Day Trade Shares Professional Secrets - product_7031_pdf_link.pdf

8/18/2019 Day Trade Shares Professional Secrets - product_7031_pdf_link.pdf

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Day Trading: Professional Secrets

Accendo Markets Ltd is Authorised and Regulated by the Financial Conduct Authority (FCA) No. 475285.We offer CFD, Spread Bet and FX Trading Services. Accendo Markets Ltd, Registered in England andWales No. 6417051. Registered Office: 1 Alie Street, London, E1 8DE, +44 (0) 20 3051 7461

Trading with a Personal Touch

Leveraged products involve a high level of risk and you can lose more than your original investment.

They are not suitable for everyone so please ensure you understand the risks involved and if necessary please obtain investment advice from a financialadviser before investing. This report is not a personal recommendation and does not take into account your personal circumstances or appetite for risk.

About This Report

The basics of financial trading can take just a few hours to master, but it is time well spent - potentially servingyou for a lifetime. That’s not to say that the work stops there. There is more to learn every day. Privateindividuals can make an excellent living trading the financial markets, and with time and patience most novicescan become self-sufficient. Some find it intuitive - ‘born’ traders. Others take longer to find their niche and forte.Whatever your experience, there is a mountain of excellent material from which to draw upon to help you

develop and perfect your trading strategy and attain your goals.

This report is designed to provide you with a broad introduction to some of the methods you could employ toidentify trading opportunities, and to develop your trading strategy. There is no right or wrong way to trade thefinancial markets. It is differences in opinion which make the market so dynamic. This report, we hope, will giveyou a foundation from which to decide on what you want to trade and how you want to trade it.

Choosing your trading strategy

Strategic planning is important preparation for every successful trader. You need to know what you’re aiming toachieve. Formulating a strategy is key to help you know what you want to achieve, help you stick to your plan

and allow you to evaluate your performance. Perseverance and discipline are also required.

There is an array of trading strategies that work. Testament to this is the range of successful hedge fundsinvolved in the financial markets, all trading different assets and using different strategies. There is no right orwrong way to trade, different strategies work for different traders - some find themselves particularly talented atanticipating market moves using certain methods.

Technical analysis

Technical analysis, otherwise known as ‘charting’, is widely used by professional and amateur traders alike. Itinvolves forecasting the movement of asset prices by studying past data, which typically includes price andvolume plotted on the graph/chart. Technical analysis is essentially concerned with the anticipation of crowdbehaviour (herd mentality) and market sentiment. This contrasts with fundamental analysis, which is concernedwith an asset’s ‘fair value’.

The basic principle of technical analysis is that an asset’s price reflects all relevant available information.Therefore, the asset’s trading pattern, rather than external drivers such as economic, fundamental and newsevents, should tell the trader all they need to know. Price action tends to repeat, because crowds tend towardpredictable, patterned behaviour – hence the technical analyst’s focus on conditions and trends.

Our research is produced by Accendo Markets Limited. Research produced and disseminated by Accendo Markets is classified as non-independentresearch, and is therefore a marketing communication. Accendo Markets research has not been prepared in accordance with legal requirementsdesigned to promote its independence and may not comply with FCA guidelines to prevent conflicts of interest and is not subject to any prohibition ondealing ahead of the dissemination of research. As such, this research does not constitute a personal recommendation or offer to enter into a transaction

or an investment, and is produced and distributed for information purposes only. Accendo Markets considers information contained within the research tobe valid when published, and gives no warranty as to the investments referred to in this material. The income from the investments referred to may godown as well as up, and investors may realise losses on investments. The past performance of a particular investment is not necessarily a guide to itsfuture performance. Prepared by Augustin Eden, Analyst

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Back-testing

Back-testing is the evaluation of a trading strategy’s performance, assuming it had been employed historically.Results do not tell you whether the system will work in the future (future market conditions will always bedifferent), but give an idea of the success rate the strategy would have had. The longer the time-frame used,the better idea you can get. It also allows analysis without having to incur the costs of the losses likely incurredalong the way. While it can work well for one thing (a particular share, FX pair, commodity or index), it does notmean it will work for all. Often, different systems are needed and used for each.

While back-testing used to be a very laborious and expensive process, this is no longer the case. Advances intechnology mean the tool is now accessible on many trading software programmes and charting packagesused by retail investors. Back tests can range from being extremely simple, based on single criteria, toextremely elaborate tests involving multiple conditions.

If, f or example, you notice that the last few times Barclays’ share price has moved up through its 50-daymoving average that the shares continued to move higher, you might want to back-test a Buy strategy. Youcould set up to test over the last five years, evaluating the performance of a strategy buying each time theshares moved above the 50-day moving average, and closing when the shares fall back below. The strategy

could be expanded to go short on every move below, and closed every time the shares moved back above.Should you see that the strategy would have returned an interesting return over the 5 years, you might decide itworth following the signal.

One thing to consider through is the maximum loss the strategy would have incurred during the time-frame.Five years is a long time. There may have been several bad signals and a run of losing trades. Could yourcapital base have managed this? If not, the system may not be appropriate and require refining.

You can ‘back test’ your strategy with Accendo Markets’ trading platforms and charting software. To receiveyour trading platform login, you need to open an account. There is no extra charge for you to back-test yourideas, and it costs nothing to open an account.

To open your account now and start back-testing your ideas at no risk, visit our account application page.

Pairs Trading

Pairs Trading is designed as a market neutral way of trading, whether the market is rallying or falling. Thestrategy involves trading two historically highly correlated securities (eg. shares, commodities, indices) whenthe relationship has broken down. The strategy involves going long on the underperformer and short of theoutperformer with the hope that the spread/relationship between the two returns to its historical average.

The idea in trading correlated stocks is that the two should move in a similar (if not the same) manner whateverway the market moves; any losses on one being offset by gains on the other. As long as the long rises morethan the short rises, or the short falls more than the long falls, the strategy will be profitable.

The most popular way of trading is with two highly correlated equities likely from the same sector whichremoves both sector and market risk. Two miners (for example, Rio Tinto and Anglo American) or banks (forexample Lloyds and RBS) might be good examples.



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Interesting pairs can be back-tested to evaluate the success rate of the spread returning to the mean.

You can trade a very huge range of markets with an Accendo Markets trading account, including many pairstrading opportunities.

To open your account now and start practising your pairs trading strategy, visit our account application page.

Arbitrage

Arbitrage is similar to pairs trading. It involves looking at the historical relationship between two securities andtrading with the hope the relationship returns. Examples include looking at the shares of a company which islisted on two different exchanges in two different countries. If the difference between the two share prices ismore than the exchange rate between the two different countries, there may be a trade opportunity.

Other options include the difference in the price of oil in two different locations. With oil traded in US dollars,exchange rate risk is negated, meaning you could buy oil in the cheaper location and sell the same oil in themore expensive location, profiting from the difference.

In many cases arbitrage requires trading in large size to allow profiting from the usually small differences inprice.

As with Pairs trading, back-testing can be used to analyse the theoretical historical success rate of the pricedifferential correcting from a given level.

Using orders (stops and limits)

Stop orders can be used to put you into a trade when it starts moving in the direction you are hoping. They areused to jump on the back of existing momentum, allowing you to wait for confirmation of momentum and

allowing the trade platform to take care of executing the order when the price meets your criteria.

Limit orders put you into a trade when the price falls back, to give you a better entry point. If you believe a pricemay move higher you might place a limit order below the current price to give you a better entry point. To besure you don’t miss out on any up move, you could also use a Stop order above the share price to ensureexecution if the price starts immediately moving the way you were expecting and fails to trigger you limit order.

Stops and limits are important tools for ensuring execution at the desired level. They are also significant inallowing emotion to be removed from the equation leaving the trading platform to execute the tradeautomatically.

Accendo Markets’ platforms will allow you to utilise a range of automatic orders, including stops andlimits.



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Fundamentals

Trading on fundamentals involves focusing on company specific events to decide what to buy/sell and when todo so. It is more associated with the traditional long-term buy-and-hold strategy than short-term trading, but canbe used for both. Trading around scheduled, anticipated or unscheduled events (such as company financialresults publications, drilling announcements, product launches, take-overs, broker upgrade/downgrades, profitwarnings, macro –economic data) often result in big moves.

Trading on fundamentals contrasts with trading technicals which, as discussed earlier, involves using pricecharts to identify support, resistance and patterns etc. to try and help you decide where the price might go next.

Ahead of scheduled or much anticipated events (such as company results, drilling reports) if you believe theymight be better/worse than expectations, you might trade the shares hoping that the build-up to the resultsmight see others move in and force the price in your favour. You could then close out before results or, ifconvinced the shares still had potential to react to the event, hold on until after.

The same applies for unexpected events (broker upgrade/downgrades, take-overs, profit warnings, macrodata). When they occur, you can trade the shares in anticipation that the existing move has legs as more and

more people try to profit from the move.

Accendo Markets’ research can tell you what will be announced and when. Our exclusive research, producedin-house by our analysts, is available to all active CFD clients at no extra charge. If you’d like to receive a free14-day trial of our research, please visit our research trial application.

Day Trading

Day Trading (or intra-day trading as it should really be known) refers to the buying and selling shares, FX,Indices and commodities within the same trading day, never holding a position overnight. The idea is that youare not sitting on any risk overnight. You may miss out on interesting overnight moves by not keeping positions

open, but you can’t lose any money based on world events or macro-economic data which may materialise inthe wee hours.

Day traders spend their time looking for set-ups - situations where the price (of a currency, commodity, index ofshare) is set to move. Positions can then be held for anything from a few seconds (see Scalping below)thorough to several hours. They may trade just once in the day, they may trade tens of times. Discipline andrisk-management are key with day-trading.

Day traders usually identify opportunities via breakouts from support/resistance or patterns on price charts.Other technical indicators used include momentum (see later), volume, and Fibonacci levels (% retracement ofprior moves).

The practice used to be limited to firms and professionals, however, advances in technology now mean thatanyone can now trade almost anything from anywhere in the world as long as they have a trading account andaccess to the internet.



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Note that Day Trading can sometimes be a misnomer, with some traders holding positions overnight if theyhave a strong conviction that they should let an existing position run, or look to profit from an overnight move.

To open your account now and start practising your day trading strategy, visit our account application page.

Scalping

A derivative of Day Trading, Scalping involves trading big positions for very short lengths of time with the aim ofcapitalising on small moves. The idea is to do this several times a day. When positions start going sour, theyare closed very quickly, limiting losses and preserving capital for use with later opportunities. The hope is thatthe few successful trades can offset the several unsuccessful trades. Stop orders can be used to enter onmomentum and Limits placed a short distance further to capture a profit. Risk can be limited by using closelyset Stop Losses.

Reading List

This report is a broad introduction to just some of the trading methods you could employ in your trading activity.Our daily research and charting software (both of which are provided to all active clients) should give you thetools you need to reach your trading goals.

Accendo’s Head of Research has worked in the city for a decade and studied for several exams focused onsecurities, derivatives and technical analysis (charting). Some of the reading material he has devoured over theyears includes the below list. His top ten is below comes highly recommended for everyone from the beginnerto the seasoned trader.

All provide excellent material to help further comprehension of the world’s financial markets and developmentof trading techniques and strategy.

1. Technical Analysis of Stock Trends (R. Edwards & J. Magee)

2. Technical Analysis of the Financial Markets (J. Murphy)3. Technical Analysis Explained (M. Pring)4. Candlestick Charts (C. Lambert)5. Cloud Charts, trading Success with Ichimoku technique (D. Linton)6. Trader Vic: Methods of a Wall Street Master (V. Sperandeo)7. Market Wizards: Interviews with America’s top traders (J. Schwager) 8. New Market Wizards: Conversations with America’s Top Traders (J. Schwager) 9. The Way of the Turtle (C. M. Faith)10. The Naked Trader (R. Burns)



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Why should you day trade equities?

As discussed, ‘day trading’ involves trading during market hours and not holding positions overnight. Thisremoves the risk of something negatively (and positively) affecting your position while you are unable to react.When you read that a share price finished up 2%, it might not sound that exciting. However, if you were toknow that over the course of the day the shares traded -5%, before rallying significantly to be +5% and thenfalling again before closing +2%. A very different picture I’m sure you’ll agree (10% high to low trading range),

offering interesting trading opportunities. Many stocks regularly trade like this, reacting to both companyspecific and macro-economic news as well as moves in commodities and Forex. This rarely leaves day traderstwiddling their thumbs.

Looking again at the percentage moves, you may again say that they are still not interesting enough to use withshares. This is where the leverage embedded in CFDs proves its worth. With traders only having to front apercentage of the value of the shares they are trading, the potential returns on their deposit can be scaled upby several times (4x to 20x). Additional benefits of using CFDs include the option to trade in both directionsboth up and down allowing you to take advantage of the full trading range of a stock.

Why should you day trade with Accendo Markets?

Accendo Markets exists to help you day trade the way you want to, and with confidence. We do this byproviding you not only with someone to speak to for market insight and help with placing trades, but also viaaccess to our exclusive in-house research - a host of daily and weekly publications, to help you navigate themarkets, and further your education.

Our morning report lets you know what has impacted market sentiment overnight and why (example) it mightmore share prices. Our Week Ahead lets you know what major data or company results could impact yourshares position the following week (example). Our daily calendar takes this a step further, with a more detailedbreakdown of potentially market-moving events scheduled for the following day. This is updated live throughoutthe trading day, letting you know where data was better/worse than expected (example). Our FTSE Focuspublication looks at the UK flagship index over 4 different time horizons identifying potential support andresistance for both long-term, short-term and day-traders. This allows you to look at any of the other indices weoffer and to analyse them in the same way (example).

How to day trade equities using CFDs

Trading equities with CFDs is a simple affair, allowing you to maximise your profit potential. Purchases of£10,000 worth of traditional shares would require you to part with the full £10,000 up front. With CFDs,however, your initial outlay for an identical trade could be as little as £500 (shares require deposits rangingfrom 5% to 25%). Whilst your outlay is lower, your risk/reward remains the same as if you had acquired£10,000 of physical shares.

As a CFD day trader, you benefit/suffer to the same extent as the traditional shareholder, but benefit from nothaving to part with the full amount at the outset. Furthermore, as you are not buying shares, Stamp duty is notpayable, meaning your trading costs are reduced yet further. Day traders typically do the above several times a

day but usually close the day with an empty positions page, no risk held overnight. In summary, CFDs offer youa simple way to day trade, long and short whilst maximising your profit potential.

For a worked example of setting up an equity CFD day trade, see over



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The below chart identifies the 5 stages of an equities CFD day trade in RBS;

1. The shares get to a level you wish to trade at; for example, making new highs at 255p

2. Short position opened at 255p.

3. Trailing stop-loss placed at 260p, limiting risk to 5p.

4. Shares fall by 15p to new low of 240p. Trailing stop remains 5p behind, moving down to 245p

5. Shares rise by 5p from low, trailing stop triggered at 245p. Trade closed with profits of 10p (3.9%)

Had the above trade been placed on a £100 per point basis, your position would have initially been risking£500 (5p loss x £100/point). When the trade moved in your favour the trailing stop would have moved down in-line, first to breakeven (stop in-line with entry point) then to protect profits (stop below entry point). When theshares hit new lows, the position would have shown a profit of £1,500. With the tailing stop still 5p below youwould be have been locking in profits of £1,000.

Best of all with that trade closed by mid-morning, you have the opportunity to continue trading in the day withprofits already banked. Day trading applies equally as well to Shares, Indices, Forex and Commodities.

Please note, however, that had you not had a protective stop in place and the shares rose rather than fell, youwould be liable for any losses.

Other ways of helping yourself in day trade set-up include the use of technical indicators.For more, see over



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Support and Resistance

If the below chart applied to an equity, you would be in a position to identify levels of ‘Support’ and ‘Resistance’.So long as these levels remain unbroken, you could assume that shares will continue to trade within this range,or ‘channel’, as the below example has done since March-2015 when two highs and two lows would haveallowed you to draw and extend trend lines.

If one of these levels is broken, you would then be in a position to look to the next higher/lower level (usually asignificant historic high or low) as the next level of potential resistance/support. The breakout level would likelyreverse its prior role (support becomes resistance, resistance becomes support) for any subsequentrally/declines.



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Volume – What’s going on behind the Scenes?

Looking at the vertical volume bars below the above price chart, you could identify when the volume of sharestraded rises and falls. Given that it is assumed shares require volume (or market appetite) to rise, you can useincreased volume to confirm that a rising price trend is valid. You could also use falling volume (as is the caseabove) to question a rising price trend such as the continued uptrend through July. Such a divergence,combined with the fact that shares have reached the trendline of resistance, could indicate an imminentcorrection or reversal.

Moving Averages



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The dashed lines on the chart above are called the moving averages of the price. These take an average of theclosing prices over a certain period. In our case we have used 20 days (red dashed line) and 50 days (bluedashed line), but there is no right or wrong choice here. Day traders will often use periods in the region of hoursor even minutes, tailoring their choices to the specific security they are trading.

Momentum

A share price’s momentum is found by taking the difference between the price on day X and the price 12 daysprior. It gives an indication of the amount by which the price has changed over 12 days and thus the underlyingrate of change in the price. High momentum (positive or negative) illustrates high underlying power behind aprice move (up or down). If a share’s price is trending up while its momentum is falling off (a negative divergence), that can be seen as an indication of an impending reversal. The same is true for a share price thatis falling off while its momentum is trending upwards – a positive divergence or convergence.

And that’s it! Of course there are far more tools in the technical analyst’s box – but you should realise by nowthat if you just use the above simple indicators with discipline it is possible to predict the future with enoughconsistency to profit handsomely from trading. It’s not rocket science, and it may even be more lucrative!



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