Day Trading For Canadians For Dummies

Bryan Borzykowski is Founder and President of ALLCAPS Content. He is a renowned business journalist and has written for outlets including The New York Times, CNBC, CNNMoney, and more. Ann Logue, MBA teaches finance at the University of Illinois. She's also a finance writer and has edited publications on equity trading and risk management.

• Introduction 1About This Book 2Foolish Assumptions 2Icons Used in This Book 3Beyond the Book 3Where to Go from Here 4Part 1: Day Trading Fundamentals 5Chapter 1: All You Need to know about Day Trading 7It’s All in a Day’s Work 8Speculating, not hedging 9Understanding zero-sum markets 9Keeping the discipline: Closing out each night 10Committing to Trading as a Business 11Trading part-time: An okay idea if done right 11Trading as a hobby: A bad idea 12Working with a Small Number of Assets 13Managing your positions 14Focusing your attention 14Working with risk capital 15Personality Traits of Successful Day Traders 15Independence 16Quick-wittedness 17Decisiveness 17The Difference between Trading, Investing, and Gambling 18Investing is slow and steady 18Trading works fast 19Gambling is nothing more than luck 19Busting Some Day Trading Myths 20Myth #1: I can make millions 20Myth #2: Profits are guaranteed 21Myth #3: Day trading is dangerous 21Myth #4: It’s easy 21A lot of other worthwhile activities are stressful too 22Chapter 2: The Business of Day Trading 25A Day in the Life of a Trader 26Setting Up Your Trading Laboratory 29Where to sit, where to work 30Count on your computer 30See it on the big screen 30Connect to the Internet 31Fix hours, vacation, and sick leave 31Stay virus- and hacker-free 32The department of redundancy department: Back up your systems 33Planning Your Trading Business 33Setting your goals 34Finding volatility 34Investing in your business 36Evaluating and revising your plan 36Getting Mobile with the Markets 37Controlling Your Emotions 37Dealing with destructive emotions 38Having an outlet 41Setting up support systems 42Watching your walk-away money 43Managing the Risks of Day Trading 44It’s your business 44It’s your life 44Chapter 3: Introducing the Financial Markets 45Having a Firm Grasp How Markets Work 46Supply and demand 46Exchanges versus over the counter 47Commissions, fees, and spreads 48Understanding zero-sum games 49Opening an Account and Placing an Order 50Opening a brokerage account 50Placing your initial order 50Closing out your order 50Taking your cash 50Defining the Principles of Successful Day Trading 51Working with a small number of assets 51Managing your positions 52Focusing your attention 53Understanding Risk and Return 53Recognizing what risk is 54Getting rewarded for the risk you take 57Market efficiency in the real world 58Chapter 4: Assets 101: Stocks, Bonds, Currency, and Commodities 61Grasping the Different Things to Trade 61Defining a Good Day Trading Asset 62Looking for liquidity 62Homing in on high volatility 64Staying within your budget 65Making sure you can use margin 65Taking a Closer Look at Stocks 67How Canadian and U.S stocks trade 68Where Canadian stocks trade 69Where U.S stocks trade 72The high-risk over-the-counter exchanges 74Dark pools 75Examining Bonds 75How bonds trade 76Listed bonds 77Over-the-counter trading 77Treasury dealers 77Cashing In with Currency 78How currency trades 78How the Canadian dollar is traded 79Where currency trades 79Considering Commodities and How They Trade 80Chapter 5: Assets 102: ETFs, Cryptocurrency, Options, and Derivatives 81Explaining Exchange-Traded Funds (ETFs) in Plain English 82Traditional ETFs 83Strategy ETFs 84How ETFs trade 85ETF risks 86Getting Familiar with Cryptocurrency 86Bitcoin and blockchain 87Other cryptocurrencies 88Understanding how cryptocurrencies trade 89Avoiding the risks of cryptocurrencies 91Dealing in Derivatives 91Getting to know types of derivatives 92Buying and selling derivatives 94Comprehending Arbitrage and the Law of One Price 96Understanding how arbitrage and market efficiency interact 96Creating synthetic securities 97Taking advantage of price discrepancies 98Reducing arbitrage opportunities: High-frequency trading 99Chapter 6: Increasing Risk and Potential Return with Short Selling and Leverage 101Understanding the Magic of Margin 102Making margin agreements 103Understanding the costs and fees of margin 104Managing margin calls 105Enjoying margin bargains for day traders 105The Switch-Up of Short Selling 105Selling short 106Short selling in Canada 107Choosing shorts 108Losing your shorts? 108Leveraging All Kinds of Accounts 109In stock and bond markets 109In options markets 110In futures trading 111In foreign exchange 112Borrowing in Your Trading Business 113Taking margin loans for cash flow 113Borrowing for trading capital 114Assessing Risks and Returns from Short Selling and Leverage 115Losing your money 115Losing your nerve 115Chapter 7: Managing Your Money and Positions 117Setting Your Earnings Expectations 118Finding your expected return 118Determining your probability of ruin 119Gaining Advantage with a Money-Management Plan 121Minimizing damage while increasing opportunity 121Staying in the market longer 122Getting out before you lose everything 123Accounting for opportunity costs 123Examining Styles of Money Management 124Limiting portions: Fixed fractional 124Protecting profits: Fixed ratio 125Sticking to 10 percent: Gann 126Finding the ideal percentage: Kelly criterion 126Doubling down: Martingale 127Letting a program guide you: Monte Carlo simulation 127Considering past performance: Optimal F 128How Money Management Affects Your Return 129Planning for Your Profits 130Compounding interest 131Pyramiding power 131Making regular withdrawals 133Chapter 8: Planning Your Trades and Trading Your Plans 135Starting to Plan Your Trades: Just the Basics, Please 136What do you want to trade? 136When will you be trading? 137How do you want to trade? 137Figuring out when to buy and when to sell 139Setting profit goals 139Setting limits on your trades 141What if the trade goes wrong? 144Closing Out Your Position 146Swing trading: Holding for days 146Position trading: Holding for weeks 147Investing: Holding for months or years 147Maxims and Clichés That Guide and Mislead Traders 147Pigs get fat, hogs get slaughtered 148In a bear market, the money returns to its rightful owners 148The trend is your friend 149Buy the rumour, sell the news 149Cut your losses and ride your winners 150You’re only as good as your last trade 150If you don’t know who you are, Wall Street is an expensive place to find out 151There are old traders and bold traders, but no old, bold traders 151Part 2: Developing Your Strategy 153Chapter 9: Picture This: Technical Analysis 155Comparing Research Techniques Used in Day Trading 156Knowing what direction your research is 156Examining fundamental research 157Looking closer at technical analysis 158Using Technical Analysis 160First things first: Should you follow a trend or deviate from it? 160Finding trends 161Those ever-changing trends 165Reading the Charts 167Wave your pennants and flags 167Not just for the shower: Head and shoulders 169Drink from a cup and handle 169Mind the gap 170Grab your pitchforks! 171Considering Different Approaches to Technical Analysis 172Dow Theory 172Fibonacci numbers and the Elliott Wave 172Japanese candlestick charting 173The Gann system 174Avoiding Technical Analysis Pitfalls 174If it’s obvious, there’s no opportunity 175Overanalyzing the data 175Success may be the result of an upward bias 175Chapter 10: Following Market Indicators and Tried-and-True Day Trading Strategies 177Psyching Out the Markets 178Betting on the buy side 179Avoiding the projection trap 179Taking the Temperature of the Market 180Pinpointing with price indicators 180Volume 183Volatility, crisis, and opportunity 185Measuring Money Flows 187Accumulation/distribution index 188Money-flow ratio and money-flow index 189Short interest ratios 189Considering Information That Crops Up during the Trading Day 190Price, time, and sales 191Order book 191Quote stuffing 192News flows 192Identifying Anomalies and Traps 193Bear traps and bull traps 194Calendar effects 195Chapter 11: Eliminating Emotion with Program Trading 197Creating Your Own Trading Program 198Recognizing what you want to automate 198Knowing the limitations of robots 199Programming, the Day Trading Way 199Looking at basic brokerage offerings 200Adding a trading platform 200Finding trading modules 200Backtesting Once, Backtesting Twice 201Building on Some Standard Strategies 201Range trading 202Contrarian trading 202News trading 203Pairs trading 203Arbitraging for Fun and Profit 203Understanding how arbitrage and market efficiency interact 204Taking advantages of price discrepancies 205Scalping, the Dangerous Game 206Understanding Risk Arbitrage and Its Tools 207Arbitrating derivatives 208Levering with leverage 209Short selling 209Creating synthetic securities 209Examining Arbitrage Strategies 210Convertible arbitrage 211ETF arbitrage 211Fixed income and interest-rate arbitrage 212Index arbitrage 213Merger arbitrage 213Option arbitrage 215Watching Out for Those Pesky Transaction Costs 215Chapter 12: Day Trading for Investors 217Recognizing What Investors Can Glean from Traders 217Being disciplined 218Dealing with breaking news and breaking markets 219Setting targets and limits 220Judging execution quality 221Applying Momentum 223Earnings momentum 224Price momentum 224For investors only: Momentum-research systems 225When an Investor Considers Trading 227The idea has a short shelf life 227Your research shows you some trading opportunities 227You see some great short opportunities 228Chapter 13: Researching Research Services 229Understanding the Trade of Trading 230Enjoying freebies from the exchanges and the regulators 230Hitting the (virtual) road for conferences 233Taking training classes 234Getting the Research You Need 236(Price) Quote me on that 237Charting your strategy 238News, newsletters, gurus, and strategic advice 240Doing Your Due Diligence 243Where to start your research 243Questions to ask 244Chapter 14: Testing, Tracking, and Evaluating Performance 247Before You Trade: Testing Your System 247Backtesting 248Simulation trading 250Backtesting and simulation software 251During the Day: Tracking Your Trades 254Setting up your spreadsheet 254Pulling everything into a profit and loss statement 255Keeping a trading diary 256After You Trade: Calculating Overall Performance 257Reviewing types of return 258Calculating returns 258Determining the risk to your return 263Using benchmarks to evaluate your performance 265Part 3: Day Trading, Incorporated 267Chapter 15: Your Key Vendor: Your Broker 269Choosing a Brokerage 270Getting proper pricing 270Evaluating types of platform 272Opening an account 274Exploring Brokers for Day Traders 275Brokers for stocks and a bit of the rest 275Brokers for foreign exchange 278Watching Out for Brokerage Scams 279Chapter 16: Regulation Right Now 281How Regulations Created Day Trading 282Who Regulates What? 283Provincial securities commissions 284Investment Industry Regulatory Organization of Canada (IIROC) 285Mutual Fund Dealers Association of Canada (MFDA) 286The exchanges 286Brokerage Basics for Firm and Customer 286Are you suitable for day trading? 286Staying out of the money laundromat 287Rules for day traders 288Tax reporting 289Hot Tips and Insider Trading 289Taking on Partners 290Chapter 17: Choosing the Right Accounts 291Understanding Investment Accounts 292RRSP 292TFSA 293RRIF 294Non-registered accounts 295Deciding on an Account to Use for Day Trading 295Chapter 18: Taxes for Traders 297Are You a Trader or an Investor? 298Claiming Business Expenses 298Hiring a Tax Adviser 299The many flavours of tax experts 299Questions to ask a prospective adviser 300You still want to do it yourself? 301What is Income, Anyway? 302Earned income 302Capital gains and losses 303Tracking Your Investment Expenses 305Qualified and deductible expenses 306Paying Taxes All Year 308Using Your RRSP 308Trading within a Tax-Free Savings Account 309Part 4: The Part of Tens 311Chapter 19: Ten Good Reasons to Day Trade 313You Love Being Independent 313You Want to Work Anywhere You Like 314You’re Comfortable with Technology 314You Want to Eat What You Kill 315You Love the Markets 315You Have Market Experience 315You’ve Studied Trading Systems and Know What Works for You 316You’re Decisive and Persistent 316You Can Afford to Lose Money 317You Have a Support System 318Chapter 20: Ten Common Day Trading Mistakes 319Starting with Unrealistic Expectations 319Beginning without a Business and Trading Plan 320Ignoring Cash Management 321Failing to Manage Risk 321Not Committing the Time and Money to Do It Right 322Chasing the Herd 322Switching between Research Systems 323Overtrading 323Sticking Too Long with Losing Trades 324Getting Too Emotionally Involved 324Chapter 21: Almost Ten Alternatives to Day Trading 325Proprietary Trading for an Investment Company or Hedge Fund 325Trading for an Agricultural, Energy, or Commodities Company 326Joining a Market Making Firm 326Traditional Investing for Your Own Account 327Taking a Swing at Swing Trading 327Gambling for the Fun of It 327Playing Day Trading Video Games 328Trading in Demo Accounts 328Participating in a Trading Contest 329Chapter 22: Ten Tested Money-Management Techniques 331Taking Money off the Table 332Using Stops 332Applying Gann’s 10 Percent Rule 332Limiting Your Losses with the Fixed Fractional System 333Increasing Returns with the Fixed-Ratio System 333Following the Kelly Criterion Formula 334Figuring the Amount to Trade with Optimal F 334Measuring Risk and Sizing Trades with Monte Carlo Simulation 335Taking a Risk with the Martingale System 335Throwing It to the Fates 336Appendix: Additional Resources For Day Traders 337Index 345