traders. CFD's are not allowed in the U.S. due to legal restrictions imposed by the American Regulators. Contracts for Difference were developed in London in the early 1990's. The innovation is accredited to Mr. Brian Keelan and Mr. Jon Wood of UBS Warburg. They The y were then initially used by institutional investors and hedge funds to limit their exposure to volatility on the London Stock Exchange in a cost-effective way, for in addition to being traded on margin, they helped avoid stamp duty (a government tax on purchase and sale of securities). A CFD is in essence a contract between two parties agreeing that the buyer will be paid by the seller the difference between the contract value of the underlying equity and its value at time of contract. This means that traders and investors can participate in the gains and losses (if shorting) of the market for a fraction of capital exposed ex posed if the equity was purchased outright. ou tright. In This regard the CDS's operate like option contracts, but unlike calls and puts, there are no n o fixed expiration dates and contract amounts. However How ever contract values are normally subject to interest and commission charges. For this reason they are not really suitable to investors with a long-term  buy and hold strategies. CFd's allow traders to invest long or short using margin. This fixed margin is usually about 510% of the value of the underlying financial instrument. Once the contract is purchased p urchased there is a variable adjustment in the value of the clients account based on the "marked to market" valuation  process that happens in real time when the market is open. Thus for example if a stock ABC Inc. is trading at $100 it would cost approx. $10 to trade a CFD in ABC. If 1000 units were traded it would therefore cost the investor $10,000 to "control" $100,000 worth of stock. If the stock increased in value to $110 the "marked to market" process would add $10,000 to the client's account (110-100 by 1000). 100 0). As we can see the situation works very similarly to options but for the fact that there are no standard option contract sizes and expiration exp iration dates and complicated strike levels. Their simplicity has added greatly to their popular app eal amount the retail public. Contracts For Difference are currently available in over the counter markets in Sweden, Spain, France, Canada, New Zealand, Australia, South Africa, Australia, Singapore, Switzerland, Italy, Germany and the United Kingdom. Their power and scope continue to grow. This development  poses a problem to American financial institutions in that unless there is a change in security regulation Wall Street will lose out on a financial instrument that is ch anging the manner in which the greater public and aggressive a ggressive financial managers are investing for the future. It is expected that Contracts for Difference will become the medium of transaction for the majority of World traders within the next decade.

Note 3: Moving Average Convergence Divergence (MACD)

 Developed by Gerald Appel, A ppel, MACD is one of the simplest and most reliable indicators available. MACD uses moving averages, which are lagging indicators, to include some trend following characteristics. These lagging indicators are turned into a momen tum oscillator by subtracting the longer moving average from the shorter moving average. The resulting plot forms a line that oscillates above and below zero. The most popular formula for the standard MACD is the difference between a stock's 26-day 26-da y and 12-day exponential moving averages. However Appel and others have since tinkered with these original settings to come up with a MACD that is better suited for faster or slower securities. Using shorter moving averages will produce a quicker, qui cker, more responsive indicator, while using longer averages will produce a slower indicator. What does MACD do? MACD measures the difference between two moving averages. A positive MACD indicates that the 12-day EMA (exponential moving average) is trading above the 26-day EMA. A negative MACD indicates that the 12-day EMA is trading below the 26-EMA. If MACD is positive and rising, then the gap between the 12-day EMA and the 26-day EMA is widening. This indicates that the rate-of-change of the faster moving average is higher than the rate-of-change for the slower moving average. Positive momentum is increasing and this would be considered bullish. If MACD is negative and declining further, then the negative gap between the faster moving average and the slower moving average is expanding. Downward momentum is accelerating and this would be considered bearish. MACD centerline crossovers occur when the faster moving average crosses the slower moving average. One On e of the primary benefits of MACD is that it does incorporate aspects of both momentum and trend in one indicator. As a trend following indicator, it will not be wrong for long. The use of moving averages ensures that the indicator will eventually follow the movements of the underlying security.

As a momentum indicator, MACD has the ability to foreshadow moves in the underlying stock. MACD divergences can be a key factor factor in predicting a trend change. For example a negative divergence on a rising security signifies that bullish momentum is wavering and that there could  be a potential change in trend from bullish to bearish. This can serve as an alert for traders and investors. In 1986 Thomas Aspray developed the MACD histogram in order to anticipate MACD crossovers. The MACD histogram represents the difference between MACD and the 9-day EMA of MACD. The plot of this difference is presented as a histogram, making centerline crossovers and divergences more identifiable. Sharp increases increase s in the MACD histogram indicate that MACD is rising faster than the 9-day ema and bullish momentum mo mentum is strengthening. Sharp declines in the MACD histogram indicate that the MACD is falling faster that its 9-day ema and bearish momentum is increasing. Thomas Aspray recognized the MACD histogram as a tool to anticipate  a moving average crossover. Divergences usually appear in the MACD histogram  before MACD moving average crossover. Armed with this knowledge, traders and investors can  better prepare for potential change. Remember the weekly MACD histogram can be used to generate a long-term signal in order to establish the tradable trend, thus allowing only short-term signals that agree with the major trend to be used for investment action.

© Christopher M. Quigley 2017 Dublin, Ireland, [email protected]