Option Trading College

Subject: The Basics of Day Trading
Instructor: The donFranko
Length: 7 sessions

Training  Home

Entry is Key...Exit is Everything! TM

Session 1 - The history of Day Trading

There is nothing more exciting in the trading world than day trading. It's fast paced, exhilarating and can be quite addicting too.

The term Day Trading means you come to the market each day and look for your favorite profit opportunities. The goal is to make your money during the current trading hours and by the end of the day, you are flat on all open positions—win lose or draw.

It's more like hunting vs. buy and hold investing. You are attempting each day to take on the world so to speak. The main goal is to make your living or "nut" as we like to say. Of course, you will have losses, but the disciplined day trader has acceptable ranges and must be diligent in preserving capital to fight for another pay day.

To put it simply: You eat what you kill.

Modern Day trading for the average American is in it's infancy compared to the stock markets beginnings. The US stock market started over 200 years ago when the colonial government decided they needed to finance the war. They set up a market place where the general public could buy bonds—government notes promising to pay out at a profit in the future to the holder of the bond certificate. Around the same time, private banks were also issuing stock certificates to also raise money. This allowed the public at large, to buy into a small ownership position of the banks monopoly...or so they were led to believe. Stock and Bond investing was the "new" way for the little guy to have a shot at creating wealth, but in reality, it made those issuing the certificates far more wealth and riches than it has or ever will for the small investor.

Once this way of investing became popular, government had to step in and start regulating it because the rich and influential, were getting so rich, they began to get greedy and were taking advantage of the publics interest giving rise to the term of endearment, "Stinking Filthy Rich".

On May 17, 1792, a meeting of twenty four of the largest merchants banned together and formed the Buttonwood Agreement outside of 68 Wall Street—The meeting was actually done under a buttonwood tree.

The first central location of the exchange was a rented room located at 40 Wall Street that went for $200 a month; however, in 1835 it was destroyed by the Great Fire of New York. By 1863, the board of governors set up shop at 10-12 Broad Street and officially changed its name to, " The New York Stock Exchange (NYSE). The location of this meeting was set up on the now famous Wall Street where these brokers would offer their stocks and bond certificates to the highest bidders and thus, the beginnings of "Day Trading" located at 11 Wall Street, New York, New York.

Moving forward, the NYSE trading volume gained in popularity and as the trading of stock certificates grew, so grew the challenges with how things were handled. Thousands of small investors were being taken advantage of, promised riches, given shares of the wealth of these companies and ultimately, most of them were robbed of their limited resources. The stock exchange grew rapidly with unbridled enthusiasm and vast fortunes were created for many, but the growth could not be sustained and the greed of many took control, and on October 29th, 1929, Black Tuesday was born causing a massive panic sell-off and ushering in the Great Depression of 1929.

To help stem this tide of greed and financial destruction, the government stepped in and started to regulate the exchange of trading stocks—A way of leveling the playing field for both large and small investors alike. They called it the Securities and Exchange Commission (SEC), and it brought some assurance as well as much needed confidence into the trading of stocks and bonds.

Since it's inception, the (SEC) has meticulously implemented rules and regulations with the purpose of making the practice of trading as equitable as possible for all participants. Of course, it comes with it's own challenges, but overall, it allows a small investor the chance to build wealth without fear of massive loss...or so that was what they were lead to believe.

As time marched on, the complexities and cost of trading grew too arduous for the small investor giving rise to firms who would manage funds for individual investors. By joining a brokerage firm, the average individual could combine their money with others around the world and together, they had buying power to compete with the rich a wealthy investors. This allowed firms such as JP Morgan, Goldman Sachs, Bear Sterns, Schwab etc. to grow into massive and powerful companies offering their investors many options to participate in the world of trading.

In the early years of day trading, the individual investor had no choice but to work with brokers. This created a bit of a monopoly for them, and so they began to charge large fees to handle individual trades. As with any type of monopolistic endeavor, greed always gets the best of someone, and with it competition ensues. With the (SEC) doing what it could to stem the growth of lawlessness amongst the trading community, small investors still got the short end of the financial stick—Then came along computer technology.

As technology expanded and improved, the flow of information allowed investors to make better choices. This brought down the cost of trading and opened the door to even more investors who had large fears of the stock market. Confidence grew as well as more brokerage houses offering investors opportunities to participate. Trading commissions dropped from hundreds of dollars to buy or sell and became a very affordable price for the smallest of investors. Still, the large brokers had a strangle hold on investors pocket books and kept commission high at the "retail" level, but in 1975, the (SEC) made fixed commission rates illegal giving rise to the discount broker industry giving trading a more level playing field and affordable transaction rates for even more investors and speculators. This allowed investors to make more trades in a day, because the cost was low enough for them to make a profit and still cover the cost of trading.

Discount brokers would open the doors to small investors letting them start their trading accounts with as little as $5,000 - $10,000 dollars and then give them 2:1 leverage over their account. This would allow investors to use the leverage to buy and sell or buy and hold for the future or long term gains. Stock investing became simple to get involved with, but still very hard to master. Tens of thousands of novice speculators began trading giving rise to more and more volume at the NYSE.

When the internet took shape, the trading world developed electronic communication networks (ECNs) and the trading world exploded with opportunities giving rise to millions of people who rushed into trading looking to cash in. It was the modern day gold rush, and everyone wanted to stake their claim. What they did not know, is the playing filed was definitely stacked against them, and by the time a novice investor figured that out, their accounts were decimated or eaten away by the cost of repetitive trading commissions.

From 1997-2000, the technology of trading accelerated, and in 1997, the (SEC) adopted special "Order Handling Rules" that required all market-makers to publish their best bid and ask prices on the NASDAQ. This opened the door to many traders who were left completely in the dark and allowed them to see more clearly the pricing offered. Another move by the SEC was to change the structure of pricing from fractional to decimal giving a much more level playing field. Instead of having a bid/ask spread of 1/8 - 3/16 most stocks now trade at .01 cents.

 

Trading (Start Here)

 

Controlling Losses

 

Calls

A month in the life

 

Puts

A month in the life

 

Day Trading Intro

Charting

Covered Calls

L.E.A.P.S.

Spreads

Naked Puts

Naked Calls

Compounding

Pair Trading

 

PORTFOLIOS

 

Model Portfolio

Day Trades

Lotto Trades

 

Members

Training Links

 

Bull/Bear 180's

Day Trading

Risk Free Trading

Hit Options Lotto

 

Session 2 - How to Day Trade for your living

So how does one learn to day trade? Well that's a very loaded question my friends. I have been day trading Options, Stocks and FOREX for over 15 years, and let me be the first to WARN you, it's not for everybody. Sure, everybody thinks they can do it, but that's where the problem lies. Most novice investors approach day trading with a cavalier attitude thinking they can just step into the most competitive business environment in the world and simply scoop up profits at a whim. What most novice investors do not realize (or understand) is they have a definite disadvantage to the professional traders of the markets.

Trading on a daily basis takes a very large amount of capital to effectively have a chance to make your living at it. I would venture to say that 95% of the day trading public has limited resources and instead uses leverage (margin) to make up the difference. This is why there are millions of casualties in the world of day trading. Margin will kill your account almost silently because most novice investors do not understand the complexities of margin trading and the compounding effect it has on your losing trades. The other hidden capital destroying monster is commissions and trading fees.

If you trade with a retail brokerage account, then you are going to pay the highest commission rates in the industry. Many so called "discount" brokerages are still ridiculous in the amount they charge a day trader. When I started out day trading, the typical commission for placing an order was $8-10 for 100 - 1,000 shares. After that, you paid a per share price up to 10,000 shares, and if you could buy more, you had to have your trade worked by a floor broker.

As more and more people came to the game, commissions started to come down at brokerages like E-Trade, Scottrade, TD Ameritrade etc., but they are still way too expensive for the average investor when it comes to repetitive day trading. Today, there are more "discount" brokers to choose from than ever before, and rates for day trading have dropped as low as .01 cents per share with a $5.00 minimum. Oh, did i mention that all commission are charged per transaction? Yes, that means you pay when you buy and you pay the same rate again when you sell. The brokers are the middle men to the market makers and specialists because they do not want to deal with odd lots or small investors, so they contract with brokers who facilitate these orders and batch them into larger ones.

What does it take to actually make your living trading stocks on a daily basis? First off, it takes a lot of capital to execute an effective trading plan. The SEC requires anyone who wishes to day trade stocks to have a minimum of $25,000 in liquid capital at the beginning of each trading day in order to "Pattern Day-Trade." Even though they require $25k, you really need at least $30k to cover commissions and some draw down if you plan to be very active. In fact, it's well disclosed and recommended that you have a minimum of $50k in order to have a reasonable chance at trading success. This all sounds great, but believe you me, if you do not have a proper education (FIRST) and a vast amount of live trading experience (with small shares), you are going to fail in the long run. Most, if not all, successful day traders have admittedly blown up several trading accounts until they either quit or just got it right—The ones who survived the learning curve go on to build a financial empire.

So, if you want to make your fortune in the markets, then you need to become a very well educated and mentored trader before you bring real money to the game. Sadly, most people come to the market with barely enough capital to stand the test of time, and therefore, they never realize the dream of trading success. Some finally figure it out, but usually they have diminished their trading capital well below the minimum requirement and can't continue to "day trade" their way to success; however, if you have lower capital to work with, then the alternatives are to trade with proprietary firms who allow you to pool your capital (typically a $3-5k minimum risk deposit) with theirs and get around the $25k SEC minimum—They also offer you  leverage of 10:1 or more vs. the standard 4:1 offered with a traditional account—Even though this sounds great, it's usually more disastrous to new traders because they always use too much leverage and devastate their trading accounts even faster.

There are two types of organizations you can partner with:

A Broker Dealer:

Most Broker Dealers require you to get a series 7 Stock Brokers license to become a member of the firm and get access to their trading capital. This is more to do with a little CYA in case you blow up your risk deposit and therefore cannot "blame" them—after all, you were an educated Stock Broker right?

Most Broker Dealer firms will require you to put up the SEC minimum of $25k in risk capital; however, you will get much larger leverage and/or access to firm capital (with strings attached no doubt) so you can work with strategies that actually make profits but require substantial capital to do them with.

Commissions are charged, but the rate is substantially lower than a retail or discount brokerage.

You keep 100% of your profits, but usually pay a desk fee or software fee.

Private Equity Group:

No series 7 license is required; however, you still have to register with the CBOE and become a member of the firm.

Risk deposits are typically $5k - $10k and these firms typically start you out at 10:1 buying power and can offer you considerably more with proven track records.

These firms charge you much lower commission rates than retail or discount brokers; however, they usually want to cut into your profits for using their trading capital. The typical split is 90/10, but if you are a very active and profitable trader, you can negotiate a better split. You usually have to pay for your data feeds as well.

Both these venues give you the major advantage of low commissions and institutional benefits like rebates and direct access. If you trade with a traditional retail brokerage account, your cost per trade can be $3 – 5 each. In some cases you can get a share cost of .01 each but a minimum of $5.00 per ticket; adding this up, you can easily see the cost would be prohibitive for rapid micro style trading, this is why you need to be with a professional firm to really be able to day trade effectively.

There is hope for you if you do not want to go the Broker Dealer or Private Equity route; however, you must limit the stock universe you trade in and work with larger share size. That way, you reduce your exposure significantly and your costs are minimized.

The bottom line, get your education from a reputable source and find a mentor to guide you through the process of learning how to day trade. It's a skill that can be mastered, but it takes typically 3-8 years to become proficient at it—this is a career choice and not a hobby.

Treat your journey like you are heading to university and then graduate school to achieve your MBA, and you will have a lot more success getting to a position of wealth as a full time day trader.

Now for the beginning of your trading education!

The first thing you absolutely need to bring to the table every single day is 110% self discipline. Without it, you are guaranteed to fail and blow up any and all bankrolls you trade with. Day trading is not a sprint, it's a marathon, and only the most patient, well educated and funded trader, will ever realize their potential.

There are many styles of trading, but let me help you out with some very good advice—work with no more than three trading tactics until you are 100% proficient, and profitable, then you can experiment with all the variations available out there.

Avoid getting suckered into overtrading by news stories on TV, because 9 times out of 10, that news you hear on CNBC type channels is old, and you are going to lose far too many times trying to catch the sharp moves in the markets. The best way to trade the news is to wait for the reaction, and then exploit the secondary moves that stocks make. Only the novice trader runs into the volatility giving rise to the gamblers instinct—and their reward is Vegas style odds.

Ok, here we go...

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