The failure rate for persons who try to make a living from active trading strategies is said to be 80%. But if you are a newbie interested in taking a shot at becoming one of the successful 20%, a first step might be to read Ken Little’s The Complete Idiots Guide to Active Trading(source of the above stats on success rates).
Among other things, youll learn that direct-access brokers give short-term traders an edge. Their trading platforms route orders to the market faster, quote real-time prices, and show standing buy and sell orders known as Level II quotes. Some also offer back testing of trading ideas, real-time charting, and demo accounts.
The Level II quotes are a particularly handy tool for the short-term trader. They can see if demand or supply is building in the order book to confirm price and volume signals and then trade the imbalance. But there are pitfalls. Large orders can be hidden by breaking them up. And some professionals may feint traders by putting large orders in the Level II quotes to give the appearance of demand or supply build-ups.
The book also advises rookies to: i) first learn with paper-trading accounts available at many brokerages, ii) back test purchased or self-developed trading systems under various conditions, iii) follow a pre-session routine for gathering information that puts you into the proper mindset, and iv) have back-up Internet connections, computer systems, etc.
In general, high volume, volatile stocks are preferred by traders. They offer the most potential to make gains and are easier to exit in a hurry. Within that framework, several trading strategies were referenced. They included:
the day traders practice of scalping, which entails buying and selling a security simultaneously if the bid-ask spread is wide enough to cover costs
the swing traders practice of playing one to five-day trends triggered by events such as earning announcements
the position traders practice of riding longer trends tied to factors such as business cycles and phases
taking contrarian positions to over-reactions in the market, e.g. short selling stocks inflated by news of a merger in their industry
merger and acquisition arbitrage, which involves going long the company to be acquired and short the acquiring company (plus other arbitrage situations, such as pairs trading and discrepancies between securities such as options and stocks)
fading stock gaps at the open, i.e. going long in anticipation of a bounce back on a stock that opened far below its previous closing price due to some negative overnight news especially if volume was light on the gap down
playing support and resistance levels at even numbers in prices
A variety of tools and techniques are covered, such as margin trading, trailing stop orders, moving averages, charting (head-and-shoulders, and cup-and-handle, etc. ), technical indicators (on-balance volume, stochastic oscillator, etc.), momentum indicators (rate-of-change plot, breakouts on volume, etc). Limit and market orders take up one chapter; market orders are cheaper but are subject to slippage, i.e. the market maker fills your buy order at $32.75 even though the price was $32.50 at the time the order was submitted.
Ken Little is a seasoned business writer with over a dozen investing and personal finance books to his credit. It shows. The writing was crisp and clear.
However, I thought the book could have been brought to life more with real-life stories of active traders. In addition, I thought that the section on technical indicators could have had more depth: in many instances, the descriptions are rather brief and the reader is referred to an appendix for sources with more information.