The Truth About Day Trading Stocks · of success. In Th e Truth About Day Trading Stocks, DiPietro...

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In terms of the potential for heavy fi nancial

losses, day trading is a high-risk profession.

No one should contemplate day trading

without giving thought to the ways he can lose,

and all the ways to lessen or avoid them. Yet

many people enter the game with unrealistic

expectations, unaware of what it takes to

succeed. Seminars and software alone do not

make a successful day trader, cautions author

Josh DiPietro. Instead, a trader must learn hard

lessons of self-discipline, consistency, and staying

in the game for the long haul to have a real chance

of success. In Th e Truth About Day Trading Stocks,

DiPietro off ers the amateur day trader a brutally

honest look at the pitfalls of day trading—and

how to hopefully avoid them.

Written in an engaging and sometimes humorous

tone, Th e Truth About Day Trading Stocks draws

on the author’s own experiences as a day trader to

off er a clear-cut departure from typical “golden

goose” strategies promising instant wealth.

Instead, he attempts to slow down the dangerous

fervor of the average amateur and demonstrate

the ways you can become a professional and not

lose your shirt in the process. Th e Truth About

Day Trading Stocks shows how trading decisions

are bent and shaped by emotions, and why it is

critical to know yourself, understand risk, and

remember that increasing your skill level is a

gradual, ongoing process—there’s always more

to learn! After dispensing with popular illusions,

DiPietro proceeds to off er realistic, practical

trading advice—comparing pay-per-trade with

pay-per-share brokers, determining which works

best and when, off ering suggestions on how to

avoid the prospect of perfect trades turning

ugly, and more. At the end of the book, he also

includes a section called “Rules to Remember,” a

list of over eighty rules, simply stated and easy to

grasp, to benefi t amateurs’ performance.

Th roughout the book, the author describes

his development of acute self-awareness while

fi guring out how to succeed. Th rough that blunt

self-portrayal, the goal of Th e Truth About Day

Trading Stocks is to help you create a disciplined

mind-set and apply it to your own successful

trading style.

( c o n t i n u e d f r o m f r o n t f l a p )

( c o n t i n u e d o n b a c k f l a p )

J a c k e t D e s i g n : P a u l M c C a r t h y

J a c k e t I l l u s t r a t i o n : © G e t t y I m a g e s

The Truth About Day Trading StocksA realistic guide to day trading today’s stock market

“ Josh does an outstanding job of capturing all his trading experience into an

invaluable memoir detailing specifi c rules for both the inexperienced and

experienced trader. Anyone interested in trading professionally should read this

book as they will learn invaluable lessons.”

—Stephen Ehrlich, CEO, Lightspeed Financial, LLC

“ Having been a trader for over twenty years myself, I’ve read my share of books

about the fi nancial markets. Josh’s book is one of the few which doesn’t sugarcoat

the fact that successful trading is both hard work and takes a long time to

master. Th ese lessons and guidance are drawn from real-life experiences, not

hypotheticals, which simply adds to their weight. Active traders who are serious

about their success need to read this book.”

—Tim Knight, founder of Prophet.net,

author of Chart Your Way to Profi ts

“ A brutally honest depiction of the reality of trading. Great stuff . If you’re new to

the trading game, this book will shorten your learning curve and—if you take its

lessons to heart—it just might save you money and grief.”

—Jason Alan Jankovsky, author of Th e Art of the Trade and

Trading Rules that Work

DiPietro

The Truth

Ab

out Day Trad

ing Stocks

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JOSH D I PIE TRO has

been day trading stocks for ten

years. He operates a web site

(www.daytraderjosh.com) and

provides training programs for

aspiring day traders. DiPietro’s

trading approach involves making many trades

every day, taking small profi ts, exiting losing

trades quickly, and minimizing transaction costs.

He is a critic of the educational paths off ered by

the established trading industry and is dedicated

to providing an alternative educational approach

for aspiring traders.

P1: JYSFM JWBT098-Dipietro May 6, 2009 10:23 Printer: Yet to come

vi


The TruthAbout Day

Trading Stocks

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Founded in 1807, John Wiley & Sons is the oldest independent publish-ing company in the United States. With offices in North America, Europe,Australia, and Asia, Wiley is globally committed to developing and market-ing print and electronic products and services for our customers’ profes-sional and personal knowledge and understanding.

The Wiley Trading series features books by traders who have survivedthe market’s ever changing temperament and have prospered—some byreinventing systems, others by getting back to basics. Whether a novicetrader, professional, or somewhere in-between, these books will providethe advice and strategies needed to prosper today and well into the future.

For a list of available titles, visit our Web site at www.WileyFinance.com.

ii


The TruthAbout Day

Trading StocksA Cautionary Tale About

Hard Challenges and What

It Takes to Succeed

JOSH DIPIETRO

John Wiley & Sons, Inc.

iii


Copyright C© 2009 by Josh DiPietro. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.Published simultaneously in Canada.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted inany form or by any means, electronic, mechanical, photocopying, recording, scanning, or oth-erwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act,without either the prior written permission of the Publisher, or authorization through paymentof the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive,Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the web at www.copyright.com.Requests to the Publisher for permission should be addressed to the Permissions Department,John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permissions.

Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their bestefforts in preparing this book, they make no representations or warranties with respect to theaccuracy or completeness of the contents of this book and specifically disclaim any impliedwarranties of merchantability or fitness for a particular purpose. No warranty may be createdor extended by sales representatives or written sales materials. The advice and strategies con-tained herein may not be suitable for your situation. You should consult with a professionalwhere appropriate. Neither the publisher nor author shall be liable for any loss of profit or anyother commercial damages, including but not limited to special, incidental, consequential, orother damages.

For general information on our other products and services or for technical support, pleasecontact our Customer Care Department within the United States at (800) 762-2974, outside theUnited States at (317) 572-3993 or fax (317) 572-4002.

Wiley also publishes its books in a variety of electronic formats. Some content that appearsin print may not be available in electronic books. For more information about Wiley products,visit our web site at www.wiley.com.

Library of Congress Cataloging-in-Publication Data:

DiPietro, Josh, 1976–The truth about day trading stocks : a cautionary tale about hard challenges

and what it takes to succeed / Josh DiPietro.p. cm. – (Wiley trading series)

Includes index.ISBN 978-0-470-44848-9 (cloth)

1. Day trading (Securities) 2. Electronic trading of securities. I. Title.HG4515.95.D57 2009332.63′228–dc22

2008054930

Printed in the United States of America

10 9 8 7 6 5 4 3 2 1

iv


I would like to dedicate this book to all day-traders,

amateur and professional, who have learned the hard way.

To the traders who understand that becoming a successful

day-trader is a process that cannot be fast-tracked.

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Contents

Preface xiii

Acknowledgments xvii

Introduction: The Wholehearted Amateur 1

PART I Psychological Truths and What to Doabout Them 5

CHAPTER 1 Truths about Yourself to Know First 7

How Often Do You Trade, and How Profitably? 10

How Much Are You Trading in Capital and Leverage? 10

How Long Have You Been Trading? 12

What Financial Instruments Are You Trading? 13

Are You Trading Other Peoples’ Money or Your

Personal Capital? 13

Are You a Licensed Trader, or Trading Independently? 13

How Were You Trained? 14

Rules to Remember 14

CHAPTER 2 How Emotions Can Destroy a Trade 15

The Fear Factor 16

Greed Is Not Good 18


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viii CONTENTS

CHAPTER 3 Preventing Overconfidence 23

Ignoring Your Predetermined Stop/Loss Price 24

Holding Too Long 24


CHAPTER 4 From Impatient to Cool, Calm,and Collected 27

The Waiting Is the Hardest Part 29

Deciding to Learn More 31


CHAPTER 5 Taking Breaks 35

Break When Your Confidence Is Low 38

Break Because It’s Just Not Working 38

Break and Then What? 39


PART II The Truth about Your Risk 43

CHAPTER 6 The Importance of Risk Management 45

The Amount of Trading Capital Allocated to Each Trade 46

The Timing for Allocating Capital to a Trade 47

Overexposure to Risk 48

The Stock or Company You’re Trading 49

The Time of Day You’re Trading 49

Gambling 50


CHAPTER 7 Why Overexposure to the MarketCan Hurt 53

Time versus Timing 54



Contents ix

CHAPTER 8 Budgeting: Knowing YourFinancial Limitations 59

Don’t Quit Your Day Job: Catch-22 60

Crunching the Numbers 62

Cushion Cash 63


CHAPTER 9 Minimizing Your Risk withStop/Loss 65

Making Stop/Loss Automatic 65


CHAPTER 10 Averaging-Down: A Skilled Strategy 73

To Average-Down Successfully Takes Mastery 74

Know-How Doesn’t Grow Overnight 75


CHAPTER 11 Gambling versus Day Trading 79


PART III Intraday Trading Truths 83

CHAPTER 12 Why Some Traders MakeMore Mistakes 85

Pick Your Stocks Carefully 86

Focus, Focus, Focus 87

Pay Attention to Market-Moving News 90


CHAPTER 13 Trading Consistently All Day 93



x CONTENTS

CHAPTER 14 Stock Picking: Simplifyingthe Process 99

Your Stock Should Have an Average Daily Volume of One

Million Shares or More 100

Choose Stocks between $10 and $100 101

Pick Stocks That Display Tradable Intraday Price Swings 102

Don’t Trade Stocks Affected by Strict Federal Regulations 102

Beware of Stocks Directly Affected by Current

News Headlines 104


CHAPTER 15 Why News Can Be Just Noise 107

Trading on News versus Monitoring News 109


PART IV The Truth about Trainingand Preparation 113

CHAPTER 16 About Those Training Programs 115

Seminars for the Greenhorns 116

Training Programs for the More Experienced Trader 119

Tips for Selecting the Right Program 120


CHAPTER 17 Picking the Right Online Broker:Pay-per-Share versus Pay-per-Trade 125

Starting Out with Pay-per-Trade 125

Transitioning to Pay-per-Share 126

High Leverage Pros and Cons 130

Hang on to Your Pay-per-Trade Account 131


CHAPTER 18 Paper-Trading Strategy 133

Paper Trading for the Amateur 134

A Word about Advanced Paper Trading 139



Contents xi

CHAPTER 19 Trading for Skill versus Tradingfor Income 141

Building a Foundation of Trading Skills 141

First Level 144

Second Level 146

Third Level 147

Summary 148


CHAPTER 20 The Perfect Trading Day 151

Early Morning Activities 151

Pre-market Trading 153

The Opening Bell 156

Midday Activities 157

The Last Hour of Trading 159

The Closing Bell 160

After-Market Trading 160

Homework 161

CHAPTER 21 The Worst Trading Day 163

Early Morning Activities 163

Premarket Trading 164

The Opening Bell 166

Midday Activities 166

Last Hour of Trading 167

The Closing Bell 168

After-Market Trading 168

Homework 169

Conclusion: Parting Words 171

Appendix: Rules to Remember 175

About the Author 181

Index 183


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Preface

The most successful turtle was apparently Curtis

Faith. Trading records show that Mr. Faith, who

was only 19 when he started the program, made

about $31.5 million in profits for Mr. Dennis.

—Stanley W. Angrist, The Wall Street Journal

T he above is a dangerous citation. No one should use it as assurance.Not every amateur day-trader succeeds like Curtis Faith. Many be-ginners lose all of their start-up capital—sometimes more than once.

The purpose of The Truth About Day Trading Stocks is to caution, and tosome degree reprogram, the naıve, heedless amateur day-trader. I want toprevent beginners from watching their money disappear.

In this book, I offer the amateur day-trader, a candid account of thechallenges I’ve encountered while developing in the profession. By candidI mean brutally truthful, mostly about myself, mostly with the side-splittinglaughter that the distance of hindsight provides!

This is my personal story, and I tell it like it is, just as if we were kick-ing back and having ourselves some brews, letting it all hang out at times—that is, confessing all my mistakes. My personal day-trading horror storiesare a constant, vivid motif. Laced through that saga is my identification ofkey psychological factors that destroy wise day-trading performance, inter-spersed with my cache of antidotes, all self-disciplinary, that I’ve developedin the contemplative aftermath of my most harmful mistakes.

My tone is both comical and compassionate, with a practical and gener-ous infusion of informative techno-speak. My approach to instruction is anemphatic departure from “golden goose” strategies, and my overall inten-tion is twofold: to slow down the hazardous fervor of the average amateur,and to demonstrate the ways he can become a professional and not losehis shirt in the process. Throughout the book, you’ll notice the word “hold”highlighted when I discuss disastrous situations involving “holding” stocks

xiii


xiv PREFACE

without any real plan of exit. If you’re reading this you’re probably a begin-ner in day-trading. Or maybe you’re somewhat experienced, but not yet aconfident pro. You’re highly motivated and eager to learn how to day-tradewith success. You’re probably a risk-taker by nature, with a high tolerancefor stress.

You’re willing to stop at nothing to achieve the status of a professionaltrader who’s thriving—a badge of honor. In the beginning, the process mayseem thrilling. The opportunity to trade for a living looks wonderful. Thisis gonna be an adventure! You’ve found there are scads of outfits to trainyou (for a hefty fee, of course). And you could line a mansion’s mantelwith how-to books. You sign yourself up for a training program. You’regreeted with head-swelling optimism and hope by the truckload, and youstart harboring dreams of grandeur. The prospect of succeeding as a traderis making you almost giddy. Now you have a vision of perfection: you seewealth, freedom and leisure!

Who wouldn’t want to make $5000 a week from home, sitting in his orher underwear?

I’ll be the first to admit it: I’m guilty of indulging in euphoric expec-tation without the self-disciplined expertise to make it all come true. Istarted down my path to day-trading glory late in the 1990’s. I moved toSan Diego from Buffalo, New York. When I got to the West Coast I imme-diately learned of this potentially lucrative career.

Well, it’s 2009—a whole decade has passed and I’m here to warn youabout something that nobody wants to hear: You’ll probably never mas-ter the profession without losing money first. Many beginner traders arebrought to their knees by despair and lose their will to deal with the mar-ket. Even the more fortunate proteges, those who got into trading withalmost unlimited wealth, learn that the pain of losing can take a big toll ontheir egos.

I realize that my focus on losing sounds annoying and counterproduc-tive. Well, you can trust me on this one: I have reasons for emphasizing loss.Taming the loss monster is paramount to creating your long-term, consis-

tent success. In day-trading, consistency rules.The Truth About Day Trading Stocks shows how trading decisions

are bent and shaped by emotions. Day-trading is a psychological process.Day-trading is emotional. Anyone can learn how to research and scrutinizefundamental business data. Anyone can master chart pattern analysis. Butin the end the execution of an actual real-time order is all that really mat-ters. That’s why feelings take over. I show what can happen when feelingsare heightened—especially by the powerful factors of inevitable fear andgreed. The outcome can be very dismal.

Again, I’m not here to show you the “golden goose” of ultimate strate-gizing, while neglecting to reveal the grim hazards involved in keyboarding


Preface xv

for money all day. I feel that it’s crucial to emphasize the downside, in orderto shed light on the maddening fact that most new day-traders are pickledand stewed in the positive view of this career—encouraged to inflate withambition and adrenaline—all at their neophyte peril.

I designed this book not only as an escape from dry tedious texts, aramble down Easy Read Lane, but also as a reference tool for serious day-trading careerists. If you approach this tome as a tool, you may be inclinedto pick only the passages that address your most pressing questions. I feelthat I should warn you not to do that. You should read the chapters in order.Later chapters build on ideas presented in earlier chapters, and if you skiparound, the ideas may not gel.

When it comes to pure technical know-how, I’ve made sure that myadvisories take off and expound in ways that five-day seminars don’t. I re-veal some harsh truths about day-trading stocks; my intention is to burstthe greenhorn’s bubble. Then, with the illusions dispensed with, I proceedto realistically useful advising. I compare pay-per-trade with pay-per-sharebrokers, determining which works best, and when; I define how day-tradingisn’t gambling; I repeatedly stress the wisdom of maintaining low exposure;and that’s just a sampling of my arsenal of disaster-averting discussions.

Although I conclude with a chapter that exemplifies a great trading day,I did not write this book to spotlight and boast the performance of perfecttrades. I wrote it to offer suggestions on how to avoid the prospect of per-fect trades turning ugly. Throughout the book, I describe my developmentof acute self-awareness while figuring out how to succeed. My goal, in thatblunt self-portrayal, is to help you create a disciplined mindset, and applyit to your own trading style.

In the back of the book, you’ll find a section called “Rules to Remem-ber,” a list of over eighty rules, simply stated and easy to grasp, to benefitamateurs’ performance.

I close with an offer of mentorship, designed to equip you with thetools to succeed. I believe that the best way to learn is direct experienceunder the supervision of a well-seasoned guide. Through my mentorshipprogram, I will day-trade with you live, one-on-one, for an entire week ormonth. For more information, go to: www.DayTraderJosh.com.

In response to my ominous precautions, maybe you’re thinking: “If I

want to make money, don’t I just buy low and sell high?

Well, take that simplistic outlook and throw it right out the window.Why? Because it will hurt you. I sure wish someone had told me that whenI started out.


xvi


Acknowledgments

I want to first give special thanks to Serene Sao. She is the person, veryclose to me, who initially supported my decision to become a profes-sional day-trader.I wish to thank Georgianna Groen, a fabulous author and mentor, for

her tireless editorship. She has aided and encouraged me throughout mywork on this book.

Many thanks to my father and his friend Lee McCormick for accom-modating me in their beautiful cabin style home, in its mountainous NewEngland setting. The atmosphere has been perfect for my clarity of mind,for both day-trading and my work on this book.

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xviii

P1: OTAintro JWBT098-Dipietro April 25, 2009 14:7 Printer: Yet to come

I N T R O D U C T I O N

TheWholehearted

Amateur

T he year was 1999. I was in my car, on a mission.I was driving to Irvine from my home in San Diego. Every mile glowedwith deep indigo skies and the kiss of a warm, mellow sun; these were

the everyday blessings I enjoyed in Southern California . . . even in the mid-dle of winter. This climate made me hopeful and encouraged. It felt like agood luck charm. I had moved here from the cold, gloomy Rust Belt.

I was headed for a three-day program of training that focused on day-trading strategies. One week before this, while talking on the phone, I hadbecome convinced I should go. The sales rep I spoke to from the sponsor-ing firm had performed his job admirably; he had made me charged up toattend.

Up to this point in my business career, I’d been trading stocks for sixmonths. I hadn’t yet done any day trading, however, and I was gung-ho tolearn how. As I narrowed the distance between myself and Irvine, my ex-pectations were high. I never took in any scenery; I was so deep in thoughtthat I was driving by reflex.

I kept thinking of the things that I was going to buy soon after I got backfrom the training program, when the big bucks were going to flow. Yousee, I was brimming with confidence. In my short time in the profession ofdealing with stocks, I had made a few really good trades.

It had never yet occurred to me that they were just dumb good luck.Well, I got to the designated luxury hotel and let it gouge my credit

card, and then I settled in for three mind-blowing days of comprehensive,motivating coaching.

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