Day Trading Do’s and Don’ts
Day trading profitably over a series of years is probably the most difficult vocation anyone can attempt. The odds of being a consistently profitable day trader are enormously against the average person. The main reason for the difficulty in achieving consistent profitability is the work and discipline involved in the effort of day trading, along with a dollop of luck along the way. Even so, given all that, an outlier event can ruin the day trader if he/she is not on the job the moment the outlier is made known to the market! All good day traders are disciplined, intelligent, and emotionally mature individuals. They are excellent risk managers. They manage time well too. The following list has been compiled over a period of 35 years spent observing the stock and options markets, as well as trading them. This list is dynamic, as I add to it when the addition has passed the test of time and is known by me to be efficacious.
1)If immediately after a trade execution the trade works dramatically in your favor, you actually waited too long to execute it.
2)You will know almost always in the moment right after you initiate a trade whether or not it will be profitable.
3)If you “know” something, odds greatly favor that thousands of others also “know” it.
4)If at first you are a successful trader with never having initial setbacks, the odds greatly favor that you will suffer more so than the normal trader who has not been so fortunate. You could even “blow out” your account if not careful with your newfound success.
5)Breakouts take their sweet time becoming cyclical.
6)Cyclical periods for stocks far outlast breakout periods for them.
7) If it seems too good to be true, it isn’t.
8)Always position trade options “delta neutral”.
9)100% invested is akin to the “I’m all in” mentality, which eventually leads to “I’m all out” of money. Thus, keep some cash available at all times.
10)Call options inordinate volume of at least an increase of a few hundred percent of normal daily activity over a few consecutive days is a signal of a possible takeover in play.
11)Takeover activity in call options involves far more volume for out of the money calls than in the money or at the money calls. Leverage and greed are the causes.
12)Large put activity can be bullish IF you know that the put buyers are also buying the underlying stock! Thus the puts were merely a hedge to a long stock position play. This combination is a synthetic call (i.e., long stock and long the stock’s puts.).
13)Improvement in earnings in one quarter leads to the same for the next quarter. The odds of such are quite high.
14)The market will always need touts. Touts lead the sheep to slaughter.
15)If a popular tout tells you something, that news is entrenched in the market.
16)The more popular the tout or guru, the less probability of their recommended play turning out profitable for you.
17)Professional traders have very small egos. Touts and gurus do not.
18)Rumors have some fact in them, the question being how much fact.
19)If rumors are driving a stock up or down, and in spite of the rumor’s denial by those who should know if those rumors are true or not, And the stock continues to react to the rumors, go in the direction of the rumors!
20)Denial is the first step on the road to panic.
21)Always trade hedged. Do not let “one grenade” blow up your account by shooting for the moon with that play!
22)Getting caught being short a stock rumored and acting like a takeover will teach you a valuable lesson and might wipe you out!
23)Do not give unsolicited advice to any other trader.
24)Do not make known to other traders your positions and biases unless they sincerely need to know.
25) Abnormal pops or flops in a stock without a reaction by their options to that unusual, sudden move, suggest those moves will be ephemeral.
26)Fade the ephemeral moves of #25 (buy that dip or short that pop!).
27)Do not sell calls to get short or sell puts to get long. Buy calls to get long and buy puts to get short.
28)A buy/write is 99.999% equivalent to the sale of a shorted put, all things being equal (strike and expiration month the same.). For proof do the math.
29)Periods of “rotation” tend to end when seasonal add periods (new money coming into the market) begin.
31)Things stay the same.
32)Know the differences between #30 and #31.
33)Be proactive but control losses by always having a “cut bait” dollar amount for every trade.
34 Position trade in 3’s by dividing your money going into the trade by 3, entering each third of the allotted funds as the stock fluctuates.
35)Never trade relatives’ money or a friend’s money.
36)Read stock market history books. Not THAT much has changed!
37)When the dust settles, the fundamentals rule the day. Charts can only take you for a ride to that “day’s” end.
38)All bull runs end in euphoria and bear runs end in despair—and not a moment before!
39)There are no rich “cabdrivers”, unless they inherit it. Fade “their” advice, especially if it comes to you unsolicited.
40)Even a mushroom cloud begins as a puff of smoke. Be wary of quiet selling.
41)In a stiff breeze even a turkey can fly. Thus, do not short a stock just because it is “flying”.
42)Odds greatly favor that a stock that breaks down below 4 will trade at 2 before it trades at 6.
43)Odds greatly favor a stock that trades up through 2 will eventually trade at 4.
44)You have NOT seen it all! I once watched in awe as a 2 dollar stock blasted off to $28 in a month (in 1975), doing so while at the very same time the company was filing for bankruptcy! The cause for this weirdness was that over 110% of the floating stock somehow was sold short! Once word got out about the plight of the shorts, all hell broke loose and buyers raised their offering prices really high! A few weeks later, after that all time short squeeze, the stock went to zero.
45)Making money in the stock market is akin to war. Trading is your tactical movements while proper money management is your overall strategy. No war or battle ever went according to plan. Always be prepared to adjust to the unexpected as well as the certain collateral damage.
46)Never stay in a trade where you are “riding the tiger” (which implies that should you get off that tiger, the tiger will eat you!). Thus do not add good money to a position which was NOT planned to be used in the trade.
47)All stock market cycles end in high emotion. To measure that emotion, use the Standard and Poor’s short term oscillator. A minus 4 or higher is reading an oversold condition and a positive 4 or higher is reading an overbought condition. The stock market always, eventually, reverts to the mean, or fulcrum.
48)The stock market rises akin to walking up a flight of stairs, and falls akin to slipping on a banana peel on those same stairs.
49)The stock market tends to move in a series of 3’s.
50)When the dust settles, the fundamentals rule.