Advanced Techniques in Day Trading by Andrew Aziz: Overview
Are you looking to take your day trading skills to the next level? Want to learn advanced techniques from an experienced trader?
In Advanced Techniques in Day Trading, Andrew Aziz shares his expertise on sophisticated trading strategies. You'll discover how to select the right trading platform, analyze market opportunities, and execute trades like a pro.
Let's dive into the key insights from Aziz's book and explore how you can apply these advanced techniques to your own day trading.
Overview of Advanced Techniques in Day Trading
Day trading requires swift action and carefully calibrated strategies. In Advanced Techniques in Day Trading, author Andrew Aziz teaches traders how to recognize potential opportunities and execute transactions with precision timing.
The book covers selecting the right brokerage and software setup, scanning for stocks primed for movement, and implementing advanced trading techniques like the Fallen Angel and ABCD pattern. It also details portfolio management essentials, such as position sizing based on trading capital and maintaining strict risk limits to protect your account.
Choosing the Right Trading Platform
When it comes to day trading, your choice of brokerage and trading platform can make or break your success. You'll want to select a broker that offers direct market access, allowing you to execute trades quickly and reliably.
Traditional brokers often provide a wide range of services, including market trend advice and retirement planning. However, they're not typically geared towards the rapid trade execution that day traders need. These brokers often route client orders through third parties, which can lead to delays.
On the other hand, direct access brokers are ideal for day traders. They allow you to interact directly with stock exchanges, ensuring fast order confirmation and execution. Some popular options include TD Ameritrade, Lightspeed Trading, Interactive Brokers, and CenterPoint Securities.
Keep in mind the Pattern Day Trade regulation if you're trading in the US. This rule requires you to maintain a minimum equity of $25,000 in your account. If your balance drops below this threshold, you'll face trading restrictions until you top up your account. While this rule specifically applies to US traders, if you're trading elsewhere, make sure to check the regulations in your region.
Setting Up Your Trading Environment
Once you've chosen your broker, it's time to set up your trading environment. You'll need a system that allows for quick trade execution and offers advanced charting tools and features like hotkeys.
One key component of your trading platform is the Montage window. This displays Level 1 information, including the previous day's closing price, number of shares traded, Volume Weighted Average Price (VWAP), daily price range, and last trade price. Level 2, or market depth, shows various buy and sell orders from different exchanges. Understanding these levels can give you insights into overall market sentiment and potential price movements.
To trade effectively, you'll need to understand different order types. It's generally best to avoid market orders to prevent slippage. Instead, use limit or marketable limit orders to have more control over your trade prices. Limit orders that can be executed immediately within a set price range ensure you get the best possible price.
Hotkeys are crucial for quick order placement and execution in the fast-paced day trading environment. Consider setting up shortcut keys on platforms like DAS to boost your efficiency and reduce errors.
Finally, master various stop order techniques to manage risk effectively. Options like Stop Market, Stop Limit, and Trailing Stop can help protect your capital from potential losses. You can also use One-Cancels-the-Other orders to set both a stop loss and a target price simultaneously.
Identifying Trading Opportunities
To be a successful day trader, you need to be able to spot potential trading opportunities quickly. Start your day by creating a watchlist of stocks showing significant activity. Look for stocks with a notable increase in trading volume compared to their usual levels, along with fundamental factors that could lead to significant price volatility.
Before the market opens, focus on stocks that not only move but also have sufficient volume to ensure consistent profitability. Stocks with a substantial increase in trading volume compared to their normal levels often move independently of general market or sector trends. These movements are usually driven by significant news or events like earnings reports, regulatory approvals, or company changes.
Pay attention to the most active stocks on trading platforms. These lists are frequently updated to highlight stocks attracting significant interest and activity from individual investors. They typically exclude stocks primarily held by institutional investors like Apple or Microsoft.
Analyze pre-market patterns and price movements to identify potential trading opportunities. Look closely at stocks showing pre-market price movement due to significant news or company events. Focus on a select few (usually between three and five) that show noticeable price fluctuations and well-defined trading ranges before the market opens.
For example, the stock of Chinanet Online Holdings Inc. (CNET) might experience significant changes in response to company announcements. When the market opens, you'll typically see a noticeable increase in trading volume around the VWAP for your chosen stocks, indicating their active trading status.
Recognizing Key Price Levels
Once you've identified stocks to watch, it's crucial to recognize important price levels that will guide your decisions on when to enter and exit trades.
Use the previous day's high and low points, along with trend indicators like the 200-day Simple Moving Average (SMA) and the 9-day Exponential Moving Average (EMA), as important reference points. Historical stock examples like AVEO and NVDA demonstrate how these levels can influence price movements throughout a trading session.
You can also identify critical price points by analyzing price movement patterns in conjunction with trading volumes. For instance, noticeable wicks on daily candlestick charts often signal pivotal levels where prices may either bounce back or break through. Moving averages over different periods can serve as flexible reference points.
Study the market's pattern of creating ascending peaks and troughs or descending peaks and troughs to recognize trends. When evaluated alongside changes in market activity, these patterns can indicate optimal times to enter trades.
Advanced Trading Techniques
Now that you've got the basics down, let's dive into some advanced trading techniques. These strategies will help you navigate the stock market's volatile fluctuations, identify the best times to enter and exit the market, and improve your risk management approaches.
The Fallen Angel Strategy
The Fallen Angel strategy is particularly useful for stocks with limited share availability. To implement this strategy, keep an eye out for stocks that show substantial price increases at the market's open, often driven by impactful news. These stocks typically experience heavy trading volume before the official market start.
A Fallen Angel scenario occurs when a stock rapidly rises to its highest value of the day, only to undergo an equally rapid descent soon after. To trade this pattern, wait for a period of market stability before initiating your trade. Ideally, you'd enter near significant points such as the low point observed during the pre-opening session or the dynamic averages noted on daily or five-minute charts.
When executing a Fallen Angel trade, timing is crucial. Enter the trade when you see prices rise following a period of consolidation, specifically when a new high is observed along with a substantial surge in trade volume. Set your stop loss securely below the point where the price demonstrates stability. Target your profits at significant technical levels like the VWAP, or the highest and lowest prices noted during pre-market and regular trading hours.
The Abcd Pattern
The ABCD pattern and its reverse formations can help you identify optimal trade entry points. In a typical ABCD pattern, a security rises to establish the day's peak, retreats to a support level above the initial surge, stabilizes, and then ascends again.
To take advantage of the ABCD pattern, start trading near the support levels and set stop losses to activate if those levels are breached. The Reverse ABCD Pattern works in the opposite direction and is used for short selling.
When trading the ABCD or Reverse ABCD pattern, it's crucial to set a well-defined loss limit and establish precise profit-taking objectives. Once you've realized some gains, adjust your stop-loss order to maintain the trade's profitability, ensuring a favorable risk-to-reward ratio. Be prepared to adjust your approach if signs suggest that buyer or seller enthusiasm is waning.
The Opening Range Breakout (orb) Strategy
The Opening Range Breakout (ORB) strategy focuses on the market's initial trading phase right after the opening bell. This phase typically establishes the direction of the breakout. To implement this strategy effectively, wait for the market to find its footing by refraining from initiating trades in the first five minutes after the market opens.
When using the ORB strategy, pinpoint exact entry points when the market moves beyond the initial range. Develop a definitive exit strategy that doesn't rely solely on the ORB signal. Stay vigilant regarding market fluctuations and set clear parameters for when to exit trades to manage your trading endeavors efficiently and minimize potential losses.
Volume Weighted Average Price (vwap) Strategies
The Volume Weighted Average Price (VWAP) is a powerful tool in a day trader's arsenal. To use it effectively, align your trading approaches with the actions of major market players.
You might choose to short a stock that doesn't breach the VWAP, indicating a lack of strength to overcome this key level. Watch for trend reversals as the stock price intersects the VWAP, and confirm the trend's continuity by observing the behavior of the VWAP's moving average.
Consider combining the VWAP with other technical tools like Exponential Moving Averages (EMAs) to identify potential support and resistance zones, plan your market entry and exit strategies, and set profit targets. For instance, you might use the VWAP as an important reference level, while EMAs could indicate the probable direction of a security's price. Using these tools in combination can improve your insight into the strength of a market trend and help you identify the best times to initiate trades.
Managing Risk and Portfolio Size
Effective risk management is crucial for successful trading. A good rule of thumb is to limit the risk on any single trade to no more than 2% of your total trading account. This approach helps protect your capital and ensures you can continue trading even if you face a string of losses.
For example, if your trading account balance is $30,000, you should cap your risk at a maximum of $600 for each individual trade. This means determining the right investment scale and setting a cap on potential losses to avoid engaging in transactions that would exceed your predetermined risk threshold.
If your projected stop loss suggests a potential loss greater than 2%, it's best to skip the trade and look for an alternative that adheres to your risk management guidelines. Stick to these risk exposure limits consistently, regardless of how promising a trading opportunity might seem.
Another useful guideline is the 6% rule, which limits your maximum monthly loss. If your combined total of the month's losses and the potential risk from current positions reaches 6% of your account's total value, stop all real-market transactions. Instead, practice with a simulated trading environment until the month ends. This rule acts as a safeguard for your funds during challenging market conditions.
To avoid common trading errors, it's crucial to stick to your predefined trading plan and resist the urge to overtrade or average down on losing positions. Have a clear strategy for opening and closing trades, including the use of stop-loss orders to cap potential losses.
Avoid holding onto losing day trades, which can create a harmful cycle fueled by misplaced optimism. Experienced traders often take prompt action to cut their losses instead of allowing them to grow. They work diligently to make their trades successful from the beginning rather than trying to salvage losing positions.
Resist the temptation to invest additional capital into losing positions, as this can quickly erode your earnings. Don't modify your stop-loss parameters to allow more flexibility within a trade. Instead, acknowledge minor setbacks, move on to fresh opportunities, and consistently adhere to your strategic trading blueprint with unwavering discipline.
Remember, when using margin to amplify your buying power, it's crucial to stick to the 2% risk limit per trade. Leveraging beyond this limit can significantly increase your potential losses.
By following these risk management principles - limiting risk to 2% per trade, keeping monthly losses below 6%, avoiding overtrading, cutting losses promptly, and consistently applying a well-defined trading strategy - you'll be well-positioned to navigate the challenges of day trading and protect your capital over the long term.