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Day Trade Online, 2nd Edition



Day Trade Online, 2nd Edition

Christopher A. Farrell

ISBN: 978-1-119-21239-3 December 2008 208 Pages

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Preface xiii

Acknowledgments xix

Introduction 1

Section I The World of the Day Trader 5

Chapter 1. Exploiting the Excesses of Capitalism 7

The House Edge 9

The Bid-Ask Spread 11

Section II Introduction to Day Trading 17

Chapter 2. Trading 101: Buying on Bad News and Selling on Good News 19

The Mind-set of an Online Day Trader 19

A Buyer When the Market Needs Buyers 20

Hit Singles, Not Home Runs 20

Brokerage Commissions Can Destroy Profits 21

Buy in on Fear, Sell in on Greed 22

The Slow Execution 23

Is the NYSE an Easier Market to Trade? 24

Section III How to Beat Wall Street at Its Own Game 25

Chapter 3. Exploiting Wall Street’s Conflict of Interest: Market Orders versus Limit Orders 27

Understanding Wall Street’s Conflict of Interest 27

Price Makers versus Price Takers 29

The Bargaining Process 30

Price Negotiation—Market versus Limit Orders 32

Wall Street’s Prey 34

Prelude to the Bid-Ask Spread 35

Chapter 4. The Day Trader’s Crystal Ball: Understanding the Bid-Ask Spread 37

A Snapshot of a Moving Picture 37

The Mechanics of Price Movement—Understanding What Makes a Stock Move Higher 39

Example 1: The Quote—Snapshot of a Moving Picture 41

Example 2: The Market Order to Sell—Hitting the Bid 46

Example 3: The Market Order to Buy—Lifting the Offer 48

Example 4: The Limit Order to Buy—Bidding for Stock 50

Day Orders versus Good-until-Canceled (GTC) Orders 52

Example 5: The Limit Order to Sell—Offering Stock 54

Haggling Over Nickels and Dimes 56

Example 6: Moving the Stock Higher 57

Chapter 5. The Role of the Specialist on the New York Stock Exchange 61

Using the Specialist System to Your Advantage 64

What If There Were No NYSE Specialist? 66

Buyer of Last Resort 67

Is the Profit the Specialist Makes Justified? 68

A License to Steal? 68

The Specialist’s Limit Order Book 69

Being on Both Sides of the Market 71

Narrowing the Bid-Ask Spread 72

Wide Spreads Protect the Specialist from Volatility 73

Handling a Large Sell Order 74

The Real Intentions of the Specialists 77

Beware When the Specialist Takes the Other Side of Your Trade 77

The Day Trader as a Shadow Specialist 78

The NYSE’s Fair Order Handling Rules 80

Never Reveal Your Hand 85

How Can You Determine Where the Specialist Lurks in the Stock? 85

Jockeying for Position 87

How Do You Know Where You Stand in Line? 89

When in Doubt, Ask the NYSE Floor 89

Tipping the Odds in Your Favor 92

Beware of the Specialist 93

Section IV Introduction to Scalping The NYSE: Taking Food Out of the Specialist’s Mouth 95

Chapter 6. The Day Trader’s Secret Weapon: Exploiting the Bid-Ask Spread 97

How Can You Make Money Trading Stocks that Don’t Move? 98

The Role of the Scalper 99

Hit Singles, Not Home Runs 100

Operating under the Radar 100

Avoiding the Glamour Stocks 102

Exploiting the Bid-Ask Spread 103

Finding the Trade’s Sweet Spot 103

Simplifying a Complex Process 104

Other Moving Parts to This Trade 105

A Bet with the House? 109

Too Much Work for Only $100 in Gross Profits? 110

A Few Words on Risk 110

Section V Trading The Market’s Momentum: How to Profit from Volatility 113

Chapter 7. Exploiting Market Volatility and Momentum: Strategies for Trading Volatile Stocks 115

The Specialist and the Upper Hand 116

Playing the Gap Open—A Strategy for Betting with the House 117

Buying on Bad News 118

Betting on the Specialist 119

Parameters of the Gap-Opening Trade 122

How to Tell If the Opening Trade Will “Clear” the Specialist’s Limit Order Book 124

Selling before the Second Wave 125

Trading Tick for Tick with the Market Indexes 127

Why Limit Orders Don’t Work in a Rally 127

Using the S&P Futures to Gauge the Sustainability of a Rally 129

Lightning-Fast Market Upsurge: How Offers Vanish in the Vapor Trail 129

Stock for Sale Becoming Scarce 130

Nasdaq and the Role of the Market Makers 131

A Few Words on Short Selling 135

Two Methods for Day Trading Nasdaq Stocks 136

The Apple Computer Trade 139

Buying Strong Stocks on Pullbacks 140

Opening the Stock Abnormally High 141

The Dangers of Buying a Strong Stock on the Opening Trade 141

Inflicting Heavy Damage on the Market Makers by Attacking Their Vulnerability 142

Chapter 8. The Day Trader’s Ticket to the Poorhouse: How I Managed to Lose $12,000 in Less than 24 Hours 145

The Pain of Missing a Trade 147

How Could the Stock Go Any Lower? 147

The Terrifying Feeling of Getting Caught in a Downdraft 148

A Feeling of Irresistible Greed 148

The Need to Break Even 150

Buying the Stock for the Third Time 151

Feeling of Devastation Leads to Useful Insights 152

Learning from the Mistake and Moving On 156

Can the Quoted Market Always Be Trusted? 156

A Fool and His Money Are Soon Parted 159

Appendix A.

The Day Trader’s Arsenal: Online Brokers, Trade Commissions, Real-Time Quote Systems, and the Home Office 161

Choosing an Online Broker 161

Negotiate the Best Possible Commission Rate 163

Make Sure that the Broker Can Route Directly to the NYSE 163

Per-Share versus Per-Trade Commission Rates 164

Setting up at Least Two Accounts 164

System Crashes and the Late Fill 165

Customer Service, Back-Office Problems, and Trade Discrepancies 167

The Remedy—Keep Good Trading Records 167

The Home Office and the Virtual Trading Floor 169

Appendix B.

Considerations for Trading for a Living: The Allocation of Trading Capital, the Pattern Day Trader Rule, Using Margin and Trading Part-Time vs. Full-Time 173

Allocation of Trading Capital 174

The Pattern Day Trader Rule 177

Trading on Margin 177

Margin Calls 178

Part-Time versus Full-Time Trading 179

Index 183