9781119736714

Purchase the power to trade smart

Knowledge is power in any endeavor, and in the quick-action world of day trading—with roller-coaster markets, trade wars, and new tax laws inflating both opportunity and risk—being expertly informed is what gives you the power to trade fast with a cool head. The fully updated new edition of Day Trading For Canadians For Dummies—the first in almost a decade—gives you that knowledge, taking you from the basic machinery of short-term markets to building and sticking to a plan of action that keeps your bottom line sitting pretty.

In an easy-to-follow, no-jargon style, award-winning business journalist Bryan Borzykowski provides a complete course in day trading. He covers the basics—such as raising capital and protecting one’s principal investments—as well as specialized skills and knowledge, including risk-management strategies and ways to keep your emotions in check when you’re plugged into an overheating market. You’ll also find sample trading plans and important Canada-specific information, such as the best online brokerage firms, useful local resources, and an overview of the unique tax issues faced by Canadian traders.

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For day traders, every second counts: With the help of Day Trading For Canadians For Dummies, you’ll know where you want to be and how to get there—and how best to profit—fast.

Bryan Borzykowski (Toronto, Canada) is the founder and president of ALLCAPS Content. He is an award-winning business journalist who has written for The New York Times, CNBC, CNNMoney, BBC Capital, Forbes, Canadian Business, The Globe and Mail and other leading North American publications. He’s also co-authored ETFs For Canadians For Dummies and Building Wealth For Canadians All-in-One For Dummies. He is a regular talking head on one of Canada's national news stations and makes frequent appearances on SiriusXM radio. He currently writes regular investing features for Canadian Business magazine, and regularly contributes to MoneySense, PROFIT, Chatelaine, UR Magazine and Advisor.ca, where he was the investment reporter.

Ann C. Logue, MBA, has close to 20 years of working experience in financial services and teaches finance at the University of Illinois at Chicago. She is a finance writer who has written numerous articles on investment and has edited publications on equity trading and risk management. She has previously authored seven For Dummies titles.

Introduction 1

About This Book 2

Foolish Assumptions 2

Icons Used in This Book 3

Beyond the Book 3

Where to Go from Here 4

Part 1: Day Trading Fundamentals 5

Chapter 1: All You Need to know about Day Trading 7

It’s All in a Day’s Work 8

Speculating, not hedging 9

Understanding zero-sum markets 9

Keeping the discipline: Closing out each night 10

Committing to Trading as a Business 11

Trading part-time: An okay idea if done right 11

Trading as a hobby: A bad idea 12

Working with a Small Number of Assets 13

Managing your positions 14

Focusing your attention 14

Working with risk capital 15

Personality Traits of Successful Day Traders 15

Independence 16

Quick-wittedness 17

Decisiveness 17

The Difference between Trading, Investing, and Gambling 18

Investing is slow and steady 18

Trading works fast 19

Gambling is nothing more than luck 19

Busting Some Day Trading Myths 20

Myth #1: I can make millions 20

Myth #2: Profits are guaranteed 21

Myth #3: Day trading is dangerous 21

Myth #4: It’s easy 21

A lot of other worthwhile activities are stressful too 22

Chapter 2: The Business of Day Trading 25

A Day in the Life of a Trader 26

Setting Up Your Trading Laboratory 29

Where to sit, where to work 30

Count on your computer 30

See it on the big screen 30

Connect to the Internet 31

Fix hours, vacation, and sick leave 31

Stay virus- and hacker-free 32

The department of redundancy department: Back up your systems 33

Planning Your Trading Business 33

Setting your goals 34

Finding volatility 34

Investing in your business 36

Evaluating and revising your plan 36

Getting Mobile with the Markets 37

Controlling Your Emotions 37

Dealing with destructive emotions 38

Having an outlet 41

Setting up support systems 42

Watching your walk-away money 43

Managing the Risks of Day Trading 44

It’s your business 44

It’s your life 44

Chapter 3: Introducing the Financial Markets 45

Having a Firm Grasp How Markets Work 46

Supply and demand 46

Exchanges versus over the counter 47

Commissions, fees, and spreads 48

Understanding zero-sum games 49

Opening an Account and Placing an Order 50

Opening a brokerage account 50

Placing your initial order 50

Closing out your order 50

Taking your cash 50

Defining the Principles of Successful Day Trading 51

Working with a small number of assets 51

Managing your positions 52

Focusing your attention 53

Understanding Risk and Return 53

Recognizing what risk is 54

Getting rewarded for the risk you take 57

Market efficiency in the real world 58

Chapter 4: Assets 101: Stocks, Bonds, Currency, and Commodities 61

Grasping the Different Things to Trade 61

Defining a Good Day Trading Asset 62

Looking for liquidity 62

Homing in on high volatility 64

Staying within your budget 65

Making sure you can use margin 65

Taking a Closer Look at Stocks 67

How Canadian and U.S stocks trade 68

Where Canadian stocks trade 69

Where U.S stocks trade 72

The high-risk over-the-counter exchanges 74

Dark pools 75

Examining Bonds 75

How bonds trade 76

Listed bonds 77

Over-the-counter trading 77

Treasury dealers 77

Cashing In with Currency 78

How currency trades 78

How the Canadian dollar is traded 79

Where currency trades 79

Considering Commodities and How They Trade 80

Chapter 5: Assets 102: ETFs, Cryptocurrency, Options, and Derivatives 81

Explaining Exchange-Traded Funds (ETFs) in Plain English 82

Traditional ETFs 83

Strategy ETFs 84

How ETFs trade 85

ETF risks 86

Getting Familiar with Cryptocurrency 86

Bitcoin and blockchain 87

Other cryptocurrencies 88

Understanding how cryptocurrencies trade 89

Avoiding the risks of cryptocurrencies 91

Dealing in Derivatives 91

Getting to know types of derivatives 92

Buying and selling derivatives 94

Comprehending Arbitrage and the Law of One Price 96

Understanding how arbitrage and market efficiency interact 96

Creating synthetic securities 97

Taking advantage of price discrepancies 98

Reducing arbitrage opportunities: High-frequency trading 99

Chapter 6: Increasing Risk and Potential Return with Short Selling and Leverage 101

Understanding the Magic of Margin 102

Making margin agreements 103

Understanding the costs and fees of margin 104

Managing margin calls 105

Enjoying margin bargains for day traders 105

The Switch-Up of Short Selling 105

Selling short 106

Short selling in Canada 107

Choosing shorts 108

Losing your shorts? 108

Leveraging All Kinds of Accounts 109

In stock and bond markets 109

In options markets 110

In futures trading 111

In foreign exchange 112

Borrowing in Your Trading Business 113

Taking margin loans for cash flow 113

Borrowing for trading capital 114

Assessing Risks and Returns from Short Selling and Leverage 115

Losing your money 115

Losing your nerve 115

Chapter 7: Managing Your Money and Positions 117

Setting Your Earnings Expectations 118

Finding your expected return 118

Determining your probability of ruin 119

Gaining Advantage with a Money-Management Plan 121

Minimizing damage while increasing opportunity 121

Staying in the market longer 122

Getting out before you lose everything 123

Accounting for opportunity costs 123

Examining Styles of Money Management 124

Limiting portions: Fixed fractional 124

Protecting profits: Fixed ratio 125

Sticking to 10 percent: Gann 126

Finding the ideal percentage: Kelly criterion 126

Doubling down: Martingale 127

Letting a program guide you: Monte Carlo simulation 127

Considering past performance: Optimal F 128

How Money Management Affects Your Return 129

Planning for Your Profits 130

Compounding interest 131

Pyramiding power 131

Making regular withdrawals 133

Chapter 8: Planning Your Trades and Trading Your Plans 135

Starting to Plan Your Trades: Just the Basics, Please 136

What do you want to trade? 136

When will you be trading? 137

How do you want to trade? 137

Figuring out when to buy and when to sell 139

Setting profit goals 139

Setting limits on your trades 141

What if the trade goes wrong? 144

Closing Out Your Position 146

Swing trading: Holding for days 146

Position trading: Holding for weeks 147

Investing: Holding for months or years 147

Maxims and Clichés That Guide and Mislead Traders 147

Pigs get fat, hogs get slaughtered 148

In a bear market, the money returns to its rightful owners 148

The trend is your friend 149

Buy the rumour, sell the news 149

Cut your losses and ride your winners 150

You’re only as good as your last trade 150

If you don’t know who you are, Wall Street is an expensive place to find out 151

There are old traders and bold traders, but no old, bold traders 151

Part 2: Developing Your Strategy 153

Chapter 9: Picture This: Technical Analysis 155

Comparing Research Techniques Used in Day Trading 156

Knowing what direction your research is 156

Examining fundamental research 157

Looking closer at technical analysis 158

Using Technical Analysis 160

First things first: Should you follow a trend or deviate from it? 160

Finding trends 161

Those ever-changing trends 165

Reading the Charts 167

Wave your pennants and flags 167

Not just for the shower: Head and shoulders 169

Drink from a cup and handle 169

Mind the gap 170

Grab your pitchforks! 171

Considering Different Approaches to Technical Analysis 172

Dow Theory 172

Fibonacci numbers and the Elliott Wave 172

Japanese candlestick charting 173

The Gann system 174

Avoiding Technical Analysis Pitfalls 174

If it’s obvious, there’s no opportunity 175

Overanalyzing the data 175

Success may be the result of an upward bias 175

Chapter 10: Following Market Indicators and Tried-and-True Day Trading Strategies 177

Psyching Out the Markets 178

Betting on the buy side 179

Avoiding the projection trap 179

Taking the Temperature of the Market 180

Pinpointing with price indicators 180

Volume 183

Volatility, crisis, and opportunity 185

Measuring Money Flows 187

Accumulation/distribution index 188

Money-flow ratio and money-flow index 189

Short interest ratios 189

Considering Information That Crops Up during the Trading Day 190

Price, time, and sales 191

Order book 191

Quote stuffing 192

News flows 192

Identifying Anomalies and Traps 193

Bear traps and bull traps 194

Calendar effects 195

Chapter 11: Eliminating Emotion with Program Trading 197

Creating Your Own Trading Program 198

Recognizing what you want to automate 198

Knowing the limitations of robots 199

Programming, the Day Trading Way 199

Looking at basic brokerage offerings 200

Adding a trading platform 200

Finding trading modules 200

Backtesting Once, Backtesting Twice 201

Building on Some Standard Strategies 201

Range trading 202

Contrarian trading 202

News trading 203

Pairs trading 203

Arbitraging for Fun and Profit 203

Understanding how arbitrage and market efficiency interact 204

Taking advantages of price discrepancies 205

Scalping, the Dangerous Game 206

Understanding Risk Arbitrage and Its Tools 207

Arbitrating derivatives 208

Levering with leverage 209

Short selling 209

Creating synthetic securities 209

Examining Arbitrage Strategies 210

Convertible arbitrage 211

ETF arbitrage 211

Fixed income and interest-rate arbitrage 212

Index arbitrage 213

Merger arbitrage 213

Option arbitrage 215

Watching Out for Those Pesky Transaction Costs 215

Chapter 12: Day Trading for Investors 217

Recognizing What Investors Can Glean from Traders 217

Being disciplined 218

Dealing with breaking news and breaking markets 219

Setting targets and limits 220

Judging execution quality 221

Applying Momentum 223

Earnings momentum 224

Price momentum 224

For investors only: Momentum-research systems 225

When an Investor Considers Trading 227

The idea has a short shelf life 227

Your research shows you some trading opportunities 227

You see some great short opportunities 228

Chapter 13: Researching Research Services 229

Understanding the Trade of Trading 230

Enjoying freebies from the exchanges and the regulators 230

Hitting the (virtual) road for conferences 233

Taking training classes 234

Getting the Research You Need 236

(Price) Quote me on that 237

Charting your strategy 238

News, newsletters, gurus, and strategic advice 240

Doing Your Due Diligence 243

Where to start your research 243

Questions to ask 244

Chapter 14: Testing, Tracking, and Evaluating Performance 247

Before You Trade: Testing Your System 247

Backtesting 248

Simulation trading 250

Backtesting and simulation software 251

During the Day: Tracking Your Trades 254

Setting up your spreadsheet 254

Pulling everything into a profit and loss statement 255

Keeping a trading diary 256

After You Trade: Calculating Overall Performance 257

Reviewing types of return 258

Calculating returns 258

Determining the risk to your return 263

Using benchmarks to evaluate your performance 265

Part 3: Day Trading, Incorporated 267

Chapter 15: Your Key Vendor: Your Broker 269

Choosing a Brokerage 270

Getting proper pricing 270

Evaluating types of platform 272

Opening an account 274

Exploring Brokers for Day Traders 275

Brokers for stocks and a bit of the rest 275

Brokers for foreign exchange 278

Watching Out for Brokerage Scams 279

Chapter 16: Regulation Right Now 281

How Regulations Created Day Trading 282

Who Regulates What? 283

Provincial securities commissions 284

Investment Industry Regulatory Organization of Canada (IIROC) 285

Mutual Fund Dealers Association of Canada (MFDA) 286

The exchanges 286

Brokerage Basics for Firm and Customer 286

Are you suitable for day trading? 286

Staying out of the money laundromat 287

Rules for day traders 288

Tax reporting 289

Hot Tips and Insider Trading 289

Taking on Partners 290

Chapter 17: Choosing the Right Accounts 291

Understanding Investment Accounts 292

RRSP 292

TFSA 293

RRIF 294

Non-registered accounts 295

Deciding on an Account to Use for Day Trading 295

Chapter 18: Taxes for Traders 297

Are You a Trader or an Investor? 298

Claiming Business Expenses 298

Hiring a Tax Adviser 299

The many flavours of tax experts 299

Questions to ask a prospective adviser 300

You still want to do it yourself? 301

What is Income, Anyway? 302

Earned income 302

Capital gains and losses 303

Tracking Your Investment Expenses 305

Qualified and deductible expenses 306

Paying Taxes All Year 308

Using Your RRSP 308

Trading within a Tax-Free Savings Account 309

Part 4: The Part of Tens 311

Chapter 19: Ten Good Reasons to Day Trade 313

You Love Being Independent 313

You Want to Work Anywhere You Like 314

You’re Comfortable with Technology 314

You Want to Eat What You Kill 315

You Love the Markets 315

You Have Market Experience 315

You’ve Studied Trading Systems and Know What Works for You 316

You’re Decisive and Persistent 316

You Can Afford to Lose Money 317

You Have a Support System 318

Chapter 20: Ten Common Day Trading Mistakes 319

Starting with Unrealistic Expectations 319

Beginning without a Business and Trading Plan 320

Ignoring Cash Management 321

Failing to Manage Risk 321

Not Committing the Time and Money to Do It Right 322

Chasing the Herd 322

Switching between Research Systems 323

Overtrading 323

Sticking Too Long with Losing Trades 324

Getting Too Emotionally Involved 324

Chapter 21: Almost Ten Alternatives to Day Trading 325

Proprietary Trading for an Investment Company or Hedge Fund 325

Trading for an Agricultural, Energy, or Commodities Company 326

Joining a Market Making Firm 326

Traditional Investing for Your Own Account 327

Taking a Swing at Swing Trading 327

Gambling for the Fun of It 327

Playing Day Trading Video Games 328

Trading in Demo Accounts 328

Participating in a Trading Contest 329

Chapter 22: Ten Tested Money-Management Techniques 331

Taking Money off the Table 332

Using Stops 332

Applying Gann’s 10 Percent Rule 332

Limiting Your Losses with the Fixed Fractional System 333

Increasing Returns with the Fixed-Ratio System 333

Following the Kelly Criterion Formula 334

Figuring the Amount to Trade with Optimal F 334

Measuring Risk and Sizing Trades with Monte Carlo Simulation 335

Taking a Risk with the Martingale System 335

Throwing It to the Fates 336

Appendix: Additional Resources For Day Traders 337

Index 345

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Day Trading For Canadians For Dummies

Day Trading For Canadians For Dummies

1119736714

Summary

Author Biography

Table of Contents

Supplemental Materials

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