Introduction
Study after study proclaims that attempting to “beat the market” is a losing strategy. Many financial professionals and writers, me included, encourage people to make quality investments that they can hold for the long term.
New studies have shown that most people who invested in actively managed mutual funds would have done better if they had put their money in a low-cost index fund instead.
Why, then, write a book about active investing? There are several reasons.
Active investing is not about “beating the market.” It is about making a profit one trade at a time over a short period, rather than waiting for years to see if your investment pays off.
More important, active trading is not about what “most people” should do. The truth is most people should not attempt active trading. They will not have the financial resources, determination, or patience to learn how to make money at it. The statistics speak for themselves: by some counts, 80 percent of the people who attempt active trading as a full-time career do not succeed. Interestingly, that is about the same percentage of failure for starting your own business, which is what becoming a full-time active trader amounts to.
Active trading comprises a group of strategies to pursue profits in the markets, just as growth and value investing are strategies. There is nothing unseemly or of less value about active trading. It provides liquidity and there is little evidence that retail active traders have much influence on prices.
Active trading is an umbrella term for several different strategies that involve holding a position for a limited amount of time ranging from seconds to months. Throughout the book, I use the term short-term trading instead of day trading. The reasoning is that day trading is limited to one particular style and I want to emphasize that today’s active trader has several strategies that can be used as market conditions and opportunities dictate.
I also focus on trading stocks because they are still very popular with active traders and most readers will have some familiarity with them. Many of the strategies discussed apply to other securities; however, it would take a very large book to detail how to trade them all. Thanks to the Internet and technology, you can trade a wide variety of domestic and foreign securities from the comfort of your home.
With this convenience comes the explicit understanding that you must take responsibility for your actions. You will not have a professional looking over your shoulder telling you what to do or correcting your mistakes. You will also not have that person taking a big bite of your investment capital whether you have a winning trade or not. When you lose, you must learn from your mistakes. When you have a winning trade, you must also learn why the trade worked to confirm your trading strategy. Active trading is a process of constantly learning because the market is constantly changing. No one will ever be smarter than the market, but if you are a faithful student, it will reward hard work.

What to Expect

This book is an overview of what active trading is and how it works. It is not an attempt to sell you on active trading (or anything else for that matter). If you decide to learn more, there are several important topics that are only discussed briefly in this book and will require a much more detailed examination. Maybe the most important area you will need to study is technical analysis, which looks at patterns in price movements and volume. Short-term active traders rely heavily on technical analysis to spot price trends and reversals.
You will also need to study futures, options, and other derivatives in depth along with the forex market to gain a better understanding of these markets. You may find products or markets to trade that are better suited to your style than stocks or bonds.
The most dangerous thing you could do would be to put down this book and attempt to become an active trader with no other preparation. However, if you are determined to be your own boss and have the patience to do what is necessary in preparation work, an exciting career in active trading may be yours.

How to Use This Book

This book is divided into five parts:
Part 1, “The Active Trading Game,” defines active trading and describes the several different strategies that make up this form of trading. We’ll also explore the ways in which active trading differs from investing.
Part 2, “Markets and Products for Active Trading,” takes you on a tour of the markets and securities that active traders use to profit in all types of market conditions.
Part 3, “Active Trading Tools,” describes the technology and information services and providers that make active trading possible. What resources you need at all levels of active trading are outlined. Introduction XXV
Part 4, “Strategies for Active Traders,” discusses what each of the four main active trading strategies entails and how they find profits in the market.
Part 5, “What It Takes to Be an Active Trader,” walks you through the legal, financial, and tax consequences of being an active trader. It also discusses some of the personality traits that may help and some that may hinder your success.

Extras

Throughout the book, you will find these sidebars, which will add to your understanding of active trading:
002
Trading Tip
These boxes feature insider information on making the most of active trading tools and techniques.
003
Margin Call
Here you’ll find warnings about the pitfalls and dangers of active trading.
def·i·ni·tion
These sidebars contain definitions of industry terms.
Market Place
Advice for getting the most out of your active trading strategies can be found here.

Acknowledgments

A special thanks to Andrew Wilkinson with Interactive Brokers (www.interactivebrokers.com), who provided the majority of charts used in this book as screen shots from its trading system. The black-and white-reproductions don’t do the charts justice. I don’t endorse any products or services, but if you are serious about active trading, there is a good reason I chose Interactive Brokers to help with this book. It would be worth your time to consider its services when you are looking for a direct access provider.
Thanks again to Paul Dinas of Alpha Books for another chance to test his patience. Also thanks to Mike Thomas and Jennifer Connolly and the rest of the Alpha team that make me look good.

Trademarks

All terms mentioned in this book that are known to be or are suspected of being trademarks or service marks have been appropriately capitalized. Alpha Books and Penguin Group (USA) Inc. cannot attest to the accuracy of this information. Use of a term in this book should not be regarded as affecting the validity of any trademark or service mark.
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