How to Day Trade for a Living

Alpha Predators
You must remember that retail trading does not work on all stocks. It only works on the stocks
that have high relative volume. Some stocks like Apple Inc. (ticker: AAPL) will on average
trade millions and millions of shares each day, while other stocks on average might trade only
500,000 shares a day. Does this mean you should trade AAPL only? No. High volume will be
relative from one stock to another. You don’t just look for high total volume. There are some
stocks that on average will trade with much volume. You need to look for what's above average
for that specific stock. Thirty million shares of AAPL traded in one day might very well not be
higher than usual. Do not trade AAPL unless it has a very unusual trading volume. If trading
volume is not higher than normal, it means that the trading is being dominated by institutional
traders and high frequency trading computers. Stay away from it.
AAPL Daily Chart for Summer 2016. Days that AAPL had a significant relative volume are marked. Those days were
suitable for day trading AAPL.
Take a look at the AAPL daily chart for the summer of 2016. As you can see, there were only
two days that had high relative activity. They’re marked with arrows on the chart. Interestingly
enough, when you take a close look at the chart, you realize that on those days the stock gapped
up or down. I marked those price gaps in the chart. If you wanted to trade AAPL, you should
have traded it only on those days. The other days were comprised of just normal, high
frequency, algorithmic trading. Retail traders should stay away from stocks that are trading
normally.
The most important characteristics of high relative volume stocks is that these stocks trade
independent of what their sector and overall market are doing. When the market is weak, it
means that the majority of stocks are selling off. It does not matter if it is Apple, Facebook,
Amazon or Exxon. When the market is strong, the prices of the majority of stocks will be going

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higher. Similarly, when you hear someone say the market is “bear” or “collapsing,” they don’t
mean a specific stock. They mean that the whole stock market is losing its value - all stocks
together. The same is true for specific sectors. For example, when the pharmaceutical sector is
weak, it means all of the pharmaceutical companies are losing their values together. How do
you recognize behavior of market? Index funds such as the Dow Jones Industrial Average
(DJIA) or the S&P 500 (SPY) are usually good indicators of what the overall market is doing. If
the Dow Jones or the SPY are red, it means that the overall market is weak. If the Dow Jones or
SPY are strong, then the overall market will be going higher.
The behavior of stocks that have high relative volume is independent of the overall market.
Every day, only a handful of stocks are being traded independently of their sector and the
overall market. Day traders trade only those stocks. I call those stocks “
Alpha Predators
”. In the
animal kingdom, an alpha predator is a predator at the top of a food chain upon which no other
creatures prey. In day trading, Alpha Predator stocks are the ones that are independent of both
the overall market and their sector. The market cannot control them.
Therefore, the next rule is about Alpha Predators;
Rule 7:
Retail traders trade only Alpha Predators, high relative volume stocks that have
fundamental catalysts and are being traded regardless of the overall market.
What makes a stock an Alpha Predator? Usually it is the release of fundamental news about the
stock either the day before or during the same trading day. Important news or events for
companies can have huge effects on their value in the market and therefore act as fundamental
catalysts for their price action.
As mentioned in Chapter 2, some examples of the fundamental catalysts for stocks that make
them suitable for day trading include:
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

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In Chapter 7, I explain specific day trading strategies such as Momentum, Reversal, VWAP
Strategy and Moving Average. For the moment, your main question is, how do I find the stock
for each strategy? I categorize stocks for retail trading into three classes. Based on my
experiences, this categorization provides some clarity on how to find stocks and on how to
adopt a strategy for them. You will find other categories elsewhere, and some of my fellow day
traders will disagree with my categorization, saying, with some justification, that it is very
simplified.
Before explaining the three categories, let me explain the definition of “float” and “market
capitalization” or “market cap”. Float means the number of shares available for trading. Apple
Inc. for example, as of July 2016, had 5.3 billion shares in the market that are available for
buying and selling. Apple is considered a “Mega Cap” stock. These stocks usually don’t move
much during the day because they require significant volume and money to be traded, so Apple
shares might on average change by only one or two dollars each day. They are not very volatile
and therefore day traders don’t like trading them. Day traders look for volatility.
On the other hand, there are some stocks that have very low float. For example, Cesca
Therapeutics Inc. (ticker: KOOL) has only a 1.2-million-share float. This means that the supply
of shares of KOOL stock is low and therefore a large demand can very quickly move the price
of the stock. Low float stocks can be volatile and move very fast. Most of the low float stocks
are under $10 because they are early stage companies which for the most part are not profitable.
They hope to grow, and by growing further, they issue more shares and raise more money from
the public market and slowly become mega cap stocks. These low float stocks are called small
cap or micro-cap stocks. Day traders love low float stocks.
Now let’s return to the three categories I had just mentioned. The first category consists of low
float stocks that are priced under $10. These stocks are extremely volatile, moving 10%, 20%,
100% or even 1000% a day. Yes, there have been these kinds of moves! You must be careful
with this category. Just as you can turn your $1,000 into $10,000 in a single trade, your $1,000
can easily turn into $10. Low float stocks under $10 are often highly manipulated and difficult
to trade, and therefore only very experienced and highly equipped retail traders should trade
these stocks. I personally rarely trade in them. If someone claims to have turned $1,000 into
$10,000 in a month, and if it’s true, they must have traded this type of low float stock. No
beginner or even intermediate trader can trade with such accuracy and efficiency. If novice
traders tried trading low float stocks that are under $10, they would more likely turn their
$1,000 into nothing in a matter of days.
When it comes to low float stocks, the Bull Flag Momentum Strategy — which I detail in
Chapter 7 — works best. The other strategies in this book are not suitable for low float sub-$10
stocks.
You generally cannot sell short low float stocks that cost less than $10. For short selling, you
need to borrow shares from your broker, and it’s rare that a broker will lend you such volatile
stocks. Even if your broker is willing to lend them to you, I strongly advise that you do not
attempt to short sell them. They can easily surge and you will end up wiping out your account.

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You definitely can become a full-time profitable day trader without short selling risky stocks, so
leave that to the Wall Street professionals.
The second category is medium float stocks in the range of $10-$100. These stocks have
medium floats of around 5 million to 500 million shares. Most of my strategies explained in this
book work well on these stocks, especially the VWAP and Support or Resistance Strategies.
Medium float stocks that are more expensive than $100 are not popular among retail day traders
and I myself avoid them. You usually cannot buy many shares of them because of their high
price. Therefore, it is basically useless to day trade them. Leave them for the institutional
traders.
The third category of stocks
 
for trading is mega cap stocks like Apple, Ali Baba, Yahoo,
Microsoft and Home Depot. These are well established companies that usually have over $500
million in shares outstanding available for trading. These stocks are traded in millions of shares
every day. As you may guess, these stocks move only when large institutional traders,
investment banks, and hedge funds are buying or selling large positions. Retail traders like us,
who typically trade 100 to 1,000 shares, usually cannot move the price of these stocks. Retail
traders should avoid these stocks unless there is a good fundamental catalyst for them. From the
strategies set forth in Chapter 7, Reversals and Moving Average Strategies usually work well on
these stocks. Do not forget though, unless there is a fundamental catalyst, these stocks are being
heavily traded by computers and high frequency traders and are not suitable for retail day
trading.
The table below summarizes these categories: