So now another interesting question arises: If your buy only goes against someone else's sell, is the practice of day-trading stocks a zero sum game? I do not believe so. Anyone trading on an exchange adds liquidity, and liquidity is what makes a market successful. Securities do not have time values in them the way that derivatives do. In the equities market, real wealth is both created and destroyed on a daily basis.

Let's get started and review what day trading is and how it differs from other forms of trading activity. Day traders by definition do not hold positions in securities overnight. Typically, the day trader makes and holds trades for only minutes at a time, most commonly for less than an hour. Operating in this fashion requires a very disciplined approach that includes accepting loss as part of the cost of doing business. It is not possible to make every trade a winner. In fact, I know of people who make lots of money being right only half the time in the trades they make.

The key to making money while day trading is limiting your losses and taking profits when you can. Not only does this take a methodical approach, but the approach must be based on the reality of what is happening to the asset you hold, not the hope of what may happen to it in the future.

For those who have held investment accounts, concepts such as doubling down, which may work well for longer-term trades, are potentially disastrous in day trading. Doubling down is the practice of buying a security, and if its price falls, you buy more in order to lower your average cost. That way, you can make money even if the security does not get back to your original purchase price. When day trading, these types of tactics fall more into the hope than the reality column, and they definitely do not contribute to a disciplined approach. As I will say again and again, discipline is the key to survival and profitability in the day-trading game. Making an investment decision to trade in securities that are then held for years at a time generally comes as the result of fundamental analysis of a company's busi­ness. You then apply some sort of valuation model to the share price and become convinced that the share price should be higher. The day trader cares nothing for this sort of analysis. Day traders only care about finding imbalances between supply and demand, and taking positions in securities that take advantage of those temporary imbalances.

One of the concepts I learned in the earliest years of my trading was how to know when I was in congestion. I was taught each of the concepts I will present, the most recent by my trader friend, Neal Arthur Muckler. I'll begin with that one.

Any time prices close on four bars, within the confines of the range of a single price bar and subsequent to that bar, you have congestion. This is regardless of where the highs and lows may be located. The single price bar may be termed a measuring bar.

You will have to closely and carefully study the charts that follow. Congestion can be very subtle in appearance. Often the difference between congestion or trend is the positioning of a single open or close.

One of the tools available to me in my early trading was one that clearly identifies the trend. The tools allowed me to lock onto a definite set of rules. Either the market was trending or it was not, according to my set of rules. Wow I want to show you what those rules were. They are still correct after these many years. They were utilized before I ever began trading, and they worked as well then as they do now. Is there some sort of magic about these rules? Definitely not. Their value lies in the fact that they afforded me a concrete definition of what constituted a trend. As long as I followed the rule, I could safely assume the market was trending.

Did the rule work one-hundred percent of the time? No! I have not yet found a perfect way of trading. The rule worked most of the time, and that was sufficient for me.

Obviously these „pointy places“ were different from the number two points of 1–2–3 formations. It became equally obvious that they had nothing to do with supply and demand.

If that were the case, there were only two things that could be causing them. One was obvious — the hooks were caused by profit taking. Whenever the market had moved sufficiently to satisfy a majority, profit taking caused the market to begin to move counter-trend.

The other reason was not so obvious, at least not to me, and not at that time. Today, it has become all too obvious and is a splendid way to pick the pockets of naive, tess experienced traders.

At the point in my trading career where I discovered the hooks, I was almost totally unaware of the phenomenon I've come to call „the technical indicator trader.“

I had been taught classical technical analysis which involved learning how people traded heads and shoulders, megaphones, pennants, flags, speed lines, etc. Also, I had been taught how to fade these traders in the markets. I had been taught a great deal about floor trader action in the markets, and how to neutralize what they do.

I could generally spot an engineered move by large operators on the floor. Then I could either participate or not according to my choosing.

What I was ignorant of was the use of moving average crossovers, and technical indicators such as stochastics, RSI, and others that were coming to be used in the markets.