I. Introduction

II. Seed Money

III. Things to Study Before you Begin

IV. Pre-Market Prep

V. Trade

VI. Evaluate and Repeat

 

INTRODUCTION

 

            I started trading early in college. I had no idea what I was doing. Later I came to find out the term was called scalping. I was giving most of my money away in fees. At the time, I did not really care. I just needed enough money to buy noodles and art supplies. Being a trader was not my focus. I did however take a few classes I believed would help me when I was ready to get more serious about it – Finance, Macro and Micro Economics, Psychology and Philosophy. And here we are.

 

II. Seed Money

Some people think that you need a lot of money to get started. You don’t really. You just have to be realistic about it. Here are some basics to consider when deciding how much you want to start out with:

            1. What are the broker commissions for each trade and other fees on the account?

The smaller your position the great your gain needs to be to break even after fees if you are trading OTC (over-the-counter) stocks. I don’t say this to add stress or put you off to trading. I say this so you are aware. My personal suggestion is to take at least a $200 position as no more than 30% of your account. Meaning, I would personally start with a $675 minimum in my account (I started with $250 and was using 40% of my account on some trades - don't do this). Also, keep in mind that some brokers like E-trade require a minimum of $1,000 in your account to get live data plus an additional $9 a month for Level II. If you don’t have it, then there will be a 15- minute delay.

For many the OTC fees start at $6.95 to buy and $6.95 to sell. That is nearly $14.00 in fees. So, if you are only taking a $100 position, you will need at least a 14% gain to break even on your brokerage fees. Consider that, on average, a day trader may only make 5-10% on their position in each trade that they make.

           

            2. Will there be any regulatory fees?

Regulatory fees can rage anywhere from pennies up to $5.95 or more. You can ask your broker or check their website for the TAF and SECTION 31 fees associated with making trades. They should also have all other fees available for things like options and futures as well as margin – I do not recommend using a margin account. Trade with your own money, not someone else’s.

           

            3. Can I add a small amount to my account each month?

Are you financially able to add $40+ a month to your account and treat that like a bill that you have to pay? If not, consider waiting to start your account until you have a little bit every month that you can pay into your account to help give you a boost in the beginning, because those broker fees and regulatory fees add up. Think of the fees like market tuition while you learn.

           

            4. Don’t forget about other fees associated with trading.

Things like chatrooms, professional services, education and monthly business subscriptions for custom scanning software or news alerts usually cost money. There are so many to choose from. Do your homework and find ones that you like. Be sure to calculate these into your current budget.

If the numbers don’t work for you, don’t worry. The market will be there when you are ready. Just take the steps that you need to and put yourself in the right position. You should never trade with money you cannot afford to lose – EVER!

 

 5. PDT vs Cash

What is PDT? Let me tell you. PDT means “pattern day trader”. PDT is a regulatory designation by the SEC for traders that execute four or more day trades (buying and selling the same ticker in 1 trading day session) over the span of five business days or 5 trading days using a margin account. The number of day trades must be more than 6% of the margin account's total trade activity during that five-day window. Now, it is fairly common knowledge among traders that to get out from under the PDT rule, you need an account with a minimum of $25,000 and you need to maintain that $25,000 day over day.

For many new traders this is not feasible – especially if you are starting small. There is a small little loophole for cash accounts. If you have a cash account you can make as many trades as you want, however for the majority of brokers there is a cash sweep settlement period of 3-4 days once you sell your position. For example, if I buy and sell $XXII on Monday, I will not be able to use that money until the cash sweep is settled back into my account on Thursday or Friday. The reality is you will get 2-3 trades in any given week on a smaller size cash account. If you try to make a trade with unsettled funds, on E-Trade, you will get a message in red letters letting you know that you are making a trade with unsettled funds and if you open and then close the position before funds are settled, you will be subject to a 90 days suspension on your account - also known as a free riding violation. As you scale up, you will be able to take more positions and trade more often on any given trading day. Just be patient and don’t try to force your trades to make money faster. The market is a harsh teacher, so don’t test her by forcing her to give you something she is not ready to give you. On a side note, yes, I call the market a ‘she’, just like I call my car a ‘she’ and my money ‘she’. If you take care of a woman, she will take care of you. The market is like a woman or any partner for that matter. You push her and she will push you right back. But, if you watch her, you learn her patterns, her history, her cues and her tells then she will reward you for your attentiveness.

 

 6. Lastly – taxes

You do have to pay taxes on your profit. If you hold a stock for less than a year, you will have to pay a short-term capital gains taxes on your profits at whatever your current tax rate is. If you hold a stock for more than a year – which as a day trader you wouldn’t unless you were bag holding – then you would pay a long-term capital gains tax which is capped at 20% and based on your total reported income when you file. You are able to deduct paid commissions and use your losses to offset your capital gains in return lowering the taxable amount. There is catch though. Are you surprised? Don’t be. Here it is: The IRS will not allow you to claim a capital loss if you sell a stock at a loss and then buy it back within 30 days. That means, if you want to claim the loss, you’ll have to wait at least 30 days before buying the same stock back.

I am not a tax professional so don’t take my word for it. I am just a small business owner. Think of taxes like a hangry b!tch. You have to feed her eventually or she will make your life miserable.

I do highly suggest that you check into the capital gains tax. If you have an accountant or someone that helps you with taxes, reach out to them and get in the know. This will prevent shock and disappointment come tax season.

 

EXAMPLE:

Enter a limit order position on OTC ticker $PLYZ at $0.0033 with 70,000 shares. That would cost $231.00. If your Brokerage account from Think or Swim or E-Trade is new, you will have a $6.95 buy fee. So now your cost is $237.95 to enter your position. You decide it is time to sell. Your sell limit order is executed at $.0035 for all 70,000 shares – a 6% gain. Your Gross profit would be. $245. Nice! You say to yourself. I made a little after commission. Not so fast – You need to subtract your $6.95 sell commission fee. And because of your position size, you now have to pay a $5.95 TAF fee and $0.01 for the Section 31 fee. So, don’t forget to subtract that $5.96 too! Your net profit is now $232.09 That means you actually lost $-5.86 because of fees.

            If your account is seasoned with 30 or more trade transactions, your buy/sell commission should go down to $4.95 per transaction on either of the above-mentioned platforms. If this is the case, you would still be at a loss of $-1.86 after all fees.

 Side Note: A limit order is saying give me the price I say or better. A market order is saying give me whatever price you can.

 

 

III. Things To Study Before You Trade

            1. Read

Here is a list of helpful books to get you started in my personal order:

a. “Candlestick and Pivot Point Trading Triggers: Setups for Stock, Forex, and Futures Market” John L. Person.

b. “The Complete Penny Stock Course: Learn How To Generate Profits Consistently By Trading Penny Stocks” Jamil Ben Alluch, Lisa VanDyke Brown

c. “If It’s Raining In Brazil, Buy Starbuck” Peter Navarro

d. “The Daily Trading Coach: 101 Lessons for Becoming Your Own Trading Psychologist” Brett N. Steenbarger

e. “Come Into My Trading Room: A Complete Guide to Trading” Alexander Elder

f. “Technical Analysis from A to Z” Steven B. Achelis

g. “The Disciplined Trader: Developing Winning Attitudes” Mark Douglas, Timothy Slater

h. “The Intelligent Investor” Benjamin Graham

This is by no means a comprehensive list. These are just the ones that were most helpful to me in the beginning.

           

            2. Watch Videos

Review trades from other successful, proven and transparent traders. Do not blindly follow someone just because they say they are successful. A lot of these types only pick and choose from their successes and don’t tell people about their losses. Many of these people lose more than they win and do not truly understand what it takes to be a successful day trader. There are many wolves out there hiding in sheep’s clothing to attract followers and later feed off their ignorance for a profit. Research anyone and everyone that you choose to follow. My two favorites to follow are Tim Sykes and Tim Bohen. Both have somewhat different trading styles – both styles have their merits. Both provide free, useful and relevant information on trading and ways to improve your skills. If you want to speed up your learning curve, they each have their own education course with decent tuition rates for the year that you apply.

           

            3. Scanners

There are many scanners out there. If you do not want to pay for one, you can use the Yahoo finance scanner to sort through the tickers.

I use a combination of Think or Swim and Yahoo Finance Screen at the moment. I do recommend StocksToTrade if it is in your budget since it is specifically designed for day traders. Plus, it has awesome add-ons that you can spring for which will give you a little bit of edge and save you time on research – my personal favorite is the breaking news alerts.

You can use either a pre-set scanner or you can input your own settings. I personally like to input my own setting because I am looking for something specific and I do not want to have to sort through potentially hundreds of tickers to find one that meets my criteria.

Be sure to run your scans several times in a day. I usually do a scan before market open, a scan during lunch and one after 8p when after-hours trading is closed.

Below are some of my preset screener setting on Yahoo Finance Screener and Think or Swim (on think or swim, you can set an alert on your scanner and it will tell you when a new ticker is added to the scan list).

I typically look for large percent gainers from the previous trading day or volume momentum in premarket, during market session and after hours for stocks under $0.50.

Stock Screeners - Yahoo Finance

(be sure to click equity screener to set criteria near top left)

Region: United States

Market Cap (Intraday): Small Cap

Price (End of Day) between: $0.005 to $0.50

Market Cap (Last Close) greater than: 1,500,000

Volume (End of Day) greater than: 5,000,000

% Change in Price (Intraday) between: 25% to 2000%

 

Think or Swim Scanner

See link at the bottom of section III-4 for scanners that you can load and then modify to your liking. The setting on my scanner are the basics. I do change the setting based on what I am looking for.

 

Stocks to Trade Scanner

A good starting point would be with the scanner than Tim Bohen setup. There is a link to his scanner and instructions to install it on Stocks to Trade at the bottom of section III-4. Setting Up Your Chart(s). He tends to look at slightly higher priced stocks than I do, but you can change the price range to whatever you are more comfortable with.

 

4. Setting Up Your Chart(s)

I like to use various studies and/or indicator on my charts to help make entering and exiting positions a little faster. This helps prevent FOMO (fear of missing out) on my entries as well as cutting my losses quickly on exits with bad plays. In essence it allows me to react with a minimal emotion. Remember that studies and indicators are never going to be 100% accurate. They are just a means to help you make a more informed decision. Every trader has their own likes and dislikes for studies and indicators. Look at as many as you can and research their uses to find the ones that you like. You do not need to overlay your chart with massive amounts of studies or indicators. Too many studies can easily become messy and confusing when you just need a quick glance for confirmation. Here are the ones that I use on TOS (Think or Swim) most often depending on the setup that I am going for – I do not use them all at the same time and I do change it up from time to time.

PPS (Predefined on TOS)

PMC (Predefined on TOS)

VWAP (Predefined on TOS)

Previous Days Close (Custom added so I don’t have to draw or scroll back)

Pivot Point Projections (Custom added so I don’t have to think about it)

Custom Study Links/Scanners Here

How to add/edit studies on TOS

 

            5. Research

The type of research you do will depend on your own trading style. If you prefer to be in and out of a stock in a day or two, then technicals and short-term catalysts like PR news, hot shot mentions or company tweets (yes, tweets - get a twitter account]) will play a major role in your trading plan. If you are more of the long swing player then you will have to dig a little deeper and look at some fundamentals in conjunction with your technicals.

No matter which style you have, it is always important to check the chart history in different time frames to see if any patterns emerge. You want to look for previous spikes, previous highs in a range as well as previous lows. Did it spike multiple times, if so, why and for how long – minutes, days, weeks, a month? Did the catalyst bring in good volume? Was it a gradual uptrend?

 

IV. Pre-Market Prep

In pre-Market Prep you will review all of the tickers that you picked out and make a trading plan on the ones that have the best outlook and just keep an eye on the rest. Don’t get over excited here. It is hard to actively watch many charts at one time. Pick out just 1 or 2 to start because you can only make 1 or 2 trades in the day at the beginning with a small account. Your plan should include things like what you are looking for before entering; such as, consolidation with breakout confirmation in volume and candlestick patterns or a dip with candlestick confirmation of a reversal coming including good volume. I say volume a lot because volume is important. As you size up, you do not want to be entering a trade when the ticker does not have sufficient volume to exit quickly and easily. Now that you have decided when you want to exit. Decide when you will exit if you are wrong. This is typically a percentage amount. Ideally you want to keep it under 5%, however volatile low-priced stocks can scare people easily when they drop and trigger a lot of stop-loss selling frenzy (this makes for great dip buying!). I try to keep my loss at 10% or less to give it some wiggle room. You decide how much you are willing to lose on each trade and make a note or set an alert to trigger you to sell your position. Try to avoid entering stop-losses unless you know you will be away from your computer. Lastly, what is your profit goal. You have to keep this realistic based on your trading style. The more you practice, the more you will see how different patterns and chart indicators will affect your overall profit goal for each setup. This will help you set a realistic goal that will allow you to exit your position with ease. If you have the patience and the market is still moving in your favor hang tight and exit when the tide looks to be changing - but don’t … I repeat, DON’T get greedy. DO NOT wait for that top. The indicators will tell you the tide is changing before the top is ever reached. In the words of Tim Sykes, “Take the meat of the move.” Sell you position to the greedy MOFOs who don’t know what they are doing and are riddled with FOMO.

 

V. TRADE!

If you have a paper trade account, try this first so that you get used to the features on your preferred trading platform. It will help eliminate frustration and keep you from scrambling around when you make your first real money trade. Treat this like a real trade. Do not go and make a dozen trades just because you can. Practice executing the plan you made in pre-market prep and see how you do.

 

VI. Evaluate and Repeat

At this point, it would be helpful to make a trading journal. You can write the ticker the date, the time and entry price for your position. For some it is also helpful to write their metal stop-loss number down. Also include your position size. Write down why you chose to enter a position on that particular ticker and what your profit goal is based on your research as well as the minimum loss you are willing to accept. Don’t forget to write the date, the time and the exit price also. Make a note of why you exited and whether you stuck to your trading plan. If you did not stick to the trading plan, tell yourself why-write it down too. Some people like to take a screenshot or print out the ticker chart at the end of the day and mark their entry and exit points to they can review the trade visually as well.

This might seem daunting. Just think of it as part of your education. As time goes on and you get more comfortable, it will all become more concise and easier to jot down. As with anything, the more you practice, the easier it becomes.

Now that you have completed your first trade and evaluated your work, ask yourself, is there anything that I can do better?  If yes, make a note in your journal and exercise the change on your next trade. If you say no, GTFO. There are always ways to improve.

Awesome! Now go back to part III and do the process again until you are no longer fumbling around. When you are comfortable with where everything is and how your platform works, execute a real trade and see how it compares to your previous paper trades. Your first real trade will be fueled with emotions. It is just like driving a car for the first time. At first you were nervous – but look at you now. It’s a cake walk!

Keep practicing and never stop improving. Good luck!