How to Day Trade for a Living

Retail vs. Institutional Traders
Individual traders, like you and I, are called 
retail traders
. We can be part-time traders, or full-
time traders, but we're not working for a firm and we’re not managing other people's money. We
retail traders are a small percentage of the volume in the market. On the other hand, there are
Wall Street investment banks, mutual funds and hedge funds, the so-called 
institutional traders,
and most of their trading is based on sophisticated computer algorithms and high frequency
trading. Rarely is any human involved in the day trading operations of these large accounts.
Through whatever means, institutional traders have considerable money behind them and they
can be very aggressive.
You may correctly ask, “
How can an individual trader, like you and me, coming later to the
game, compete against institutional traders and win?
”
The Achilles’ heel of most institutional traders is that they must trade, while individual traders
are free to trade or to stay out of the market as they deem best. Banks must be active in the
market and trade large volumes of shares at almost any price. An individual trader is free to wait
for the best opportunities to arise.
Unfortunately, however, the majority of retail traders fritter away this fantastic advantage by
over-trading. An individual who wants to succeed against the giants must develop patience and
eliminate greed. The ultimate problem of losers is not their account size but their lack of self-
discipline, over-trading, and their bad money management.
I always use the analogy of retail day trading and guerrilla warfare. Guerrilla warfare is an
irregular approach to warfare in which a small group of combatants, such as paramilitary
personnel or armed civilians, use hit-and-run military tactics, such as ambushes, sabotage, raids
and petty warfare, to maneuver around a larger and less-mobile traditional military force. The
United States military is considered to be one of the most formidable fighting forces in the
world. However, they suffered significantly as a result of jungle warfare tactics used against
them in North Vietnam. Earlier examples include the European resistance movements which
fought against Nazi Germany during World War Two.
In guerrilla trading, as the term suggests, you are in hiding, waiting for an opportunity to move
in and out of the financial jungle in a short period of time to generate quick profits while
keeping your risk to a minimum. You don’t want to defeat or outsmart investment banks. You
are simply waiting for an opportunity to reach your daily profit target.
As a retail day trader, you profit from volatility in the market. If the markets are flat, you are not
going to make any money; only high frequency traders make money under these circumstances.
Therefore, you need to find stocks that will make quick moves to the upside or to the downside
in a relatively predictable manner. Institutional traders, on the other hand, are trading with very
high frequency and will profit from very small movements of price, or as it is sometimes called,
from a “choppy price action”.

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It is extremely important to stay away from stocks that are being heavily traded by institutional
traders. As an individual retail day trader, you must stick to retail trading territory. You will not
trade stocks that other retail traders are not trading or not seeing. The strength of retail day
trading strategies is that other retail traders are also using them. The more traders using these
strategies, the better they will work. As more people recognize the line in the sand, more people
will be buying at that point. This, of course, means the stock will move up faster. The more
buyers, the quicker it will move. This is why many traders are happy to share their day trading
strategies. It not only helps other traders to become more profitable, but it also increases the
number of traders who are using these strategies. There is no benefit in hiding these methods or
keeping them secret.
As part of the algorithmic trading by computer systems, the majority of the stocks will trend
with
 
the overall market unless they have a reason not to. So, if the market is moving up, the
majority of stocks will be moving up. If the overall market is going down, the prices of the
majority of stocks will also go down. But, remember, there will be a handful of stocks that will
buck the trend of the market because they have a catalyst. I call these stocks 
Alpha Predators
. I
will explain them in Chapter 4 and describe how to find them. This is what retail traders are
looking for - that small handful of stocks that are going to be running when the markets are
tanking, or tanking when the markets are running.
If the market is running, and these stocks are running too, that's fine. You just want to make sure
you are trading stocks that are moving because they have a fundamental reason to move and are
not just moving with the overall market conditions.
You may ask, what is the fundamental catalyst for stocks that make them suitable for day
trading? Here are some examples:
Earnings reports
Earnings warnings/pre-announcements
Earnings surprises
FDA approval/disapproval
Mergers/acquisitions
Alliances/partnerships/major product releases
Major contract wins/losses
Restructuring/layoffs/management changes
Stock splits/buybacks/debt offerings
When I do reversal trades (Chapter 7), my favorite reversal trades are on stocks that are selling
off because there has been some bad news regarding that company. If there is a quick sell off
because of bad news, many people will notice and start monitoring the stock for what is called a
bottom reversal. If stocks are trending down with the overall market, such as oil was some time
ago, you cannot do a good reversal trade. Their value pops up by 10 cents, and you think it’s a
reversal, but then they are sold off for another 50 cents. They’re selling off because they’re
trending with both the overall market and their sector. Oil was a weak sector for a while and the
majority of the oil and energy stocks were selling off. When a sector is weak, that is not a good

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time for making a reversal trade. That’s where have to differentiate.
So here’s the fourth rule of day trading:
Rule 4:
Always ask, “
Is this stock moving because the overall market is moving, or is it moving
because it has a unique catalyst
?”
That’s when you have to do a little bit of research. As you become more experienced as a trader,
you will be able to differentiate between catalyst-based price action and general market
trending.
As discussed, as a retail trader, you must be careful that you are not on the wrong side of the
trade against institutional traders. But how do you stay out of their way? Instead of trying to
find institutional traders, you find out where the retail traders are hanging out on that day and
then you trade with them. Think about a schoolyard for a moment. You don’t want to be off in
the sandbox doing your own thing, trading a stock that no one is paying attention to. You’re in
the wrong place. Focus where everyone else is focused: focus on the stock that is moving every
single day and receiving literally a ton of action. That is what day traders will be looking at. Can
you day trade stock like Apple or Priceline or Coca-Cola or IBM? Of course you can, but these
are slow moving stocks that are dominated by institutional traders and algorithmic traders, and
in general terms they are going to be very hard to day trade. Think of it as the equivalent of
hanging out in that isolated sandbox instead of hanging out with your peers in the playground
where the cool cats are.