Free Proprietary Trading Training

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The Free Proprietary Training Program is comprised of two segments: Theory and Practice.  Major theory topics will be presented in lecture format that will include group exercises, quizzes and class discussions.  Practical instruction will focus on daily strategies and discipline and will be supervised closely.  From Day One we expect you to make money.

Do you have what it takes to be a prop trader?  It requires both confidence and a willingness to accept mistakes.  Ask yourself: “Do I always have to be right?”  If so, you will have to give that up.  “Can I accept my mistakes, learn from them and keep coming back for more?”  If not, you will have to learn how.

Prop trading involves high-risk speculation.  It is speculative and risky and it will humble you; it will shake the confidence you have in your abilities.  Prop trading may prove to be one of the hardest things you have ever undertaken.

You need to understand that everyone goes through a learning curve and starting out with the attitude that you do not need training or that you know about trading already may mean you will not be around long enough to get through that learning curve.  This curve is steep and it varies from person to person. There are typical reasons why people lose money and fail at prop trading and you should be aware of them.

In the beginning, people lose money mostly because of keystroke errors; for example, they will use a buy key when they really wanted to use a sell key, or they will fail to cut their losses because they do not hit the right keys at the right time. Ultimately, people fail at prop trading because they lack discipline.

The Free Proprietary Trading Training Course will develop the knowledge, psychology, and strategies necessary to trade on electronic securities markets successfully and provide the opportunity for trainees to become part of our elite team of traders.


Table of Contents


Preface. 1

Table of Contents. 3

Chapter 1. 10

Market and Exchanges 10

1.1         Exchanges 10

1.2         Markets 10

1.3         Primary and Secondary Market 10

1.4         The NASDAQ.. 11

1.5         The NYSE. 11

1.6         The AMEX.. 12

1.7         The CME. 12

1.8         The LSE. 13

Chapter 2. 14

Orders, Transactions and Positions 14

2.1         Orders 14

2.2         Transactions 14

2.3         Limit Orders 15

2.4         Market Orders 15

2.5         Long Positions 15

2.6         Short Positions 16

2.7         Inventory. 16

2.8         Unrealized Profit/Loss 17

2.9         Realized Profit/Loss 17

Chapter 3. 18

Auction Market – The Specialist 18

3.1         Auction Market 18

3.2         Characteristics of Auction Markets 18

3.3         The Specialist Book. 18

3.4         The Specialist Responsibilities 19

3.4.1.        Specialist as Auctioneer 19

3.4.2.        Specialist as Agent 19

3.4.3.        Specialist as Catalyst 19

3.4.4.        Specialist as Principal 19

Chapter 4. 20

Dealer Market – Market Maker 20

4.1         Dealer Market 20

4.2         Market Makers 20

4.3         Market Makers VS Prop Traders 20

4.4         Market Makers Restrictions 21

4.5         Market Makers Responsibilities 21

4.6         Market Markers Sources of Income. 21

Chapter 5. 22

Electronic Communication Networks and Dark Pools 22

5.1         Electronic communication Networks 22

5.2         ECNs Features and Characteristics 22

5.3         Dark Pools 23

Chapter 6. 24

Basic Software tools and trading concepts 24

6.1         Level 2 – a level beyond. 24

6.2         Tape Reading. 23

6.3         Trading Monitor and Position Summary. 24

6.4         First in First out (FIFO) 25

6.5         Volume. 25

6.6         Liquidity. 25

6.7         Rip, Tank, Swipe. 25

6.8         Volatility. 26

6.9         Gateways 26

6.10      Execution System.. 27

6.11      Books 27

6.12      Retail Traders and Prop Trader 27

6.13      Arbitrage. 28

6.14      Lots, Round Lots, Odd Lots 28

6.15      Cross Lock. 28

6.16      Rebates 29

Chapter 7. 30

Market Indicators – Information Concepts 30

7.1         Indexes and Averages 30

7.2         Dow Jones 30

7.3         S&P 500. 31

7.4         Futures 31

7.5         S&P 500 Futures 32

7.6         Squawk Box. 32

7.7         General Market Information Concepts 34

7.7.1.        News 34

7.7.2.        Correlation. 35

7.7.3.        Expectations 35

7.7.4.        Fed Meeting. 36

7.7.5.        Stock Screeners 36

Chapter 8. 37

Risk Management 37

8.1         Risk. 37

8.2         Risk Management 37

8.3         Extended Hours Trading Risk Disclosure. 38

8.3.1.        Risk of Lower Liquidity: 38

8.3.2.        Risk of Higher Volatility: 38

8.3.3.        Risk of Changing Prices: 38

8.3.4.        Risk of Unlinked Markets: 39

8.3.5.        Risk of News Announcements: 39

8.3.6.        Risk of Wider Spreads: 39

8.4         Max Loss, Max Shares and Buying Power 39

8.4.1.        Max Loss 39

8.4.2.        Buying Power 40

8.4.3.        Max Shares 40

Chapter 9. 41

Rules and Compliance. 41

9.1         Regulations 41

9.2         The SEC.. 41

9.3         The FINRA.. 41

9.4         Regulations at Proprietary Trading Firms 42

9.5         The main rules that traders will have to follow are: 42

9.6         Broken Trades 42

Chapter 10. 43

Trading Psychology. 43

10.1      Mindset 43

10.2      Focus 43

10.3      Discipline. 43

10.4      Behaviors that leads to unsuccessful trading. 44

10.5      Skills to be acquired. 44

10.6      Goals 45

10.7      Emotions experienced when starting trading. 45

10.7.1.      Anger 45

10.7.2.      Frustration. 46

10.7.3.      Anticipation. 46

10.7.4.      Incredulity/Amazement 46

10.7.5.      Elation. 46

10.8      Getting Started. 46

10.8.1.      Do’s and Don’ts 46

10.8.2.      Daily Prep. 47

10.8.3.      Money Management 47

10.9      Psychological Hurdles 48

10.10         The 3P=EPIPHANY Approach. 48

10.10.1.         Persistence. 48

10.10.2.         Preservation. 49

10.10.3.         Patience. 49

10.11         Battle Plans 49

10.12         General Trading Axioms 51

10.13         Other Trading Psychology Concepts 51

10.13.1.         Transparency: 51

10.13.2.         Desires and Faith. 52

10.13.3.         Intuition, Experience, Feeling the Market 52

10.13.4.         Instinctive people and Analysts 52

10.13.5.         Open Minded Traders are the best 53

10.13.6.         Imitation. 53

10.13.7.         Experience, Learning Curves and constant learning: 54

10.13.8.         Crowd effect, Contrarian. 54

10.13.9.         Personal Life and Self Evaluation. 55

Chapter 11. 56

Trading Strategies Concepts 56

11.1      As many strategies as traders 56

11.2      Active Trading and Passive Trading. 56

11.3      Bid-Ask Size: 56

11.4      Hotkeys 57

11.5      Inventory Management 57

11.6      Partial Fills & Odd Lots 57

11.7      Making Trades 57

11.8      Tape reading and block trades: 58

11.9      Round Numbers 58

11.10         The level 1 spread. 58

11.11         Multiple Orders, Multiple Fills 58

11.12         Short Squeeze. 59

11.13         The Axe. 59

11.14         Advanced order types: 59

11.14.1.         Hidden Orders 59

11.14.2.         Reserve Orders 60

11.14.3.         Adding Liquidity only. 60

11.14.4.         Test Orders 60

11.14.5.         Following orders or Pegging Orders 60

11.14.6.         Switching Orders 61

11.14.7.         Bunched Orders 61

11.15         Relative Strength. 61

Chapter 12. 63

Your First Battle. 63

12.1      Simulation. 63

12.2      Live Trading. 63

Chapter 13. 64

Applied Trading Strategies 64

13.1      Scalping: The Rebate Game – Market Maker Game. 64

13.1.1.      Action. 64

13.1.2.      Strategy. 64

13.1.3.     Averaging Down – Once or Twice Maximum.. 64

13.1.4.      When to get out on the downside. 65

13.1.5.      Warning: 65

13.2      Momentum Trading. 65

13.2.1.      Action: 65

13.2.2.      When to get out on downside. 66

13.3      Opening Strategies 66

13.3.1.      What is the Opening? 66

13.3.2.      Notion of fair value at the open. 66

13.3.3.      Envelope Strategy. 67

13.3.4.      Back Testing of envelope strategy. 67

13.3.5.      Positive Trading Scenario. 67

13.3.6.      Negative Trading Scenario. 68

13.3.7.      Risk of this strategy. 68

13.4      Dark Pools Strategies 68

13.4.1.      What are dark pools, how they work? 68

13.4.2.      Dark pools features 68

13.4.3.      Pegging Orders 69

13.4.4.      Execution size features 69

13.4.5.      Linking and Scanners 69

13.4.6.      Anti predatory trading algorithms 69

13.4.7.      Positive Trading Scenario. 69

13.4.8.      Negative Trading Scenario. 70

13.4.9.      How institutions defend themselves 70

13.4.10.         Good rules this strategy. 70

13.4.11.         Risk of this strategy. 71

Appendix – A.. 72

Intraday Trading Periods 72

Appendix – B.. 73

Office Rules 73

Appendix – C.. 74

Suggested Reading List 74


Chapter 1  

Market and Exchanges

1.1                          Exchanges

An exchange is an organization, which allows transactions of financial products to occur in an orderly manner and in a centralized location (physical or virtual). Stock exchanges are the most widely known example. The New York Stock Exchange (NYSE) and the National Association of Securities Dealer Automated Quotation (NASDAQ) are the two most important stock exchanges in the United States.

For future exchanges, The Chicago Mercantile Exchange (CME) is the leading one. Proprietary Trading Firms has access to all previously mentioned exchanges but also has access to the London Stock Exchange which is the most important stock exchange in Europe. Other Markets that will soon be available at Proprietary Trading Firms include Euronext and the Toronto Stock Exchange.


1.2                          Markets

A market is the consolidation of exchanges or transactions in a specific financial product. For example the US stock market is the consolidation of all the transactions happening in the stocks exchanges in United States. Other popular markets are the futures market and the options market which together can be called the derivatives market.


1.3                          Primary and Secondary Market

The primary market is for new issues of securities, as distinguished from the secondary market, where previously issued securities are bought and sold. A market is primary if the proceeds of the sales go to the issuer of the securities sold.

There is no physical or virtual defined location for the primary market. The transactions are rather happening between Investment bankers and Institutional Investors. Once all the transactions for an issue are completed on the primary market, there is what we call an Initial Public Offering (IPO) and the stocks start trading on the secondary market.

At Proprietary Trading Firms we concentrate trading on the secondary market.

1.4                          The NASDAQ

Established in 1971, the National Association of Securities Dealers Automated Quotations System (NASDAQ) is a dealer market and is the first and world’s largest electronic stock market listing nearly 4000 companies. It is operated by the NASDAQ Stock Market, Inc. More than 500 Market Makers use their own capital to buy and sell NASDAQ securities, and then redistribute the stock as needed. The NASDAQ network also connects alternative trading systems like electronic communications networks (ECNs), which enable investors to trade with each other. The NASDAQ Stock Market is composed of two separate markets: The national market and the Small Cap Market. The NASDAQ recently became a public trading on the NASDAQ under the symbol NDAQ. More information can be found on the website at



1.5                          The NYSE

Founded in 1792, The New York Stock Exchange is the largest auction market place in the world. It is located at 11 Wall Street in New York City. The NYSE is often called The Big Board or The Exchange. It is a physical market using a specialist to match orders. However, the exchange is becoming more electronic with its acquisition of the Archipelago Exchange (ARCA Exchange) and more volume on the Intra-market Trading System and different ECNs forming the third market. Approximately 3000 companies worth nearly 18 Trillion dollars in global market capitalization are listed on the exchange. Average Stock volume is more than 5 Billion shares. Listing requirements on the exchange are very strict. Therefore most stocks traded are older companies and blue ships. A lot of foreign companies are also listed on the NYSE as American Depository Receipts or other form of entities (450 Non-US companies valued at nearly 5 Trillion dollars). The exchange trades many other products like bonds, warrant, rights and ETFs. More information can be found on the website at



1.6                          The AMEX

The AMEX, which stands for the American Stock Exchange, is a smaller market for equities but it is the second-largest options exchange in the World. The AMEX was bought by the NYSE in January of 2008. About 800 different stocks were trading on the exchange and a lot of different ETFs, since the AMEX is a pioneer in that field. A lot of AMEX stocks are now traded electronically on the NYSE through Archipelago (ARCA Exchange) Exchange. The AMEX was also an auction market using a specialist. The Spiders (SPY) and Diamonds (DIA) which are ETFs respectively based on the S&P500 and Dow Jones Indexes were two of the major ETS trading on the exchange. More information can be found on the website at



1.7                          The CME

The Chicago Mercantile Exchange, which recently acquired the CBOT and the NYMEX, is the largest US derivatives exchange in the world. It was founded in 1898 as the Chicago Butter and Egg Board, evolving into the CME by 1919.

The exchange is a major marketplace for trading futures and options on agriculture products, currencies, indices, and interest rates. The exchange went public in December of 2002 and is currently traded on the NASDAQ under the symbol CME

The most popular contract traded on the CME and also the most active future contract in the world is the S&P 500 big futures (SP) contract. It represents 250 times the index. Proprietary Trading Firms accesses the CME through its electronic exchange called GLOBEX which is the first electronic trading network for futures and options. GLOBEX trades many futures contract with a smaller value often called the minis. The ES traded on GLOBEX is a very active contract and represents 50 times the S&P 500. It is also used at Proprietary Trading Firms as a global market indicator. More information can be found on the websites at

1.8                          The LSE

The London Stock Exchange formed in 1760 as a club at Jonathan’s Coffee House by 150 brokers thrown out of the Royal Exchange for rowdiness. The Stock Exchange name was adopted in 1773 and it became a regulated exchange in 1801. Following deregulation in 1986, The LSE, also called the Big Bang, introduced computerized trading via the Stock Exchange Automatic Quotation (SEAQ) and SEAQ International Systems that display share price information in brokers’ offices throughout the United Kingdom. The LSE became a public limited company in 2000, with its shares listed the following year. In 1997, the exchange introduced the Stock Exchange Electronic Trading Service (SETS). The LSE was recently added to Proprietary Trading Firms Arsenal. More information can be found on the website at


Chapter 2  

Orders, Transactions and Positions


2.1                          Orders

An order is a request or advertisement with the intention to buy or sell a specific financial product.  An order identifies the terms relative to price, quantity and conditions in which it needs to be matched.  An order is said to be open or pending until it is matched with an opposite order. An open order can normally be cancelled by the sender. For example, if you sent a request to buy 1000 shares of MSFT at 24.50 this is considered to be a buy order on MSFT. A buy order is called a bid and a sell order is called an offer. The best bid and offer on a stock from all participants is called the NBBO (highest bid and lowest offer).

There are five conditions a trade needs to think about when sending an order and they are: side (is it a buy or a sell), size (the amount of shares), route (is is a NYSE or NASDAQ stock), ticker (the stock’s symbol) and condition (is it a fill or cancel order)


2.2                          Transactions

An order becomes a transaction when it matches with another order that can fulfill its conditions (a sell order matching a buy order). In this case we say that the order has been filled or executed. Therefore a transaction, which is also called a trade, always has a buy side and a sell side. From the previous example if somebody else sends an order to sell 1000 MSFT at 24.50 then a transaction is recorded and both orders are filled. If the sell order would only be for 500 shares then the buy order of 1000 shares would be partially filled and 500 shares would still be open (standing as a pending order).


By convention we say that a trader is buying when he buys from the offer (also referred as taking the offer); and biding when he place a buy order below the best offer. In the same manner, we say that he is selling if he places a sell order at the bid price (also referred as hitting the bid); and offering if he is offering above the best bid.



2.3                          Limit Orders

A limit order is an order to buy/sell at a specific price or lower/higher. Execution can happen at the price specified or at a better price (rarely). Price improvements happen more on the NYSE at the open or the close because the specialist is going to find a price that can match the most orders Limit orders are standing in the market if they are not executed. They will be only filled if a match with another order can be made. Limit orders are the most popular order at Proprietary Trading Firms because they limit the risk of errors.


2.4                          Market Orders

A market order is an order to buy or sell a security at the best price available. Market buy orders are filled against available limit order in the market. Market orders can be very dangerous for many reasons. One big concern is that you have no control over what price you get. In some case dishonest Market Makers and dealers could cancel and move their limit orders if they see a big order coming in.

Also there is a big difference between buying/selling 1000 shares and 10000 shares but sometimes it is easy to mistakenly enter an extra 0. Those are called keystroke errors and they happen all the time in the market. Recently, in December 2005, a Japanese Trader lost hundreds of millions of dollars because of a keystroke error!! Traders using market orders are impatient and normally it does not pay to be impatient with the market. We strongly discourage the use of market orders at Proprietary Trading Firms since there are less risky ways to get quick executions with special limit orders.


2.5                          Long Positions

When you are buying stocks we say in the trading jargon that you are getting long. If you own stocks, you are said to be long that stock. For example if you send a buy order on 1000 Shares of MSFT and get filled, you are now long 1000 share (assuming you had no previous trades/transaction in MSFT).


2.6                          Short Positions

It is possible when you trade to sell stocks that you don’t own. We call that shorting. You are borrowing the stock with the intention to sell it on the market and buy it later at a lower price (obviously if the stock goes up you will be paying a higher price to buy it back and therefore lose money on the operation).

When you sell stocks that you don’t own you have a negative position in that stock and you are said to be short. For example if you send a short order of 1000 Shares of MSFT and get filled, you are now short 1000 share (assuming you had no previous trades/transaction in MSFT). You now have -1000 shares in your possession.

Short selling in an important tool, which allow traders to take advantage of a declining stock/future price (sell high, buy low). Without this position, traders would not be able to make money 50% of the time. Since stock prices fluctuate every day, if a trader can only go long, he or she will miss out on at least half of the opportunities to make money each day.

Most of the investing public does not know about short selling. This results in a long bias towards investments. Trading firms have more knowledge than the general public in this area. Finally, there are specific rules that apply to short selling securities that we will discuss later in the course.


2.7                          Inventory

Throughout the day your inventory/position will constantly change. It varies from a positive amount of shares that you own to a negative amount of shares that you are short of. When you have no inventory or no position we say in the trading jargon that you are flat. Therefore if you had no execution on a stock you are said to be flat.

The concept of Long/Short and Flat is fundamental to trading. A great deal of the training course will be based on this concept which will be covered in details as the training progresses.


2.8                          Unrealized Profit/Loss

Every time the NBBO of a stock is moving and you have a position in it, you are incurring an unrealized profit or loss. We call it unrealized because you haven’t closed your position yet. However the unrealized profit is a realistic view of how much you would make if you would be close your positions and go flat.


2.9                          Realized Profit/Loss

Every time that a transaction is made in the opposite side of your current position (selling when you are long or buying when you are short) you are realizing a profit or a loss. For example if you are long 100 shares at 11.23 and you sell 100 shares at 11.24 you are incurring a 1 dollar profit. This is called realized profit. Realized profits and losses are accumulating all day.


Chapter 3  

Auction Market – The Specialist


3.1                          Auction Market

An auction market is run by a specialist who is god of his/her particular stock(s). The NYSE and AMEX are examples of auction markets. The specialist knows everything there is to know about the stock(s) he or she trades. A specialist’s primary job is to match up buy and sell orders.


3.2                          Characteristics of Auction Markets

  • A specialist has the authority to halt trading on his stock should conditions warrant such action
  • Orders are matched up in what is known as the “specialist book”
  • If there are no matching orders in the book, the specialist may buy or sell stocks at his/her discretion; however, if an order comes in at the market price, the specialist must fill the order from the inventory of the financial institution that employs him
  • The market will award a stock to a financial institution; the financial institution will hire a person to be the specialist for that stock
  • There is only one specialist per stock but a specialist can have more than one stock
  • now it is computerized (Electronic Order Processing)


3.3                          The Specialist Book

  • This book which refreshes every second displays all the limit orders (bids and offers) – market orders and stop orders are not displayed.
  • This allows you to see all bids and offers placed by all participants.
  • Order filling is not necessarily first come, first served, but with new regulations and electronic order processing, favoritism happens much less frequently than it did years ago.


3.4                          The Specialist Responsibilities


3.4.1.  Specialist as Auctioneer

The specialist continually shows the best bids and offers throughout the trading day. These quotes are displayed electronically and anyone can access them.  The specialist maintains order in the crowd and interacts with agents representing customers.


3.4.2.  Specialist as Agent

A specialist is the agent for all SuperDOT (electronically routed) orders. A floor broker may also choose to leave an order with a specialist to represent it until it can be executed at a specified price. This frees brokers up to concentrate on other orders that require their immediate attention. As agent, a specialist assumes the same responsibilities as a broker.


3.4.3.   Specialist as Catalyst

Unique to the agency-auction is the specialist as a conduit of order flow. The specialist knows who has been interested in a stock, and keeps track of all known interest. As all buyers and sellers aren’t always represented in the crowd at the same time, the specialist can call in all interested parties to let them know what has become available in the market. By giving updates to a previously interested party, a specialist helps trades occur where they otherwise might not happen.


3.4.4.  Specialist as Principal

Specialists, in order to fulfil their role, agree to several obligations. The first is to place and execute all customer orders ahead of their own. At the NYSE, three out of four transactions take place between customers, without the capital participation of the specialist.  In the balance of transactions, a specialist participates as principal by providing capital and, thereby, adding liquidity to the market. While they do not supply all the liquidity for the market, or determine the ultimate price of a stock, they use their capital to bridge temporary gaps in supply and demand and help reduce price volatility by cushioning price movement.


Chapter 4  

Dealer Market – Market Maker


4.1                          Dealer Market

A dealer market is one where many participants are competing against each other by posting different bids and offer. The NASDAQ is the most important dealer market in the world where orders are filled through market makers and ECNs. Any Over The Counter market or fully electronic market is also a dealer market. Unlike an auction market, where there is only one specialist per stock, there are many market makers per stock in a dealer market.

4.2                          Market Makers

A market maker is an individual trader employed by a financial institution to manage the company’s inventory of a particular security. They maintain their inventory and use it to make money for the company by buying and selling on the market.

A market maker’s primary responsibility is to provide liquidity to the market – to literally make the market – they are there to provide a flowing market while following the rules as set out by the FINRA and SEC.


4.3                          Market Makers VS Prop Traders

The difference between MMs and traders at Proprietary Trading Firms is that market makers have more money and more experience. The MMs that are the most powerful on a particular security are common referred to as the AXEs. They have the same goal as prop traders – to make money trading full time. However Market Makers restrictions and responsibilities that prop traders don`t have.


4.4                          Market Makers Restrictions

  1. 1.      They must fill orders (bids, offers, buys, and sells) on a first come, first serve basis.
  2. 2.      They cannot fill orders pre or post market hours.
  3. 3.      They cannot back away from a level 1 price. (requires more detail)
  4. 4.      They cannot buy through an advertised price
  5. 5.      They must appear on both sides of the level 2 between 930am and 4pm.


4.5                          Market Makers Responsibilities

  1. 1.      Buy and sell what the public wants (This refers to retail clients – average investing customer)
  2. 2.      Fill institutional orders (Mutual funds, pension funds, etc)
  3. 3.      Trade the house account when they are not doing 1 or 2


4.6                          Market Markers Sources of Income

  1. 1.      They earn the least from retail clients – the commissions are small and so are the orders
  2. 2.      The company earns the most in commissions from the institutions – they pay a premium for a top trader to execute their orders
  3. 3.      The market maker – the person – makes the most from earning money on the house account


Without prioritization of responsibilities, retail clients would be ignored and institutional orders would be executed when convenient.


Chapter 5  

Electronic Communication Networks and Dark Pools


5.1                          Electronic communication Networks

Electronic Communication Networks are electronic systems that display and matches securities buy and sell orders placed on exchanges and over-the-counter by market makers and traders. The highest bid and lowest offer is published on the NASDAQ (National Association of Securities Dealers Automated Quotation) workstation and distributed through information vendors around the world.

There has been a lot of consolidation recently in the sectors. NASDAQ which operated Supermontage recently bought Instinet and Brut. The NYSE bought Archipelago. Another example is when NITE, a very active market maker, bought Direct Edge. ECNs are making the market more liquid and competitive.

At Proprietary Trading Firms, traders have direct access to all major ECN quotes and they can also post bids and offers on all those ECNs. They are NASDAQ, ARCA, BATS, EDGA, EDGX and TRAC.


5.2                          ECNs Features and Characteristics

  • Quotes and Execution (when there is a match) are instantaneous
  • They allow to post bids and offers to advertise on Level II
  • Posting takes milliseconds to appear on the level 2
  • There is no charge for a trader to post a bid or offer, actually, the trader will get a credit if the order is filled
  • Partial fills are a common occurrence with the more popular ECNs
  • Most ECNs have IOC (Immediate or Cancel) order types


5.3                          Dark Pools

Dark pools are Alternative Trading Systems that are not publishing their order book publicly. Dark pools are generally used by institutions to try reducing market impact when placing large orders. Dark liquidity pools offer institutional investors many of the efficiencies associated with trading on the exchanges’ public limit order books but without showing their hands to others. Dark liquidity pools avoid this risk because neither the price nor the identity of the trading company is displayed. Most dark pools also offer advanced algorithm trading to improve chances of executions of big orders. Since there is no book the execution range is based on the NBBO to avoid prints outside of the market


See the manual on ECNs and Dark Pools Routing Strategies


Chapter 6  

Basic Software tools and trading concepts


  1. 6.                           

6.1                          Level 2 – a level beyond

With the high number of Market Participants and all the different Exchanges and ECNs, Orders must be organized in a way that allows easy access to information. Level 2 windows are used by all active and serious market participants to access information about limit orders on specific stocks no matter what exchange or ECNs they are trading on.

On the Level 2, all the market markers and ECNs limit orders, with the same price and the same side (buy or sell), are called the players of the level, the players being market makers or ECNs and the level being the specific price. On a stock the highest/lowest level bid/ask provided by one or more ECN called the Level 1 Bid/Ask. The total number of shares on a specific level is called the Size of that level.

The Level 2 is screen showing the Bid Levels on the left side and the Offer Levels on the right side.


Here is a picture of a Level 2 Screen:




Starting from the top left, here is what you see on the above Stock Window:

  • Company name (Microsoft Corp). Stock symbol {MSFT}.
  • An up arrow meaning the stock is on an uptick


  • The change in price compared to the previous closing price
  • L: the current intraday lowest trade price.
  • H: the current intraday high bid price.
  • Volume: the number of shares traded since the beginning of the day

Columns, left to right:


Number of shares

Market of Execution



      Each new trade in the market is appearing on top

      Traders link it to their Level 2 window.

      We can put more than one symbol

      We can filter by size, by market, etc


The Time and Sales window (to the right) is very important when you combine it with the level 2 screen. It gives you information about the last trades that have been made in the stock.

The size and the market are very important because they give you information about where you should place your order to get a better execution. The color gives you information about which side the trades are made: green being the offer and red being the bid. A white print is a trade between the bid and the offer, which is also called the mid-point. All the information in the T&S window is often called the tape.


6.2                          Tape Reading

Tape Reading refers to getting crucial information and reading between the lines of the T&S window. Traders must adjust their orders in real time according to all the trades in the time and sales. The rhythm at which trades are executed on a specific ECN/exchange or where they are executed is also referred to as the order flow. For example, a trader could say that there is a lot of order flow on ARCA or a lot of order flow on the bid.


6.3                          Trading Monitor and Position Summary


The trading monitor is a window that shows orders and executions. You can select all orders, open orders only, executions or previous days’ executions. Each line details a different order. Sorting and Filtering can be done when there are many of them.

The position summary window shows current positions in stocks. By default long positions are blue and short positions are red and in between parentheses. There is an option to display only stocks with active positions. Sorting and Filtering can also be done here.


6.4                          First in First out (FIFO)

The concept of FIFO means that in a list, the first one to come is the first one to be served. ECNs work on the FIFO principle. For example, if on NASDAQ there are 3 pending bids of 1000 shares at 25.10, NSDQ will show 30 on the Level 2. If somebody sells 500 shares to NSDQ then the first order of 1000 that was submitted will be partially filled and 500 shares will remain on top of the list. At that time the Level 2 will show 25 on NSDQ.

A specific ECN is based on FIFO. However the whole Level 2 does not work like FIFO. For example if you send an offer on NSDQ for 1000 shares of MSFT at 25.11, somebody else could send another offer at 25.11 after you on ARCA and if the next trade happens on ARCA he will sell before you! That concept is very important when you come to decide which ECN to use based on how trades are made on a specific stock.


6.5                          Volume

The volume is the total number of shares executed on one stock since the beginning of the day. It is a good indication of the level of activity when you compare it to previous day average volume on the same stock or other stocks average volume. If you traded 50k volume on a stock that has 500k volume during the days you did not trade 10% of the volume but only about 5% since one trade always has two sides.


6.6                          Liquidity

Liquidity refers to the ability to buy or sell an asset quickly and in large volume without substantially affecting the asset’s price. Shares in large blue-chip stocks like Citigroup or General Electric are liquid because they are actively traded and there are always substantial buyers and sellers on the bid and offer.

The notion of adding liquidity therefore refers to adding pending orders to the market. Removing liquidity refers to take it away from the market by removing limit orders. Market orders are always removing liquidity. Limit orders are removing liquidity if the bid/offer price is equal or higher/lower than the current offer/bid on the ECN they are submitted to.

While volume can be a good indication of liquidity, two stocks with the same volume can have a liquidity that is completely different.


6.7                          Rip, Tank, Swipe

A Swipe is the action of taking all the liquidity available on the bid or the offer in a single transaction. For example if a stock has a bid of 25.10 and an offer of 25.11 and there are a total of 14200 shares for all participants on the offer, A market maker could decide, the price being too low, to buy everything at 25.11 with a single order. Normally he will then place a buy order at 25.11 and the bid-ask will now be 25.11 to 25.12.

A Rip is a sudden increase in price on a particular stock. When that happens, all the trades are happening on the offer (active buying on the stock) and market makers and ECNs are showing higher bid and offer for the stock. More than one Swipe can happen on a rip. Rips usually happen when there is a unexpected good news on the stock.

A tank is the opposite of a rip and it happens when the stock is going lower because almost every trade happens at the bid and Market Makers and ECNs are lowering their bid and offer. More than one Swipe can happen on a tank. Tanks usually happen when there is an unexpected bad news on the stock.

The main aspect of Rips and Tanks is that they happen so quickly that most traders have no time to react. Losing 5 cents on a tank when you are long is different than losing slowly cent by cent when the stock is going down.


6.8                          Volatility

Volatility refers to how much movement there is in a stock. The more volatile the stock the more it is going up and down. More volatile stocks are this riskier it can be for traders but they can also be good opportunities for profit. The volatility of the market is also important. On slow moving days where the market is not volatile, traders should not try to go for the long shot.

The VIX is the volatility index measuring the implied volatility from all the options traded in Chicago. The level of the VIX will tell you how much the market is volatile. Normally when the market is going down and there is fear among participants the VIX is going up. VIX is going down when the market is stable or going up slowly.


6.9                          Gateways

A gateway is a trading route. Each individual ECN is a Gateway. NSDQ is a gateway and BATS is also a gateway. When a connection to a specific gateway fails, no order can be sent or cancelled. Therefore the risk controllers need to handle all the orders by phone. The gateway itself can also fail. In that case no trader in the world can send or cancel orders.




6.10                     Execution System

The execution system sends confirmation of pending, filled and cancelled orders to the market participants for a specific ECN. The Proprietary Trading Firms Execution System is sending back confirmations concerning all the consolidated gateways to all the traders at Proprietary Trading Firms and then, modifies each account properly.


6.11                     Books

A book is the name used for the window containing orders information on a specific gateway. When you have this information available, you say that you have the book. At Proprietary Trading Firms we have access to the NASDAQ book, the Arca Book, The Bats book, the EdgX Book, the EdgA Book and the New York Book.

An ECN book is like a level 2 but shows the information for only one ECN. Therefore individual orders on the same price level can be shown in detail instead of being combined. Such a feature is available for the NASDAQ book if you subscribe to it online.


6.12                     Retail Traders and Prop Trader

Nowadays most traders have the ability to access all ECNs and to send order to each one of them. However, most traders are retail trader. Retail traders are like the traders at Proprietary Trading Firms except that they trade from home with their own capital and a broker. They normally pay high commission relative to the prop trading world. Also, they normally don’t receive rebates from ECNs (more on that later). They therefore need a lot of capital and a lot of experience.

Proprietary traders use capital from a trading firm and they share the profits they make trading the market. The Job of proprietary trader is to watch what is happening on different Level 2 and Time & Sales windows for specific stocks and send orders that allow being long or short at a good price. It might seem like a simple definition but recognizing opportunities and good prices are very complex. It will take some time to develop that instinct to find those price points. You need to buy low and sell high. However, before you can do that you need to know what is high and what is low! In some market conditions you might want to buy high and sell higher.

Experience will teach proprietary traders when to send their order, at what price and on what gateway based on the information available. There are many buyers and sellers on the market and they don’t always see each other. Proprietary traders buy from active sellers who don’t have enough information and market access tools to know that there are also active buyers in the market. Proprietary traders are making money because they facilitate trading between uninformed traders. The profit they make is basically the average difference between the bid and the offer.


6.13                     Arbitrage

Arbitrage refers to instantaneous and risk free profit. It is basically like picking up money that you find on the sidewalk. There are many types of arbitrage. Interexchange arbitrage happens when a stock is trading on more than one exchange. There is a chance that a participant on one exchange bid higher than the ask price on the other exchange. In this situation all you have to do is take the offer price on one exchange and sell at the bid price on the other. This is called pure arbitrage. However unless you are able to send 2 orders at the same time you always have the risk for the bid to be cancelled before you have time to get it.

Semi-arbitrage is more common and we take advantage of it almost every day at Proprietary Trading Firms. This happens when there are people selling on an exchange (not offering but selling at the bid) and other people are buying on another exchange (taking the offer) while bid and offer are the same on both exchange. If there are not too many orders on the level 1 bid and ask this is normally a quick way to make money by buying from the sellers on exchange A and selling to the buyers on exchange B.

There are many other types of arbitrage like risk arbitrage, statistical arbitrage, index arbitrage, etc. More information can be found on the internet and in Microstructure of the Financial Market by Larry Harris.


6.14                     Lots, Round Lots, Odd Lots

Lots refer to a specific standardized number of shares. 100 shares is usually the smallest regular lot traded on the different stock exchange. Round lots orders or trades refer to a quantity of shares in multiple of 100, for example 1200 shares. Odd lots are the opposite, for example 1238 shares. The expression can also be used in other circumstances, like buying in 1k 5k or 10k lots. It is illegal as a prop trader to enter a position with an odd lot. However if you have been partially filled and have an odd lot position you can exit it legally.


6.15                     Cross Lock

We say that the market is locked when the bid on one exchange or ECN is equal to the ask on another ECN or exchange. That is to say that there is a limit order at the bid on a specific ECN or Market Maker that has an equal price to a limit order on the offer.

Only some ECN allow locking the market. Locking the market is a common practice on small stocks on the NASDAQ. It sometimes also happens on the NYSE. It used to be that when the market was locked you could see it on the level 2. Nowadays the ECN that is creating the locked market is not allowed to display the quote on the level 2. The only way to know that a market is locked is to send a small order in the opposite side to the ECN we expect to be locking and get a fill.

Crossed markets happen when the bid price on one exchange or ECN is superior to the ask price on another ECN or exchange. This is pure arbitrage and does not happen too often. It is also good to note that it is rarely on big orders. Most ECN and dark pools prevent executions outside of the NBBO.

6.16                     Rebates

Now that you know about ECNs, Level 2 and all the related concepts, the subject of rebates can be discussed.  Rebates are part of some type of profit sharing program with the ECNs. They are an incentive to add liquidity to the market. To encourage people to add liquidity, ECNs pay rebates to the market participants that are adding liquidity.

They pay around 2$ for each 1000 shares that add liquidity (rebates are different for every ECN). Conversely, they are charging around 3$ to remove liquidity from the market. Therefore when a trade happens, they get 3$ from the liquidity remover, pay 2$ to the liquidity adder, and keep 1$ for themselves. Rebates are more popular on the NASDAQ and they are a lot lower on the NYSE.

Without rebates, the market would be a lot less liquid. Rebates are constantly changing and the managers can provide a sheet to you with all the details. This is called the rebates Schedule. Now you probably know why people are locking the market. This is because you can make money by buying and selling at the same price if you add liquidity on both sides.

The more shares you trade and the more you will realize that this can add up pretty fast. For a good trader it is not hard to make over 500 dollars in rebates every day. However, since you are playing with more shares with a smaller profit margin your loss can be considerable when you are on the wrong side.

Rebate trading with slow moving stocks is a good way to learn how to trade when you first start. It lets you make a lot of trades on different ECNs while you don’t necessarily have to know all the time which way the market is going. As you are gaining experience, after watching the level 2 for weeks you will start to get a feel for the right side to play the stock. You will start to see patterns that you were not able to notice before. A lot of trading strategies rely on rebates and we will elaborate on them later in the course.


Chapter 7  

Market Indicators – Information Concepts

7.1                          Indexes and Averages

For day trading purposes we will refer to an average or an index as meaning the same thing. There are slight technical differences between the two; however, they are not relevant to day trading. So, what is an average? It is a group of stocks averaged out to help us get a general indication of market sentiment. There are many different indexes/averages:


The most widely known ones are:

  • DJIA – Dow Jones Industrial Average
  • S&P 500 – Standard and Poor’s 500
  • NASDAQ Composite – All the NASDAQ stocks
  • NASDAQ 100 – NASDAQ top 100
  • Russell 2000 – Small cap stocks


7.2                          Dow Jones

It is an old established private company, which provides many services to traders and the financial community. They do market research; come up with averages and other market indicators. The reason the DJIA is so widely known and powerful is because of the reputation and credentials of the company. They are known for strong and reliable analysis.


Anyone can come up with an index. However, the reason we all look at the Dow is because they are well known and established. The Dow Jones is not just NYSE stocks. MSFT and INTC are also in the average. Many traders make the mistake that DJIA is the NYSE. It is not.


There are 30 stocks in the Dow Jones Industrial Average. They pick leaders in each of the different sectors. Example: who is the leader in soft drinks? Coca-Cola. And yes, they are in the Dow 30. Who is the leader in fast food? McDonald’s is also in the Dow. How about building and home renovations? Home Depot is also in the Dow. Who is the leader in retail? Wal-Mart, which is also in the Dow.



7.3                          S&P 500

S&P is another private company like Dow Jones, which does financial research and creates indexes. S&P stands for Standard and Poor’s. The S&P 500 is the most widely watched index in the world. The 500 stocks that S&P have selected to be in this index are also leaders in their fields. Once a stock is in the S&P 500 they will stay there until they are no longer a leader in the field (decided by the S&P).

Standard & Poor’s is widely recognized as a leading provider of indices. S&P indices are used by investors around the globe for investment performance measurement and as the basis for a wide range of financial instruments. The S&P 500 Index is strongly representative of the sentiment of the broad, or general, stock market. Widely regarded as the standard for measuring large-cap US stock market performance, this popular index includes a representative sample of leading companies in leading industries.

Important points about the S&P 500:

  1. Most liquid instrument in the world after the US dollar
  2. All fund managers are compared to the S&P 500
  3. If you add a stock to the S&P 500 that stock goes through the roof. (Go and find out which stocks have recently been added to the S&P 500, and how much the stock went up the day they announced that they were going to be added to the index.) This is because many index fund managers will have to buy the stock
  4. Why are stocks dropped from the S&P 500? Usually because they were merged or bought out by another company already in the index.


7.4                          Futures

A futures contract is a trade made in the present, for an item that will be delivered at a later date. In other words, two traders agree on a price, one of them agrees to buy, and one of them agrees to sell. The actual item being traded does not change hands. It is agreed that the seller will provide the item, and the buyer will take delivery of the item at a pre-set date in the future, for a price, which is agreed upon at the present time.


In simplest terms, futures are traded by agreeing on a price in the present, for an item that will not actually be ready for delivery until a specified date in the future.


At the Chicago Mercantile Exchange, futures contracts are traded on the S&P 500 Index. This is all students need to know, and arguably more than they need to know in order to use the S&P 500 Futures as a leading indicator.


7.5                          S&P 500 Futures

S&P 500 futures can be a powerful leading indicator for stock traders. After the US Dollar, they are the most liquid trading vehicles in the world and as such, they represent the sentiment of the broadest array of market participants at any one given time. By observing the price action of the S&P 500 futures, traders will notice that more often than not, stock sectors and individual stocks will tend to follow the movement of the futures. Perceptive traders will learn to recognize this correlation, and use it to successfully anticipate price movements.


The symbol for the S&P 500 futures is SP XX (the first x being the letter representing the quarter in which the futures expire and the second x being the last digit of the year in which the futures expire)

  • The letters H,M,U,Z represent the last month of the four quarters (March, June, September, and December) respectively
  • The electronically traded S&P futures follow the same formula, ES XX
  • The electronically trade NASDAQ 100 futures use the symbol NQ XX

Futures expire on the third Friday of the last month of each quarter – the third Friday of every third month


7.6                          Squawk Box

Many trading offices around the world will use something called a squawk box to acquire more knowledge about where buying and selling pressures are coming from. The name refers back to classic boxes which offices use to use attached to a telephone which had microphones on the trading floor. An announcer would call out all the major players on the floor and their actions. This was to remove some of the edge that the floor traders had in reaction quickly to order flow when the back offices had to wait for quotes. This system was extremely costly and not the most reliable. The squawk box went through many evolutions until it has reached today’s standard: Ben the Squawk.

So what is Ben the Squawk? The better question to ask is; who is Ben? Ben Lichtenstein is a Pit announcer who announces from the S&P500 futures pit on the Chicago Mercantile Exchange. He calls out all the major transaction and what he sees happening on the floor. Let’s go through his calls and what they mean.


The first thing to understand is there are two types of pit traders.

Locals: Locals are either self-funded or have money from some unknown resource or investor somewhere that funds them. They may represent someone else but it is not advertised.

Paper: Paper represents institutional traders such as those who are funded by big banks, pension funds or other large financial institutions.

Now it is important to understand that locals and paper  are working with each other most of the time. If one major paper player buys, you can expect others to push with him. Locals also have no choice to gang up against paper in the pits since they are financially limited. There is however, one exception to the rule. When Ben says “I’ve got one of my top Ten’ers stepping into the pit” be very attentive.

A top Ten’ers is one of the top 10 S&P500 futures traders in the world. These traders are experienced, extremely aggressive and most importantly, extremely well funded. No matter what their strategy is, expect the market to move in a direction. Certain traders place only one trade a day or none at all waiting for a top Ten’ers.

So now that we know the players in the pit, we have to learn the calls and what exactly Ben is saying. You will consistently hear Ben say things like “paper comes in and buys the halfs 200 times”. This means an institutional buyer came in and bought 200 contracts of the .50 price. Let’s go through the list of pricing calls.  Ben calls out the ¼ ticks of the S&P futures. 4 ticks make a point. We are interested in hearing at which tick the market is.

Evens: 950.00

Twenties and thirties: 950.25

Halfs: 950.50

Seventies or eighties: 950.75

At 1s: 951.00

Generally Ben will always be calling out the bid and offers. He will say something like “6 even bid at a half”. This could indicate a 956.00 bid and an offer at 956.50.

Let’s continue with the calls.

“Paper comes in and sells 500 evens, paper take them, more to sell, aggressive sellersThis means an institutional trader comes in and sells 500 contract at the evens and locals are trying to push back against him. Problem is he is aggressive and wants to push the markets lower.

“Locals are stuck they need to buy” This means the locals are stuck in a short position and have to buy the contracts to unravel their positions. Watch for a short squeeze.

“I’m seeing those low prints coming in right now” This means a paper or local got stopped out of their position and had to sell market. This can sometimes show a bounce coming in.

“Goldman is looking Goldman looking” OR “Goldman’s on the phone, looks like an order” Watch out for a large order to come in. Any time a large paper gets excited, it means a move. Anytime a trader gets on the phone, this means an order is coming in from the back office.

Every trader uses the squawk in his or her own way. Certain traders find it clouds their judgment and others cannot trade without it. The squawk box is extremely daunting at first and can be hard to understand but with experience, Ben’s words become images and a clear and concise idea of what the traders in the pit are doing becomes possible.


7.7                          General Market Information Concepts

There is so much information when you trade the market that knowing which one to consider and how to work with it is essential. In this section we will concentrate on information outside your Trading Software. You can get information on Bloomberg, Yahoo Finance, The Squawk Box, and Trade the News.


7.7.1.  News

Generally there are two type of news: news affecting the market in general and news affecting you stock or its sector. The first thing you need to know is that it is almost impossible to be fast enough to make money by buying a stock immediately after a good news release.

This can be largely explained by the concept of market efficiency. There are at all times hundreds of traders watching the same stocks and screening for news on it. As soon as there is a news event they all react and the stock moves instantly.

Moreover the exact hour when news happens is most often known in advance because of SEC regulation on Earning releases and Press Releases. We could even say that it would be more advisable to sell on good news and buy on bad news since most people tend to overreact. Traders with experience will be able to judge if most of the buying or selling on a news release has been done. Therefore they will know if the move is over or if there will be more to come. Watching the order flow on a news event is essential since the action is big and fast. Because of all those reasons it is preferable not to trade stocks with news when you are still a trainee.


7.7.2.  Correlation

Correlation is a statistical concept to evaluate the relation between two data series. Correlation varies from -1 to +1. The more positive the correlation is the more the data is moving in tandem. For example if ABC and CDE stock have a correlation of 1, that means that if ABC goes up 1% CDE will also go up 1%. There are no stocks like that in the market. However there are correlations of 60 or 70. Meaning 60% of the movement in one is explained by the movement in the other one. There is also negative correlation for example, Oil price can be negatively correlated with airlines stocks. The more you will watch the market and the more you will learn about different correlation relations. You will also learn which stocks react first on good news for the sector. These stocks are called the leaders of the sectors. The last ones to moves are called the lagers.

On average all stocks are normally correlated 0.6 with the market. That explains why they all move in tandem. That 60% of all the stock movements is called the Systematic risk and cannot be reduced by diversification alone. The remaining 40% has one part explained by the sector and the other by the stock itself. That part is called non systematic risk. This notion is essential since it explains why some stocks are going down even if they have good news. If the market is tanking don’t expect your stock to go up as much on good news as if the market was stable.


7.7.3.  Expectations

The stock market is not based on current data but on expectation about the future value. That is to say that most current data is already included in the price of the stock. In the trading jargon we say it is baked in the cake.

If market participants assume that Microsoft will have good earning they will buy it in advance to profit from it and they will therefore make the price go up. On the news the stock is already at a high price and if the profit are very good but less than the people who bought it expected then the stock will go down. That is why there is a popular adage on Wall Street that says: “Buy the Rumors, Sell on the Fact”. If you don’t understand the concept of expectation you will be surprised by stocks and markets movements when there is a news announcement!


7.7.4.  Fed Meeting

When the Federal Open Market Committee (FOMC) meets to modify the interest rate in the US there is normally a lot of activity and movements on the news. Since traders know in advance at what time the news will be out they tend to be flat before. On the news, they buy or sell according to what they think the market will do. As a proprietary trader you should be very prudent and not carry big positions before the announcement.


7.7.5.  Stock Screeners

Stock screeners are software that allows you to find stocks based on different criteria. Yahoo Finance and have good Stock Screeners. When you are looking for stocks today trade you should at first require the stock to have volume. 1 million is normally the minimal. Then you should choose a range.

You can also search stocks per sector. The good traders will always find new stocks to trade. You would be surprised how stocks can changed in a year as much in price, patterns and volume. The stocks you are trading today might not be tradable in two weeks. Moreover when there is a lot of money on a stock traders tend to all jump on it and therefore it becomes efficient and less money can be made if you are slower.

Another good way to find stocks is to look at the most active list on the Yahoo Finance. While those stocks are often stocks with news they are good to keep in mind as the interest and volume might still be there for a week or two.


Chapter 8  

Risk Management

8.1                          Risk

Risk is a measurable possibility or probability of losing or not gaining value. Risk is differentiated from uncertainty, which is not measurable. In trading there are many types of risk. Here is a list:

  • Risk of a movement of the market against your position
  • Risk of a news affecting your stock in the wrong direction
  • Risk of liquidity going away when you have many shares to trade to close your position
  • Risk of power loss
  • Risk of software failure
  • Risk of gateway failure
  • Risk of Network failure
  • Risk of hot keys errors


8.2                          Risk Management

The goal of a proprietary trader is to reduce risk. This is called risk management. Here is a list essential to good risk management:

  • Limit averaging down if the market is going against you. Never average down more than once and do it on sharp moves and not on slow moves.
  • Try to trade more slowly when you are close to the Max Loss point since Max Loss will keep you from trading and making money for the rest of the trading session.
  • Cut your loss at the market when you reach your Max Loss Limit or your
  • Use Time Stops for your trade. That is if you stock does not move and you are waiting for a long time you should try to get out and trade stock on which you will make more trades and money.
  • Use mental trailing stops: do not allow a big winning position to come back and become a losing one.
  • Do not accumulate more share than the stock can handle.
  • Organized hotkeys properly and use only the num pad, the F keys, the Shift and the Ctrl.
  • Pay attention to the size of your average winning trade and make sure it is bigger then your average losing trade. If your losers are too big that means you are using the wrong exit strategy.
  • Look at your win loss ratio.
  • Make sure you read all the news on the stocks you trade before the market opens.
  • Watch the S&P 500 futures closely.
  • Reduce your trading size when you are on a bad streak.
  • Avoid trading too many stocks at the same time.

Avoid leaving your computer when you have positions or pending orders.

8.3                          Extended Hours Trading Risk Disclosure

8.3.1.  Risk of Lower Liquidity:

Liquidity refers to the ability of market participants to buy and sell securities.  The more orders there are available in a market, the greater the liquidity.  Liquidity is significant because with it, it is easier for traders to buy or sell securities, and as well, it is more likely for the trader in question to pay or receive a competitive price for securities bought or sold.  There will be lower liquidity in extended hours trading as compared to regular market hours simply because the tremendous amount of buying and selling done by the market makers and specialists is no longer part of the equation.  As a result, your order may only be partially executed, or not at all.


8.3.2.  Risk of Higher Volatility:

Volatility refers to the changes in price that securities undergo during trading.  In most cases the higher the volatility of a security, the greater the price swings, the greater the potential for large profits and large loss.  There may be increased volatility in extended hours trading than after the regular trading session has closed and as a result trader orders may only be partially executed, or not at all.  Furthermore, traders will often run the risk of receiving a price in extended hours trading inferior to one likely to be obtained during regular market hours.


8.3.3.  Risk of Changing Prices:

The price of securities traded in extended hours trading may not reflect the prices either at the end of regular market hours, or upon the opening of the market the next morning.  As a result, traders receive an inferior (or admittedly a superior) price in extended hours trading than you would during regular market hours.


8.3.4.  Risk of Unlinked Markets:

Depending on the extended hours trading system or the time of day the prices displayed on an extended hours trading system may not accurately reflect prices available worldwide. There may be substantially different prices available on other concurrently operating extended hours trading systems dealing in the same securities.  So once again, the price the trader may receive for a particular security may be inferior or, again superior, to a price available on another extended hours trading system.


8.3.5.  Risk of News Announcements:

Issuers normally make news announcements likely to affect the price of their security after regular market hours have concluded.  Important financial information is similarly announced outside of regular market hours to foment stability of trading.  In extended hours trading these announcements occur thus during lower-volume trading when this is combined with the naturally higher volatility it will likely cause an exaggerated and unsustainable effect on the price of that security.


8.3.6.  Risk of Wider Spreads:

The spread refers to the difference in price between what you can buy a security for and what you can sell it for.  Lower liquidity and higher volatility in extended hours trading may result in wider than normal spreads for a particular security.


8.4                          Max Loss, Max Shares and Buying Power

8.4.1.  Max Loss

Proprietary Trading Firms is using a statistical system to come up with a maximum day trading loss for each trader. Depending on your previous performance as a trader, you Max Loss will vary. The Max Loss is the maximum amount you will be allowed to lose in a day before you have to stop trading. If your Max Loss is 50$ Head Office will cover your positions if you are losing 45 (90% of your 50 Max Loss). When you are in a situation where you are close to reach your Max Loss you will always be advised before your positions are closed.



8.4.2.  Buying Power

As you start as a trainee you will be provided with a minimal Buying Power (BP). Buying Power is the maximal dollar amount you can have for all the positions. You will not be able to buy more than what your BP will allow you. This buying power will increase as your trading profit increases. Buying Power Improvement is done by the manager on a case by case analysis of your situation. If you feel your Buying Power is too low, you should discuss about it with him. You have to understand that traders have a bigger BP because they are making more money on the market and not the opposite. Giving a high BP to somebody with not enough experience could be very dangerous.

8.4.3.  Max Shares

Max Shares is the maximum number of shares you can send an order for. For example is your Max shares is 300 you will never be able to send an order for 400 shares or more. You can post more than one order for 300 shares and get filled on all of them if there is a swipe. However you will have to get out of this position by more than one order. Traders that are using multiple orders to intentionally get double and triple fills will be disciplined. Max share are there to protect you before you get experimented enough to manage more shares. Max Shares is also modified on a case by case basis.


Chapter 9  

Rules and Compliance


9.1                          Regulations

There are many regulations in the financial market to make it fair for public investors. With no regulation the public would quickly lose confidence in the fairness of the market. In the U.S. there are two main organizations that are responsible for regulating the stock market, The Securities and Exchange Commission (SEC) and the The Financial Industry Regulatory Authority (FINRA).

9.2                          The SEC

The SEC is a federal agency created by the Securities Exchange Act of 1934 to administer that act and the Securities Act of 1933, formerly carried out by the Federal Trade Commission. The statutes administered by the SEC are designed to promote full public disclosure and protect the investing public against malpractice in the securities markets. Their mission is therefore to protect investors and maintain the integrity of the securities markets. More information on the SEC can be found on their website at

9.3                          The FINRA

The Financial Industry Regulatory Authority (FINRA) is a self-regulatory organisation (SRO) under the Securities Exchange Act of 1934, successor to the National Association of Securities Dealers, Inc. (NASD)

FINRA is responsible for regulatory oversight of all securities firms that do business with the public; professional training, testing and licensing of registered persons; arbitration and mediation; market regulation by contract for The NASDAQ Stock Market, Inc., the American Stock Exchange LLC, and the International Securities Exchange, LLC; and industry utilities,

FINRA was formed by a consolidation of the enforcement arm of the New York Stock Exchange, NYSE Regulation, Inc., and the NASD. The merger was approved by the United States Securities and Exchange Commission (SEC) on July 26, 2007.

With respect to the regulatory agency merger, SEC Chairman Chris Cox said, “The consolidation of NASD’s and NYSE’s member firm regulatory functions is an important step toward making our self-regulatory system not only more efficient, but more effective in protecting investors. The Commission will work closely with FINRA to eliminate unnecessarily duplicative regulation, including consolidating and strengthening what until now have been two different member rulebooks and two different enforcement systems

9.4                          Regulations at Proprietary Trading Firms

As a trader at Proprietary Trading Firms you have to comply with all the Rules and Regulation of the SEC and FINRA. Any trader refusing to trade according to the rules and regulations will be terminated immediately. Proprietary Trading Firms has terminated traders before. Compliance is a serious issue as it jeopardizes the reputation and existence of the whole company! Traders with bad intention will always try to find ways not to follow the rules and make money illegally. However there are many tools that the managers of Proprietary Trading Firms are using to find out about those traders. Head office will also look at the list of trades for any suspicious profit. The SEC and FINRA are also constantly monitoring all the communications in all trading firms including Proprietary Trading Firms.

9.5                          The main rules that traders will have to follow are:

  • Do not engage in Wash Trading
  • Do not trade with other traders inside the firm intentionally
  • Do not short IPO in the first 30 days of trading
  • Do not manipulate the closing price
  • Do not trade personal account with another broker during working hours
  • Do not contact people to make trading recommendations

9.6                          Broken Trades

Trades can be broken or cancelled if they were caused by a software mistake and if they are too much away from the market. The FINRA makes decisions on NASDAQ and Market makers, and ECNs have jurisdiction over trade breaks on trades made through their execution system.

You will sometimes see on the ticker trades that are obviously out of the market. Most of them are cancelled. However Illegal trades cannot be broken because in general, one participant in the trade entered into the trade in good faith and will not want it broken; as such, it would be unfair for the SEC or the FINRA to break the trade. There are four main types of illegal trades:

  1. Trading on insider information.
  2. Not declaring a short sell. If a trader goes from a long position to a short position (accidentally or on purpose) without being flat in between, the trader has not declared the short sell because Proprietary Trading Firms Trader placed the offers as normal offers and not short offers. There is now a mechanism in Proprietary Trading Firms Trader to avoid that to happen
  3. Short selling an IPO within the first 30 days
  4. Wash trading: Intentionally buying and selling within Proprietary Trading Firms is not permitted – it may happen from time to time; however, intentional wash trading is illegal. In general, wash trading benefits one trader at the expense of another



Chapter 10  

Trading Psychology

10.1                     Mindset

It is difficult for beginning traders to accept, but the tools that are essential to successful Day trading do not necessarily come in the form of strategies but from having the right mind set.  Experience offers substantial evidence of the importance of both focus and discipline but many new traders still find it hard to accept.

Without focus and discipline, there is no point in learning strategies.  Traders must be aware that day trading involves short-term, split-second decision making within a context that is often filled with contradictory information. So, the two main psychological skills that a trader must have are: the ability to remain focused the ability to remain disciplined.

10.2                     Focus

Opportunities can present themselves at any time and a successful trader will be able to remain focused throughout the trading day so they will be ready to take advantage of them.  A focused trader can analyze opportunities based on strategy & probability and then be able to execute the trade automatically due to well practiced keystroke skills and focus.

10.3                     Discipline

There is no secret or miracle method that works all the time.  No matter how smart you are or how much you know about the market, DISCIPLINE is the key to your SUCCESS. What do we mean by DISCIPLINE?

  1. Cutting losses every time a trade goes against you.
  2. Admitting that your entry point was wrong and exiting the trade immediately
  3. Scaling down when things are not going your way (Example: trading 1000 shares and scaling down to 500 share lots).
  4. Stop trading when you reach your Max Loss on the day


Cutting losses is basic discipline and the key to become a successful trader.

10.4                     Behaviors that leads to unsuccessful trading

  1. Refusing to define a loss.
  2. Not liquidating a losing trade, even after you have acknowledged the trade’s potential is greatly diminished.
  3. Getting locked into a specific opinion or belief about market direction. From a psychological perspective this is equivalent to trying to control the market with your expectation of what it will do: “I’m right, the market is wrong.”
  4. Revenge-trading as if you were trying to get back at the market for what it took from you.
  5. Not reversing your position even when you clearly sense a change in market direction.
  6. Not following the rules of the trading system.
  7. Planning for a move or feeling one building, but then finding yourself immobilized to hit the bid or offer.
  8. Not acting on your instincts or intuition.
  9. Establishing a consistent pattern of trading success over a period of time, and then giving your winnings back to the market in one or two trades and starting the cycle over again.


10.5                     Skills to be acquired

  1. Learning the dynamics of goal achievement so you can stay positively focused on what you want – not what you fear.
  2. Learning how to recognize the skills you need to progress as a trader and then stay focused on the development of those skills, instead of the money, which is merely a by-product of your skills.
  3. Learning how to adapt to respond to fundamental changes in market conditions more readily.
  4. Identifying the amount of risk you are comfortable with – your “risk comfort level” – and then learn how to expand it in a way that is consistent with your ability to maintain an objective perspective of market activity.
  5. Learning how to execute your trades immediately upon your perception of an opportunity.
  6. Learning how to let the market tell you how much is enough, instead of assessing the potential from your personal value system of how much is enough.
  7. Learning how to structure your beliefs to control your perception of market movement.
  8. Learning how to achieve and maintain a state of objectivity.
  9. Learning how to recognize “true” intuitive information and then learning how to act on it consistently.



10.6                     Goals

Traders who set goals will be more successful than those who do not; and, traders who record their goals and refer to them will be more successful than those who simply state goals.  Start a Day Trading journal to keep track of your goals, your mistakes, your rules and your lessons.



Characteristics goals should have:

  • Goals need to be Specific so that they can be easy to describe and easy to Visualize
  • Goals need to be Set at a High Level but on also need to be Realistic so that they can be Attainable
  • It is easier to make a Commitment when a goal is Written than when its only a thought.
  • There needs to be a Time Horizon for the goal to be reached and different Time Steps with objectives
  • A Plan is required to know how we will reach each objective.


10.7                     Emotions experienced when starting trading


10.7.1.                     Anger

  • the stock moves against you as soon as you buy it/short sell it
  • can’t get into a position
  • can’t get out of a position
  • hit a key and nothing happens
  • execution system (NSDQ,ARCA, etc.) goes down


10.7.2.                     Frustration

  • not getting hotkeys
  • hitting the wrong key
  • execution system goes down
  • buying or selling when you don’t intend to


10.7.3.                     Anticipation

  • can’t wait for a new trading day
  • dreaming about the Level 2 windows
  • waiting for a stock to reverse
  • making profit and wanting to make more


10.7.4.                     Incredulity/Amazement

  • when you make a mistake and make money
  • going from long to short and you make money
  • Watching a stock go up/down 1, 2, 5 or more points in a few seconds/minutes.


10.7.5.                     Elation

  • when you make your first real trade
  • when you make your first real winning trade
  • when you accurately predict a move in a stock and profit from it
  • when you see your balance at the end of a profitable day/week/month
  • when you see that you are doing much better in your second or third month


10.8                     Getting Started

10.8.1.                     Do’s and Don’ts

  • Do stay positive
  • Do stay inquisitive
  • Do learn from every trade
  • Do write a new rule in your journal every time you make an error
  • Do stop any pattern that hinders your trading
  • Don’t beat yourself up – there’s always a great trade waiting

10.8.2.                     Daily Prep

  • Read your rules daily
  • Review your trading journal daily
  • Leave your emotional challenges at home
  • Let all your trades be either ‘earning’ trades or ‘learning’ trades (or both!)
  • Stay disciplined
  • Stay focused

10.8.3.                     Money Management

Control losses:


  • know what you are willing to risk and stick to it
  • never double up on losers
  • never take your loses home at the end of the day

Develop your own style:


  • keep a journal
  • print your blotter every day to analyze it every night
  • read everything
  • do pre and post trading day preparation
  • take responsibility for your own actions
  • accept failure
  • accept success


Follow the Market:


  • Focus on Level 2 pattern and order flow in the time and sales window
  • the trend is your friend
  • know the intraday trading cycles and your own trading cycle
  • Use indicators, indices, relative strength, squawk, etc.


10.9                     Psychological Hurdles

  • not defining a loss before executing trades
  • not taking a loss or a profit – when the market has reached your exit point (on either the upside or the downside), you must take your profit or loss
  • getting locked into a belief – going into ‘hope’ mode
  • trading on inside information or taking a tip
  • kamikaze trading
  • euphoric trading
  • regret trading
  • revenge trading
  • being more concerned about being right than making money
  • trying to be perfect
  • losing confidence
  • not consistently applying your trading system
  • not being in the right state of mind – know that you can control some things and that you cannot control other thing, but stay positive

10.10                The 3P=EPIPHANY Approach

The 3Ps in the 3P=epiphany approach stands for: persistence, preservation and patience it represents both the advantages and disadvantages of rigidity in proprietary trading.

10.10.1.                Persistence

Persistence is being able to continue trading despite obstacles like frustration and low morale.  Students will often forget that trading involves each minute of each trading day if there is to be any profit taking at all at the beginning and they will begin missing days or parts of trading days.  Some students will come in late each morning or leave at lunch.  Some will leave before the market close.  Many traders forget that this process is a long one and that they should be prepared to remain without profits for several months.

Often traders have not seriously considered the average period of time it takes to become profitable and they will decide to quit.  On the other hand many times students will not know when to quit and will continue to throw good money after bad and dig themselves into a deeper intraday hole.  Experienced and successful traders have often said that while it is important to be persistent, it is equally important not to be obstinate and to learn how to ‘sit on one’s hands’ or simply walk away.



10.10.2.                Preservation

Preservation is the most basic defensive mindset and must be adhered to from the beginning if there is to be any retention of experience and discovery of a trading style.  No matter the amount of wealth a trader has, it will be difficult for him to justify spending thousands of dollars a week on trading.  Traders who are serious about trading will have to adopt capital preservation as their primary short-term goal.  Again, though, a balance must be struck as over-preservation can lead to a limiting of opportunities.  Preservation is almost totally useless if it does not have a predetermined acceptable, maximum loss.

10.10.3.                Patience

Patience is essential for anyone hoping to become a successful proprietary trader.  New students often trade aggressively for the first day or two as they familiarize themselves with the trading process.  This is okay as it allows them to become acquainted with the different execution systems and allows them to practice their keystroke speed.  However, traders must develop patience eventually and not jump into positions without reasons. Once patience is adopted the number of trades may drop but the trader’s net profit will increase.  As well, when traders become profitable regularly their losses, while fewer, are often larger in size.


10.11                Battle Plans

Battle plans are tremendously useful to new traders who have not yet found a trading style.  They can adapt 3P=epiphany approach and quantify it to meet their individual needs.  A battle plan will provide a self-imposed guideline on a trader who is too inexperienced to be able to read the concealed intricacy of sudden market manipulation and movement.  When traders first start live trading in the practical class they should have some idea of what they are interested in trading.  At that point, however it is too early to implement a restrictive battle plan as that would prevent them from exploring the market and finding securities that present learning opportunities. Volatile stocks should be eliminated.  The initial battle plan should then include:

  • Stocks not to play
  • Sector(s) to explore
  • Search Criteria for an ideal stock(s) to watch and trade for the course


Once appropriate stocks have been found, and classes usually tend to gravitate to one or two stocks, the next step is to formulate an active battle plan to follow.  Formulating the battle plan is only the first and easiest, phase.  The battle plan should include maximum losses per trade, maximum daily losses, trailing-stop losses, objectives for the day and any other relevant, quantifiable goals.

To be a successful trader one must accept that the majority of trades executed will be losing trades.  By accepting this fact the trader will be better prepared to limit the negative impact of these trades will have on both equity and ego. A trader should always try to maintain a sense of control and following their battle plan will help them to achieve success.

The battle plan also helps on the micro level. A trader should get into a trade with a reasonable expectation of a certain result.  If they go long, it is in the assumption that the stock will be going up in price. They should immediately offer it out at the level (a reasonable level) they think it will go to. They should also have a maximum acceptable loss while they wait to see if the plan will come to profitable fruition, no more than 0.02/share.

Students should also understand where buying and selling occurs in certain market conditions. Assume for a moment that a trader has bought at the ask price and now intends to offer out the stock to sell also at the ask.  The minute that the stock begins to tank, the trader should recognize that the trade has gone against him and he should attempt to sell at the bid in order to flatten out.  The tendency for the inexperienced trader is to chase the stock down by posting offers at each price level during the process.  NO ONE WILL BUY A STOCK AT THE ASK IF IT IS FALLING QUICKLY IN PRICE.  The novice trader must remember that in order to minimize losses he must cover bad trades immediately by forcing a sell (if he is long) or forcing a buy (if he is short).

The tendency to chase stocks up at the bid and down at the ask is referred to as the “spend a quarter to save a nickel” mindset.  Novice traders, eager to save the spread by buying a stock at the bid, chase a stock up by placing a bid, then canceling as the price moves up to the next level and finally by placing another one.  This process is repeated several times until, finally, the trader is filled.  Why was this trader filled?  The stock quit moving and the more experienced traders, anxious to take their profits, sold to those unfortunate enough to be at the bid.  NO ONE WILL SELL A STOCK AT THE BID IF IT IS RISING QUICKLY IN PRICE.

Experienced traders will often say that the first step in becoming constantly profitable that they ceased to be “shaken” out of position by jiggles or sudden manipulation of price movements.  When traders become more experienced their plan will become less rigid and may only include the name of the stock, the relevant research on it and a profit goal along with a maximum loss.

The battle plan must be tailored to the individual and it must have a point to it. It must come from the trader. Traders who are forced to use a battle plan will most likely not be comfortable because they do not believe it is necessary.  One of Proprietary Trading Firms’s most successful traders once pointed out that “people trade their personalities,” which is the only reason a student’s trading plan should be theirs, not somebody else’s.


10.12                General Trading Axioms

  1. Trade stocks that have good volume and are liquid; you can get in and out quite easily.  We suggest 1 million or more shares traded per day on average.
  2. Take consistent small profits instead of waiting for that one ‘big’ trade.
  3. No overnight positions period.
  4. Limit losses (trade with discipline).
  5. Buy into strength and sell into strength by paying the ask price and offering at the ask.
  6. Have more than one reason for getting into a position.
  7. Do not trade stocks you are completely unfamiliar with.
  8. Focus on entry and exit points.  Do not focus on profit or loss.
  9. Don’t trade IPOs.
  10. Don’t trade in the first 10-20 minutes if you are inexperienced – seek direction first.
  11. Don’t “hope” a stock will do something.  Make decisions based on what the market is actually doing.
  12. Be very careful when averaging down.
  13. Have rules and stick to them.  Discipline, discipline, discipline.

10.13                Other Trading Psychology Concepts

10.13.1.                Transparency:

Good traders are transparent people. They don’t care about the opinions of other people if they know they are doing the right thing. They are not ashamed of their results even if they are bad. Hiding your mistakes is one way to say that you don’t accept the full responsibility of them. It has been observed that good traders are people who accept the blame when something happens. That helps them to build a feeling of control.

Trading is a field where everybody knows exactly how you perform. Proprietary Trading Firms encourages this situation because we know that real winners are the one who like open competition and who don’t mind the results. People who like challenges and reach their goal are transparent. Moreover this attitude helps cooperation with managers.


10.13.2.                Desires and Faith

The desire to succeed is essential but it is not enough in itself. Only when you have the faith in yourself you will become successful. Even If you have strong desires, if you don’t firmly belief that they will happen, they won’t. If you have doubts in times of adversity you will abandon your goals too early and your fear of failure will become a reality without faith.  You may have been really close to the goal. Nothing is impossible to the one who has faith. However faith is not easy to acquire. We can give you the desire but we cannot give you faith. This part must come from you. The trading level you will reach is proportional to the level of faith that you have. Faith is perhaps one of the highest forms of belief a person can possess – it is a conviction. The reality is that it is hard to find people with faith because they are already successful somewhere else. The personality that makes good traders is the same personality that makes athletes, pop stars and successful business man.


10.13.3.                Intuition, Experience, Feeling the Market

Intuition is sometimes conceived by people like it is coming from nowhere. In fact intuition builds with experience. As a new trader, you won’t have a lot of intuition when you start trading. As you watch the market everyday some patterns will creep into your subconscious. When the signs of those patterns are repeated, your subconscious will send a message to you conscious to warn you that something is about to happen. At the beginning you will feel strange and won’t be able to act on this message. As you receive more of them you will start to act on it and make money. Eventually the goal is to extend that process until you feel the market like you feel your heartbeat when you just finished exercising. That is what we call feeling the market. Then you can say you have the market in your veins. You become one with the market


10.13.4.                 Instinctive people and Analysts

People who rely more on their instinct and intuition and less on their conscious analysis make the best traders. The reason is because the market is normally very fast and you don’t have time for conscious analysis. By the time your analysis is done the opportunity disappeared. That does not mean that there are no opportunities that can be analyzed, but most of the time the market is too fast for analysis. Moreover, people who analyze too much like to be more than 55% sure of their decision. In reality that is all that you need to be successful. Analysts will look for the 75% to 80% sure trade that happen only 2 or 3 times a day and they will miss all the other opportunities (55%, 60% and 65%).


10.13.5.                Open Minded Traders are the best

People who are open-minded make the best trader for many reasons. First they tend to consider more options and if the best decisions are uncommon they have a better chance to discover it. Second they will not be obstinate if one solution does not work.

Finally they will tend to be more creative and will find opportunities that nobody would have thought about. There is one big problem. Rare are the people who will admit that they are not open minded. That character is most of the time recognized by people around you. Moreover, when you tell somebody that he is not open minded he becomes normally very susceptible.


10.13.6.                Imitation

Imitation is one of the secrets of successful people. To be successful you simply need to imitate successful people. However, most people like to do things their own way because they get all the merit for it. They think success is more rewarding if they rely only on themselves.

You probably see the relation with transparency here. Transparent people would not mind imitating others to get successful. There is also a relation with jealousy and admiration. Jealousy is bad. Jealous people don’t imitate success. They deny it. People with admiration are the one who progress by imitating a model.

The reality is that if you rely only on yourself for success you may still get successful but it will take you much more time. And in the end you might be frustrated to realize that you are using the same recipe that you would have used if you would have been imitating somebody else. There are many examples of successful traders at Proprietary Trading Firms. There are also many books that have been written about successful trader. Find a role model in trading and imitate his success!


10.13.7.                Experience, Learning Curves and constant learning:

Experience comes with time and you have to respect this fact of life. There is little doubt that you will get better at trading as time goes. You will learn from your mistakes and you will see patterns that you did not see before. Don’t fall in the trap of thinking yourself as an experienced trader when you are not one. Also keep in mind that you will keep learning. If you are overconfident about your experience you will considerably slowdown you learning process.

You will refuse some ideas because you think you already know about it. Always be like a child who is curious and wants to learn about everything there is to know!


10.13.8.                Crowd effect, Contrarian

People normally like to be comforted by the opinion of others. In life if most people agree with you, you think you are heading the right way. The problem with that philosophy on the market is that most of the time when everybody is bullish the market is about to take a dive and when everybody is bearish the market is due for a rebound. Traders will have to learn to have their own opinions to be successful. They may even need to be contrarian.

Most of the time the majority is wrong but the order flow cannot be wrong. This is because if 9 people are wrong and sell a stock the 1 guy who is buying is right. However this guy is big because his volume is 9 times bigger than the average. This concept explains why it is bullish/bearish when many active traders are selling/buying and the stock is not moving. The concept of active/passive will be explained later in the course.

It may be hard to believe but two traders one long and one short at the same time can both make money. The solution is in the time frame of your trade and in selection of the right gateway.

10.13.9.                Personal Life and Self Evaluation

Life is life and trading is trading. Don’t mix them together. If you are really tired or are dealing personal problems and cannot forget about your problems, your trading will be deeply affected. Try to have your mind empty before you start your trading day. Meditation is a very good way to do that. Self evaluating your condition is always very helpful. Before you start a new trading day you should rate how you feel about your life and how fit you are mentally to trade. In the event that you cannot forget about your concerns in your personal life, that you are sick or tired, it may be a good idea to reduce your trading size and event stop trading if it does not go well.

Trading can also affect your life. Don’t let a bad streak of trading days interfere with your social life or else your friends and family will have to suffer from your up and down like the up and downs of the market.



Chapter 11  

Trading Strategies Concepts


11.1                     As many strategies as traders

There is not just one way to make money in the market. You will find one strategy you like. However, the best style is a mix of many trading styles. It also needs to be a strategy that works in both an up and down market. Observe other traders and you will notice that even if good traders are always have the same profitable positions, they have different way to get filled on their order and they manage them differently.


11.2                     Active Trading and Passive Trading

Passive Traders add liquidity and Active Traders take it away from the market. There are times to be active and time to be passives. If a stock is trending and moving fast you might not be able to get it as a passive trader. If a stock is trading in a tight range with a lot of levels on both sides it probably does not make sense to try to trade this stock actively.

You should instead place limit orders on the right gateway and try to make the spread. Choosing between Active Trading and Passive Trading is easier when you know the stock and when you have experience. However there is one rule of thumb. As a proprietary trader at Proprietary Trading Firms at least 70% of your trades should add liquidity. The vast majority of the volume at Proprietary Trading Firms is Passive. The best Passive traders are trading 8 stocks and more at the same time and have buy and sell orders on each one of them. This improves their chance of getting filled. Once they are getting shares they are doing what we call working the order. Passive trading requires more patience while active trading requires more reflexes.


11.3                     Bid-Ask Size:

You should always look at the Bid-Ask size before considering sending an order. You should also ask yourself all the size is real or if there is hidden size (more on that latter). You should normally be trying to get long if the biggest side is the bid and short if the biggest side is the offer. However if you are the last in line and do not use proper order routing you might be the last one to get fill and by then the size is not big anymore.


11.4                     Hotkeys

Traders are using keyboard shortcuts to trade more effectively. At Proprietary Trading Firms we use mostly F1 to F12 keys with combinations of SHIFT and CTRL. It is very important to configure them in an efficient manner. Also Traders should always use the numeric keyboard for numbers because it is a lot faster than using the numbers on the regular keys. The fastest trader with the best setup of keys will have a definite edge.


11.5                     Inventory Management

Trading a stock is all a lot about managing your positions. Even if a stock is a good buy you don’t have infinite buying power and you need to buy an amount that both you and the market can handle. A rule of thumb is that you should never have more long/short shares than the level 1 bid/offer can take. This way, if there is an abrupt shift in the market you can get out flat at the market.

Another concept is to try to take advantage of both sides of the market. That is to say your inventory needs to be fluctuating from long to short. To reduce your risk you should have both long and short stocks in your overall day trading inventory. With experience you will be able to handle a bigger inventory and you will therefore make more money.


11.6                     Partial Fills & Odd Lots

If your order is filled partially and slowly this is normally a sign that you are on the right side of the market since small orders are normally coming from small uninformed traders. However if this happens in a cycle you should be concerned and evaluate if you are getting filled buy on bunched order (more on that later).

The same thing is true if your orders are filled with odd lots since they are mainly from small pockets of traders that are most of the time on the wrong side of the market.


11.7                     Making Trades

You are getting information about the market every time you make a trade. The more trades you make, the more you know about the stock. It should not be hard to make more than 200 trades per day after a couple of weeks. After a month or two you should already reach 300 trades per day. The best traders at Proprietary Trading Firms are making over 600 trades per day!

11.8                     Tape reading and block trades:

Watch the tape and try to look for block trades (more than 5k share). Bigger lots normally represent bigger players who are normally better traders. Are big trades happening on the offer or on the bid? Are they happening with market makers, ECNs, specialists or dark pools? Try to notice what happens on the stock you trade after those block trades. You will notice patterns and will be able to profit from it in the future.


11.9                     Round Numbers

Stocks tend to have difficulty to go through round numbers. A good strategy to use is to avoid going long at 7 8 and 9 digits and short at 1 2 and 3. The worst digit to be long at is 99 while 01 is where a good trader does not want to be short. This is especially true when there is a large amount of orders at the round number.


11.10                The level 1 spread

Look for level 1 spread greater than 1 cent on active stocks. They normally offer the opportunity of getting a fill in the middle. If the stock is liquid and that there is a midpoint pegging order that is buying or selling you could make an easy profit.


11.11                Multiple Orders, Multiple Fills

Traders can post their orders on more than one ECN in a duplicate format. This is useful when all ECNs are getting filled as you get a piece off all the action. However you need to be very prudent as if there is a Swipe of the level you are on, you will be ending up with more shares than you originally wanted. We call that multiple fills, Double Fills for two orders, Triple fill for 3 orders, etc. The trading software of Proprietary Trading Firms allow you to set OCO (one cancel the other) orders.

This allows traders to have many orders canceling when another one is getting filled. Smart traders are able to judge how many orders to put to get a good fill. Normally you would not want to put 3 orders to buy when you would not want to be long in case of a swipe.


11.12                Short Squeeze

Normally short positions are taken for a short period of time as the tendency is for stocks to go up in the long term. Therefore traders with a short position are potential buyers of the stock. When there are too many people short in a stock the pressure to the upside when they cover will make them loose on their short position and will also force other traders that are short to cover. This is called a short squeeze. The more people are short, the more potential buyers and the more this risk to happen.


11.13                The Axe

Try to find the market maker that is the most active on the stock you trade. If that market maker is buying go long, if he is selling go short. The axe is nowadays harder to spot since market makers are now using ECNs. However you can still figure it out if you observe carefully the level 2. Never pick a fight with the axe: YOU WILL LOSE. These are extremely powerful and experienced traders, taking opposing sides to them will rarely work so instead, push with them. Many Axes trade such large blocks they must move share prices substantially to make a profit. By playing the midpoint of the axe, many traders can make good profits.


11.14                Advanced order types:

You want to know what other traders are doing but you don’t want them to know what you are doing. Advance orders are useful to hide your real intentions. When you will start trading on a bigger scale you will start using those orders more often.


11.14.1.                Hidden Orders

They are invisible orders. For example you can use hidden island orders. If somebody sends an order on the opposite side you will be executed and you will also get the rebates. However if somebody send a visible order on the same side and price than you he will get in front of you in execution priority.  Hidden NSDQ are also useful when you are shaving on stocks lower than 1$. You can keep the priority even if you are invisible if your price is 0.1 cent higher than the visible order. This trading style used to be very popular but there are now trading robots that are automatically shaving and it is really hard to get ahead. Also don’t forget that stocks under 1 dollar have a different rebate schedule. If you want to start using hidden order talk to the manager about your strategy to make sure that it is reliable.


11.14.2.                Reserve Orders

They are orders that are showing fewer shares that they really are. For example ARCA could be showing 100 shares on the LEVEL 2 while if you send a sell order for 500 shares at the market on ARCA it will be fully executed and ARCA will still be showing 100 shares. Reserve orders are also called Iceberg orders by many exchanges for an obvious reason. You should use reserve orders if you want to get fill on a large number of shares without showing your real interest. If you are long on a stock that has a reserve order on the offer you should try to get out by offering. In fact since traders using reserve orders are sophisticated you should be trading on the same side than them.


11.14.3.                Adding Liquidity only

They are orders that will not be executed if they have to remove liquidity. They are useful to avoid paying the charges by mistake on BATS. Do not use post order by default cause you won’t be able to get out if you have to be fast.


11.14.4.                Test Orders

They are orders sent to know how the market is taking them. For example you can send a small locking order on MLNM to see if there is a Buyer/Seller on the dark pool. You can also send them on NSDQ or ARCA to see if other ECNs to see if there are other traders that are following you (Pegging Orders). Test orders are also very useful on the NYSE to see what side the specialist is filling faster. Normally orders a getting filled faster if they are on the wrong side of the market.


11.14.5.                Following orders or Pegging Orders

They are robot orders that are automatically following the best bid/offer on a stock to be first in line. Those orders are easy to get advantage of if you are experimented. On average try to be long if orders are following on the bid and short if orders are following on the offer.


11.14.6.                Switching Orders

They are orders switching from the bid to the offer and vice versa. If you see 1000 P printing on the Time & Sales and you see an extra 1000 shares on ARCA immediately after you should notice that there are some scalpers on the stock. When there are too many scalpers, Market Makers will try to shake them by swiping the side they seem to prefer on 2 or 3 levels.


11.14.7.                Bunched Orders

They are trades that happen consecutively as a pattern on the ticker tape. For example 500 shares on ARCA at the offer every 30 seconds. This normally means somebody is trying to buy a big number of shares without the block trade being seen on the tape (50k share in 50 minutes). This is normally bullish and a big opportunity if there are prints on the bid at the same time. If you are able to get long at the bid you know this is only a question of time before you can get out on ARCA at the offer.


11.15                Relative Strength

Relative strength is one of the most important principles a trader can use to trade successfully. By comparing stocks to others in its sectors, or its sector to the market as a whole, a trader will have a frame of reference from which to anticipate movements in the stock’s price. By knowing the relationship between the stock and the market, a trader can predetermine what his reaction will be to each of the three potential market movements (up, down and no change).

There are several indicators a trader can use to determine a stock’s strength relative to its sector. A trader interested in trading XLNX for example, a semi-conductor company, he could watch INTC, a sector leader in the semi-conductor group. Typically, the larger companies of each sector will move before the tier two stocks within the same group. Traders, then, can use INTC as a leading indicator for XLNX. Sector indices also act as leading indicators for stocks within the sector. Using the same example, traders trading XLNX could watch the Philadelphia Semi-conductor Index ($SOX.X) as a leading indicator. In this case it may be possible to have the index leading the sector leader, which could in turn be leading the stock in question.

When comparing a stock or a sector to the market as a whole a trader will typically rely on the S&P Futures as a market indicator. There is a great deal of liquidity within the S&P Futures and this attracts traders and volume which allows the S&P Futures to, usually, reflects the mood of the market before other indicators including sector indexes.

No matter what a trader is comparing, a stock to a sector leader, a sector leader to the market, it is the net change as a percentage that he will be interested in. This percentage change will allow the trader to establish the relative part of the relative strength equation.

Once the trader has determined whether the market is strong, based on percentage change, he must determine how a specific sector is performing relative to the market’s strength. After identifying a strong sector on a strong market day the trader must identify the strongest stocks within this sector.

A trader who has taken the time to determine at stocks relative strength before playing it will be better off than the trader who simply jumped into the play without this information.

It is recommended that traders not play stocks within the first ten to twenty minutes of the trading day. This is to avoid getting involved in a trade before the market has decided which way the stock is going to go. It is probable that stocks that gap up at the open will pull back. This occurs because market makers will attempt to pull back stocks that they were forced to assume a short position in while covering the demands of the public in order to cover them. If a trader jumps in prematurely he could find himself caught up in this movement.

Relative strength as a trading mind set will see an astute trader identifying a stock’s movement relative to the entire market. Ideally a trader will play a strong stock long on a strong day and weak stock short on a weak market day. If XYZA is ripping each time that the leading indicators begin moving upwards then the stock is obviously a candidate for the long play. If the same stock tanks each time that the leading indicator takes a bearish posture than it becomes an ideal short candidate on weak market days.

Relative strength can be played a number of ways. Often traders can watch stocks that are down only a small percentage while the market is down a substantial amount. The patient trader will wait for a reversal in the market’s direction and long the stock in question as soon as the leading indicators begin to rally. This is technically strategy, known as a reversal, and is covered in more detail elsewhere. Typically these stocks sit flat all day as the market declines and moves higher in short, rapid movements at each rally.

Again, relative strength is a mindset that every successful trader employs whether he realizes it or not. Always know the strength of a stock relative to the market before trading it.



Chapter 12  

Your First Battle

12.1                     Simulation

The simulation trading part lasts 3-5 days from 9:00 – 4:30 p.m. E.T. During this segment you will get hands on experience with CTG Trader Pro, the execution software. You will be able to customize the Level II windows, time of sales, Trading Monitor and Position Summary windows. You will also customize your charts with the futures and appropriate stocks. Once your first day passes, you will be allowed to tailor your screen setup to your exact requirements and a multitude of other settings to your own personal cocktail. The data is in real time and the executions actually go to a simulator. The goal of training on simulation mode is not to make thousands of dollars, but rather to learn all the keys and to execute as many orders as possible with every execution system. The traders that can execute faster than others will definitely have an edge. Being able to get in front of orders quickly will ensure you a faster and better fills. During this segment, you will identify 2 – 3 stocks that you will follow and trade on a daily basis.

Money made or lost is not an issue. The main goal is to get you comfortable with the system.

Be attentive and ask questions. Others experience will help you greatly.

Keep keystroke mistakes to a minimum. With real money these mistakes can be extremely costly.


12.2                     Live Trading


Once you have mastered the keys and have identified 1 or 2 stocks to trade, you will then begin live trading at the 100 shares level.


When you are profitable and confident, your Max Shares will be increased to 300. You may be at that level after 1 week (depending on your progression) and then move to 500 – 1000 shares level. We expect you to meet strict criteria before you increase your share level. Your buying power (BP) will also be increased accordingly.

You will also print your daily blotters (trades) on a daily basis, and before the beginning of the next trading day we will meet and analyze the trades. You will highlight your best and worst trades and fill a small summary card for your trading day and explain why and what happened.



Chapter 13  

Applied Trading Strategies


13.1                     Scalping: The Rebate Game – Market Maker Game

Trading this style requires a patient, focused and versatile trader. The goal of this style is to make profitable trades and to receive rebates from the different ECNs such as NASDAQ, ARCA, BATS, EDGX and EDA


13.1.1.                     Action

Look and observe 5 to 10 slow moving stocks – stocks with prices ranging from $1 to $10. The intra-day ranges of these stocks will vary from $.10 to $.30 depending on the stock, news and market condition. Mergers can be good candidates also for this type of trading

Traders will look for thick stocks – e.g. stocks with lots of depth at every price level. You will place bids and offers at the 1st or 2nd price level. Traders will choose from the list of stocks given to them that meet certain criteria for ideal bid & offer stocks:

  1. Depth at every price level, lots of M.M. & ECNs.
  2. Small intra-day range ($.10 to $.30)
  3. At least 1 million shares traded daily.
  4. $.01 between price levels.


13.1.2.                     Strategy

The objective is to BID/OFFER on ECNs according to the execution happening in the stock. Use the ECN on which you have the best change to get executed. For the side use the one that has the biggest size but you still have to get a chance to get an execution. Make sure the other side is not too big and that there are some executions on it. Make sure that the stock is in a range and not tanking or ripping. As soon as you get filled, OFFER/BID half or the entire amount IN ORDER NOT TO SHOW SELLING PRESSURE.


13.1.3.                     Averaging Down – Once or Twice Maximum

Example:  You bought 1000 shares at 2.62 and stock drops to 2.60, bid another 1000 shares at 2.60 to get an average price of 2.61. Offer immediately 2000 shares at 2.61. You will not make a profit on the trade but you will get the rebates and if the stock moves up and you are the last in line, you might be able to cancel your offer and make a profit by reoffering at 2.62.

13.1.4.                     When to get out on the downside

Use your experience and judgment to decide if you should wait 2, 3 cents down or flat trade the stock. Your biggest winners should be at least as big as your biggest loser. You should not take a lot of 3 cents loss when you are only taking 1 cent profits. As you become more experienced your winning trades should be twice as much as your losing trades.



13.1.5.                     Warning:

This group of stocks doesn’t move much during the day. Some stocks will stay at the same price level for a long time without any execution before moving 1 or 2 cents up or down quickly. When there is major news on the stock, especially on mergers they can easily rip or tank by 20 cents or more.


13.2                     Momentum Trading

Trading this style requires a focused, versatile and disciplined trader. The objective of this trading style is to make profitable trades and to take advantage of the credits. Mastering buy and sell hot keys is imperative to be successful as a momentum trader.


13.2.1.                     Action:

You will trade only one stock all day long. The stock price should be above 5 dollars but less than 20. The stock should also have a daily volume of 3 million shares. You will trade mainly for profits. Because of the nature, volume and movements of these stocks, you will have to be an active trader, which means taking the bid or offer (SM/FOK) more often than bidding and offering. As a momentum trader you should find stocks that move in tandem with the market

Traders will choose a stock from the list of stocks given to them. They are in the NASDAQ 100 and move in the direction of the market most of the time. You will put up a Stock Watch window with the S/P Futures / NASDAQ Futures, the COMPX, the sector index and some stocks. Before trading you need to determine the relative strength of your stock versus the sector, the NASDAQ 100 and the futures. Is the stock you are trading stronger or weaker than the overall market and sector?


A successful momentum trader takes time to observe the movements, patterns and volatility of the stock they are trading. As guidance, you will look at the NASDAQ futures, a chart of the stock and listen to the squawk box. The intra-day ranges of these stocks can be 0.25 to $1.00 depending on market conditions. Try to get long when the overall trend of the market/sector is up and that the stock is slow to react. Use the strategies explained earlier about relative strength.

13.2.2.                     When to get out on downside

Use your judgment and experience to decide whether you should wait $.03 or flat trade the stock. In some cases 3 cents might not be enough to survive the whipsaws. That is the reason why this style is more risky. Look at offer side piling up, futures and time of sales to gage whether or not you should stay in the trade or exit. When the stock is going your way, try to let run your profit.


13.3                     Opening Strategies


13.3.1.                     What is the Opening?

We know that the stock market opens at 9:30. But, how is the opening price determined? Why is it sometimes so different than the previous closing price? How can we buy or sell at the opening price? Those are questions we will answer.

First, the opening process is different depending on what exchange a stock is traded.  Generally the opening price you will see in yahoo finance or in the newspaper is defined by the first trade at or after 9:30. This can create some distortions on the NYSE since the real opening price is considered to be the NYSE opening cross operated by the specialist which is sometimes a bit delayed, especially on the days when there is considerable news.  On those days the opening price you see in yahoo finance might well be the first print on an ECN or ATS which you cannot participate in with a NYSE opening order.

There are opening orders for 3 destinations: NYSE, NASDAQ and ARCA. In all cases there is only one matching price for all orders that are matched: the price where the maximum number of shares can be matched.  Therefore, the opening is a great opportunity for price improvement on small orders.  For example, even if you bid an OPG order at 13.00 you can get executed at a much better price which could be at 12.65 if there is a very big selling imbalance at the open.

The Website of ARCA, NASDAQ and NYSE are a good resource to learn the different characteristics of each respective opening process


13.3.2.                     Notion of fair value at the open

Fair value is the expected value of a stock assuming there is no considerable news or change in supply and demand. Normally, if the stock market is opening at the same price where it closed the previous day; a given stock, without specific news or news on its sectors, should also open around the same price where it closed. Now where should a stock price open when there is a premarket move of the whole market? This depends mostly of the volatility of the stock. Stocks that have the same volatility than the market should open up or down by about the same in percentage. If a stock is twice as volatile as the market the percentage change from open to previous close should be twice the change on the market. Beta is often used as a good evaluator of the volatility of a stock.

But how do we know what will be the percentage change of the index at the open? Well the futures are giving us a big hint on that. One of the best ways to do that is also to look at the change on the SPY and DIA directly since the futures are not carrying dividend and there might be a change caused only by many ex-dividend stocks.


13.3.3.                     Envelope Strategy

To take advantage of a few inefficiencies at the open when the opening price is far away from fair value astute traders are sending a basket of opening order bidding below and offering above fair value. They will normally do this using a fix percentage difference from the fair value. There are some strict rules to this strategy. Traders will not have stocks that have news in their baskets. They will normally quickly get out of the stock they got executed after the open. If not they will hedge their positions to avoid the impact of market movements. Envelope can be made on NYSE stocks, NASDAQ stocks and Arca stocks. All NYSE stocks will use NYSE opening orders and NASDAQ stocks will use NASDAQ or ARCA opening orders.

One problem with the envelope strategy is that you have to manually calculate and adjust the price every day. This can be done in excel and then copied in a basket in CTG Trader PRO


13.3.4.                     Back Testing of envelope strategy

It is possible to determine if an envelope strategy for a stock is successful by looking at the history of opening price compared to fair value. It is easier to do that on NASDAQ stocks than on NYSE stocks for the reasons we discussed before. The best way to get data to back test is to export it from yahoo finance and put it in excel.


13.3.5.                     Positive Trading Scenario

Let’s assume the SPY closed at 90.00. The next day before the open the SPY is trading at around 91.25. ABC stock closed at 20.00. We also assume that the stock has the same volatility than the market or a beta of 1. The stock also has no news and no news on its sector.  The fair value of the stock should be around 20.28. With a 1% envelope, a trader should put a bid at 20.08 and an offer at 20.48. If the opening price is lower than 20.08 or higher than 20.48 the trader will participate at this price. Let’s assume the trader put those bids and offer in place. At the open the stock prints 19.97. One minute following the open  the stock is at fair value and the trader makes a profit of 31 cents per share.


13.3.6.                     Negative Trading Scenario

In the same example the trader could have received a fill a 19.97. However, he realized a news announcement was released at the open and the stock plummet immediately to 19.50 after the open.


13.3.7.                     Risk of this strategy

The main risk of this strategy resides in the overexposure in the event where there is a big market move in the first minutes of trading and the traders does not have time to offset his positions. This is more likely to happen on a day with a big gap on the overall market. Another risk is the risk of making a mistake in the calculation of the price. Since, traders are sending many orders the risk of making a small mistake that would propagate to the whole basket is very important. Another risk is linked to the illiquidity of the most performing stocks for this strategy.


13.4                     Dark Pools Strategies


13.4.1.                     What are dark pools, how they work?

Dark pools are Alternative Trading Systems do not publish their order book in the Level 2 window. Dark pools are generally used by institutions to try reducing market impact when placing large orders. Dark liquidity pools offer institutional investors many of the efficiencies associated with trading on the exchanges’ public limit order books but without showing their hands to others. Dark liquidity pools avoid this risk because neither the price nor the identity of the trading company is displayed. Most dark pools also offer advanced algorithm trading to improve chances of executions of big orders. Since there is no book the execution range is based on the NBBO to avoid prints outside of the market


13.4.2.                     Dark pools features

From pegging orders to VWAP adjusted orders Dark pools are offering very sophisticated ways for institutions to send their orders. Let’s review the main features:


13.4.3.                     Pegging Orders

Pegging orders are orders that are following the NBBO when it’s moving. For example an order to buy could be linked to the NBBO bid price. Orders can be pegged to the bid or the offer but they can also add an increment to it. For example, there could be pegged orders at bid + 1 cent or ask -1 cent. Orders can also be pegged to the midpoint of the NBBO or to the last price.  Generally, pegged orders have a pegging range or a pegging limit, they stop pegging once the price reaches a certain level.


13.4.4.                     Execution size features

Institutions can set their orders to different setting for the size of their executions. There can be a minimum or a maximum per tick, a percentage of the displayed size or a minimum first execution. For example, there is an order for 50 thousand shares but if it is crossed with a small order it won’t execute.


13.4.5.                     Linking and Scanners

Many dark pools offer the possibility of linking orders to other dark pools. After scanning their own pool, if they don’t find liquidity for an order, they will scan the book of other dark pools by sending one order on one dark pool after another.


13.4.6.                     Anti predatory trading algorithms

Predatory trading is a style of trading that tries to take advantage of big institutions orders on illiquid stocks by forcing them to get in or out at a bad price. A predatory trader will send a test order to the dark pool to see if there is a big institutional order standing in the dark pool.

Dark pools designed features to prevent the predatory traders to discover hidden liquidity too easily. Some of those features includes: the possibility of orders to flash in the book at random cycle time; the possibility of splitting the orders in parts over a specific period of time; and the possibility to not execute orders against an IOC.


13.4.7.                     Positive Trading Scenario

Stock ABC is trading at 23.19 and looking at the time and sales window you see a lot of D prints hitting the bid. You get out of your 100 shares position at 19, and then you resend a bid on the dark pool at 19. Once again you get a fill instantly. At this point you have to see how many shares are on the bid and if the stock is shortable. If the stock is shortable and there is an amount that is not too high on the bid (it’s a question of judgment and experience here) you can hit the whole level and lower the offer to 19. Then you need to test if the dark pool is still crossing the market and selling at 18. Let’s assume there were 1000 shares at 19. Now you are short at 19 and send a bid for 100 shares at 18. If you get filled you also take the 18 level.  Assuming there is 500 shares at 18 you are now short 1300 shares. Once again you test the lower level and you get a fill. You hit 17 for 800 shares and test positively 16 for 100. You take 16 for 600 shares and test 15 positively. You are now short 2500 shares at an average price of 17.68. you decide that this is enough and bid the whole lot at 15 and get filled. You made a profit of about 67$ without the fees.


13.4.8.                     Negative Trading Scenario

Stock EFG is trading at 34.22 and you see a lot of D prints hitting the bid in the time and sales window. You send an order on the dark pool and get filled immediately. You get out of your 100 shares at 22 and retest the dark pool for 100 shares on the bid and get a fill. You hit the bid for 1200 shares, retest the bid at 21 and once again you get a fill. You take 900 shares at 21 and test 20 for 100. But now you order is not filled. You are now short 1900 shares and there are no more sellers on the dark pool. You look at the levels on the offer and it’s awful. There are only 800 shares total displayed shares until 30. You get out at an average of 31 for a loss of 200 dollars.


13.4.9.                     How institutions defend themselves

Institutions know that predatory traders are taking advantage of them. But the price is still lower than it would be if they would have to display their big orders to the public market. They try to use advanced order types like minimal first execution size to avoid being fooled by basic predatory trading. Once in a while they will even post a bid when in fact they want to sell to trap the predatory traders. Once they know the trader as a considerable opposite position they will cancel their dark pool order and post on the other side.


13.4.10.                Good rules this strategy

Avoid illiquid Stocks and high priced stocks

Avoid trying to go through a reserve order

Avoid accumulating too many shares until the order on the dark pool as proven its size

Avoid trying to push a stock in the same direction it just made with a big move in the last minute… you are probably late to the party

Avoid buying or selling too many shares at round numbers to push the stock

Avoid taking too many shares if you can’t push the stock, it’s better to get out at a small loss when the institution is still there

Always evaluate the size of the opposite level before getting in a considerable position



13.4.11.                Risk of this strategy

The main risk of this strategy comes from the fact that you only rely on the belief that there is a big order in the dark pool. You are therefore exposed to considerable liquidity risk if you find out the liquidity in the dark pool is much smaller then what you expected. The biggest profits, but also the biggest lost, are made on very illiquid stock with this strategy. Another risk of this strategy is the inability for you to evaluate the reward to risk ratio before hand in most cases. This comes from the fact that most illiquid stocks have reserve or hidden orders in their books.



 Theory course

                Topics covered during the 3 days of theory

  1. Introduction to;

–     Direct Access Electronic Trading

–     Level ll

  1. Dealer Markets: NASDAQ
  2. Auction Markets: NYSE
  3. Market Makers
  4. Industry Terms
  5. ECN’s (Electronic Communication Networks)

–     ECN Fees

–     Examples of ECN & Trading Fees

  1. 7.            Short Selling
  2. 8.            Keystrokes and routing of orders
  3. 9.            Market Knowledge: Relative Strength
  4. 10.          Market Indicators: Futures and Indices
  5. 11.          Squawk Box
  6. 12.          Strategies: Bid & Offer Vs. Momentum Trading

–     Averaging up/down

  1. Discipline
  2. Trading Psychology

–     Skills to be acquired

–     Emotions

–     Getting Started

–     3P’s

  1. Goal Setting & Plan of Attack (setting goals)


Simulation Trading


During these 2 days, you will get familiar with the trading platform and you will customize your setups. You will also program the keystrokes and do as many executions as possible so that you will be prepared to execute properly in real mode.


Once the initial training period of 5 days has been completed, it’s now time to trade with real money and start establishing your goals & objectives.  It’s important to keep in mind that;

You’re here to trade and not watch the screen.

If you’re not in the market, you’re not making money!!


Evolution of a Prop Trader




You will now be trading real money (Capital Traders Group’s Capital), please respect the funds as if it was your own.


We encourage you to experiment during this time various stocks while using all ECN’s.  This is the only way that you will only better understand the advantages & disadvantages of all ECN’s.  While experimenting, 100 shares lots are recommended.


– Also, focus on;

1        Identifying stock levels.

2        Shorting stocks

3        Flat trading

4        Reading stock levels from charts

5        Time of Sales

Rules for LEVEL I


– You will be allowed to trade 100 share lots of stocks that are priced below $10.00.

– You are allowed to average up/down 1 time of an additional 100 shares.

– You will not accumulate more than 200 shares at any given time

– We don’t want to see losses of more than $0.0 3- $0.05/share.

–  Maximum loss of $50 per/day.  We will not be concerned with your profitability during Level I.

GOALSThe Goals during week 1;


(a)   Making a minimum of 80 – 150 trades/days per day (1 buy and 1 sell is 2 trades).  It is not guaranteed that if you make more trades, you will make more money.  However, the main purpose here is to get you into the habit of trading.  Obviously, the quality of the trade is much more important.  About 200 trades per day is the norm.

(b)   During your 1ST week, we will not be concerned about your profitability, just your ability to get comfortable with the software and your new position as a trader.

(c)    Experiment now while trading 100 and 200 share lots.  You will learn a lot from your mistakes and better with 100 shares than 1000 shares

(d)   NO losses of more that $.03/share…discipline…discipline…etc

(e)    Start 2 new habits; Trading & cutting losses (discipline)


Please complete following table for week I


















Web sites – Information, news – Information, news – Great for news – view arca book – See where your order is in the queue


For the first 3 days, we would like to see you get familiar with the trading software, use of all ECN’s, increase your  speed of execution, understand concept of add liquidity vs removing liquidity, credit vs paying for shares.





– Important ideas, strategies & types of trades (aside from buying low and selling    high) to consider during your training and beyond;


1        FIFO > Being first in and first out on NSDQ, ARCA, BATS and EDGX  is very important

2        Discipline yourself to avoid the big hit. You will only find out (the hard way) that one bad trade can wipe out 9 good ones!!! Don’t look for Home Runs

3        Coming to office early, looking at MSNBC ticker tape and financial website to see stocks in play and get a good “feeling” for market sentiment for the day.

4        Check to see if there’s news on the stocks that you play.  If there’s positive news on your stock, does that mean the stock will go higher???

5        Reversing a trade

6        Averaging up/down

7        Writing down in a note book why your trades went good or bad, create your own rules of trading

8        Identifying BUY/SELL opportunities through futures charts and squawk box.

9        Make sure that the stocks you trade have at least an average daily trading of

1 million shares

10     If you get frustrated or angry, walk away for a few minutes

11    Risk Management: Set your own rules and follow them.

12    Follow the trend >> DO NOT FIGHT THE TREND <<



Start building levels of discipline and confidence


Have a reason for getting in/out of the stock;


1        Futures moving

2        Good profit or stop loss limit of $.03- $0.05

3        Stock breaking levels – support/resistance

4        News


Notes The higher the stock price, the more volatile the stock will be.  The stock will also have a greater price range (high and low of day) during the day.  Stocks under $5.00 are also good for credit trading with a small level of momentum built in.  Squawk box starts to become a greater asset here



After 3 -5 days of trading some traders will move on to Level II






Rules for LEVEL II


– You will be allowed to trade up to 300–500 shares priced below $10.00

– You are allowed to average up/down 1 time of an additional 500 shares.

– You will not accumulate more than 1000 shares at any time


– We don’t want to see losses of more than $.03 -$0.05/share.


NotesThe stocks that usually trade in this price range are good for credit trading with a good levesl of momentum built in.


Watch for levels of the stocks that you trade in this range, charts will help as well as the squawk box.  Check news on your stocks or stocks in the related fields. Ex– If I’m, playing JDSU, I will also check for news on other companies in fiber optics.  Companies tend to sympathize with other when it comes to news.



GOALS – The Goals in LEVEL II is

A) To be profitable for 3 consecutive days with at least $50.00/day.

                        B) Make 80 trades +/day for 3 consecutive days.

C) NO losses of more that $0.03 – $0.05/share.

D) Your stop loss will be $100 / daily


– If this is accomplished, you advance to LEVEL III.

– If you lose more than $100, you will be shut down for the day but you can still

  continue trading on practice mode.


GOALS – The Goals during week 2;


(a)   Focusing on being profitableIn order to increase to 500 share lots, you must be profitable (net profit) for 3 consecutive days or 3 our 4 days.

(b)   Making 100 trades/day with

(c)    Volume of approximately 20,000 shares/day.

(d)   NO losses of more that $.03/share.


–     Experimenting with ECN’s

–     Flatting stocks and making full spreads

–     Learning stock levels (support & resistance)

–     Read proprietary trading notes & ideas at home



–     Get out of losing positions by either reversing the trade, removing liquidity or smart sell (before it breaks the level)

–     Do not fight the trend, know at all times if NASDAQ, E-MINIS  & SOX are positive or negative

–     Watch your risk management

–     With 300 share lots, your P/L will start moving that much faster so please do not hold too many positions at one time (like at 100 share lots).



Please complete following table for week II



















 Rules for LEVEL III


– Congratulations on reaching LEVEL III, you’re now able to trade up to 1500 shares of

stocks that are priced below $10.00 and you’re buying power will also increase.

– You are allowed to average up/down 1 time of an additional 500 shares.

– You will not accumulate more than 2000 shares at any time

– No losses of more than $0.03-$0.05/trade.


Notes Stocks that trade above $5.00 will have a little more momentum therefore, follow the futures more closely and listen more carefully to the squawk box which can have a greater effect on the price.  With more volatile stocks, please do not jump in with a 1000 shares on your first trade, slowly build to that level.


If you feel comfortable with stock still trading below $5.00 and want to continue with them, it is your choice.  We’re only suggesting alternative ways to trade.


Your display should still have both momentum and flatting stocks to view.  Usually, the first and last hour of the day is great for momentum plays and between these times, Concentrate on both profit and flatting stocks until you build your niche.


GOALSThe Goals in LEVEL III is:


(a)   To make a minimum of $75-$100 per/day  consecutive 3days

(b)   Making 100 trades/day

(c)    Trading volume of 75,000 per/day

(d)   NO losses of more that $0.03-$0.05/trade


If this is accomplished, you advance to LEVEL IV.


If you lose more than $100 (and we know this will not happen), you will be shut down.  It will then be management’s decision to allow you to continue or not.



1        Getting to the next level – In order to increase to 1000 share lots, you must be profitable (net profit) for 3 consecutive days or 3 our 4 days.  Once you reach this new level, it does not mean that you should immediately start trading 1000 share lots,

–     Make sure that your very comfortable with 500 shares

–     Gradually increase to 1000 shares, 600…700…


–     Get out of losing positions by either reversing the trade, removing liquidity or smart sell (before it breaks the level)

–     Do not fight the trend, know at all times if NASDAQ, E-MINIS  & SOX are positive or negative

–     Be aware of your risk management, trade what you can handle

–     Money management, cut losses

–     Be aware of MM’s or ECN’s refreshing

–     With 500 share lots, your P/L will start moving that much faster so please do not hold too many positions at one time (like at 100 share lots).


Momentum Trading


If you want to try momentum stocks (more volatile stocks, stocks usually above $20), remember that these stocks will have a much higher range during the day and that you should be looking for gains of at least $.05 to $.10 per trade.  These stocks should follow the squawk and E-minis quite closely so pay attention to them.  Removing liquidity is the way to get shares when trading momentum stocks.


For momentum traders, your GP will be higher than your NP because of market orders (removing liquidity).  Please advise Management in advance if you want to try this method of trading as losses of more than $.03/trade will be the norm.  Initially, please start off with small lots (100-200 share lots) to get accustomed to momentum stocks.  Please do not jump in with a 1000 shares on your first trade, slowly build to that level.

Please complete following table for week III
























– Now, you will be permitted to trade up to 5000 shares of any stock.

– Averaging up/down is at your discretion as well as stock selection.

– You can continue with the Credit game or focus on momentum stocks.


– When trading momentum or more volatile stocks (stocks usually above $20), remember that these stocks will fluctuate more during the day and that you’re looking for gains of at least $.05 to $.10 per trade.  These stocks should follow the squawk and E-minis quite closely so pay attention to them.  Also, removing liquidity is the way to get shares and then offering them out.  For momentum traders, your GP will be higher than your NP due to removing liquidity.  Please advise us in advance if you want to try this method of trading as losses of more than $.03/trade are the norm.  Initially, please start off with small lots (200-300 share lots) to get accustomed to momentum stocks.


GOALSThe Goals in LEVEL IV is


(a)   To make a minimum of $100 per/day for 3 consecutive days.

(b)   Making 100 trades/day for 3 consecutive days.

(c)    Trading volume of 100,000 shares per/day for 3 consecutive days.

(d)   Avoid losses of more that $0.03-$0.05/trade


If this is accomplished, you advance to LEVEL V.  If you lose more than $150, your shut down for the day but you can still continue trading on practice mode.





If you have reached this level, you’re well on your way to becoming a Prop trader.  However, there is still work to do in order to reach a net profit of $3000.


– You’re now permitted to trade up to 5000 shares of any stock.

– Averaging up/down is at your discretion as well as stock selection


GOALSThe Goals in LEVEL V is;


(a)   To make a minimum of $150 per/day.  At this level, you will reach $3000 by months end ($150 x 20 trading days/month)

(b)   Making 150 trades/day. 

(c)    Trading volume of 150,000 per/day.

(d)   Avoid losses of more that $.03/share.


If you lose more than $200, you will be shut down for the day.  It will be management’s decision to allow you to continue trading or not.


Month by Month Objectives


– You will be starting to trade in the middle of a given month and this gives you the opportunity to do lots of practicing, experimenting and making mistakes so that you can start fresh the following month.  Get familiar with the software, ECN’s and trading environment.


– We are looking for consistency and discipline from you.

1st Full Month


– You’re still new but excuses should be limited.

– Things to keep in mind;

1        Focus on the stocks trading levels, ranges & Time of Sales

2        Getting a few cents per trade and flatting trades.

3        Asking questions to other traders about trading.

4        Taking notes, writing down questions or scenarios to ask other traders about.

5        Coming to office early (8 am) to get a head start or a good feeling for the day.

6        Discipline & Confidence.

7        Experimenting with all the ECN’s and various stocks.

8        More positive days than negative days

9        Avoid the big hit and don’t look for home runs



2nd Month



-It’s time to focus on setting make serious money


1        Trades should be 150 – 200 per day

2        Volume should be at least 100,000 shares per day

3        Net Profit should be a minimum of $2000 (that’s only $100 per day)



3RD and/or 4th Month


Focus is on $5000 plus in these months


1        Trades should be at least 100/day with a volume of 150,000/day

2        Average net profit is $225/day

What Makes a Successful Trader?



AGGRESSIVE          AMBITION                ATTITUDE


CREATIVITY                        DEDICATION           CHARACTER

DISCIPLINE             FOCUS                       HIGH GOALS

HOMEWORK                        INSTINCT                  MOTIVATION

PASSION                   PATIENCE                PERSONALITY

RISK TAKER                        VISION



Other Notes & Rules


3        If you hit your stop loss limit during the day, you must stop trading and advise management.  The system might not recognize your daily stop loss limit therefore, you should be aware of your risk at all times and respect it.


4        If  by chance you hit your loss limit for the day and you still have a position, then you must exit your position immediately.


5        You must print your trades every day and submit them to management so that we can sit and analyze your trades daily.


6        Trainees must be in the office by 9:00 a.m., no exceptions.  If you’re going to be late, please advise us. We must also be advised if you plan on missing a trading day.



System Failure


It will happen, maybe the system will crash, maybe the high-speed communication line will go down or maybe the ECN will be having problems.  What you should do is;

1. Do not continue hitting the enter button because every time you hit it, your order might be on its way to the stock exchange.

2. If you’re not sure if the order is good or not, write down all the information regarding that order (including the 8 digit ticket number) and bring it to management for verification.



Appendix – A

Intraday Trading Periods


Before 9:30 am: Pre-market

Very illiquid market, you should not trade unless you have a lot of experience. No trainees are allowed to trade Pre-Market. Traders are also preparing their OPG baskets, checking news and will send their orders at 9:27.

9:30 am: Market Open

9:30 am – 9:45 am: Opening Session

The market moves very fast. Trainees should only observe the level 2 and time and sales windows as it is really hard to trade.

9:45 am – 11:15 am: Morning Session

Normal Trading

11:15 am – 2:15 pm: Lunch

Slow Trading

2:15 pm – 3:45 pm: Afternoon Session

Normal Trading

3:45 pm – 4:00 pm: Closing Session

At 3:40 closing imbalances will be released to the public and traders who are planning to submit a market on close order should be looking at getting into a position.

Some very big moves can happen at the close and it is advisable to reduce your position. However as you get more experienced this is the time of the day to make the most money

4:00 pm: Market Close

By this time all your position should be flat and you should not have any pending. Do not wait to be fills and receive rebates at the close!!! Start thinking about getting out of all your positions and cancel all your pending orders at least 5 minutes before the close.

After 4:00 pm: Post-market

If you have positions at this time you will have to explain yourself. Any open orders following the close will result in some form of disciplinary action.


Appendix – B

Office Rules


  • Keep your trading station clean and don’t let food or any garbage sit around. Also clean the kitchen after you make a snack. Wash your hand after using the bathroom
  • Respect other people in the office
  • Avoid conversations with risk managers
  • Do not criticize the work of risk managers when they are getting you out of your positions
  • Do not criticize the software or Proprietary Trading Firms
  • Use appropriate language, avoid vulgarity.
  • Do not use your cell phone or any messaging service in the office unless you have special permission.
  • Ask us in advance if you want to have people coming to the office to meet you
  • Ask the manager if you intend to trade a new stock that nobody has heard about
  • If the office is offering food please share an equal part with everybody
  • Please try to be patient if there is a problem with the software.
  • No positions or pending orders after 4PM! We are day traders!!
  • Do not average down more than twice and cut you loss at reasonable amount
  • Tell the manager if you are in a position with a considerable loss
  • Report any illegal trade to the manager
  • Do not disturb other traders. Do not shout or coarse language
  • Arrive at least 45 minutes before the market open
  • Do not leave the office before the market closes without letting us know
  • Call the office if you don’t plan to come to the office for various reasons
  • Talk to the managers in private about any personal issue with them or other traders
  • No fraternization in the office.
  • If something or somebody offended you please tell the manager
  • Please tell us about any you would like to have in this list

Appendix – C

Suggested Reading List

Daytrading into the Millennium:  Michael P. Turner

The 21 Irrefutable Truths of Trading:  John H. Hayden

Trading and Exchanges – Market Microstructure for Practitioners:   Larry Harris

Probably the most in-depth book about the trading industry. A real bible for the financial market professional.

The Electronic Day Trader  Successful Strategies for On-line TradingMarc Friedfertig

Managing members of Broadway Trading took an inside view of the stock markets, both NYSE and NASDAQ.  They walk you through the entire online trading process and introduce you to cutting-edge trading technologies and investment strategies in today’s exciting virtual trading markets.

A Beginner’s Guide to Day Trading OnlineToni Turner, Oliver Velez

Award-winning journalist Toni Turner teaches you how to safely and successfully day trade in the stock market. Straight forward, accessible, interactive and easy to follow, A Beginner’s Guide to Day Trading Online provides clear instructions and tips, explains day traders’ unique psychological characteristics, provides a basic technical market analysis, outlines market fundamentals, reveals professional traders’ strategies and skills and describes what to look for in an online broker.

How to Get Started in Electronic Day TradingDavid S. Nassar

Introduces the reader to the inside rules and methods of Direct Access Trading.  This comprehensive guide can help you to create an account, get direct access to NYSE’s SuperDot, NASDAQ’s SelectNet and SOES and ECNs.

The Market Wizards and The New Market WizardsJack Schwager

Trading To Win: The Psychology of Mastering the MarketsAri Kiev

Strategies for the Online Day Trader-Advanced Trading Techniques for Online Profits:   Fernando Gonzalez and William Rhee

Reminiscences of a Stock Operator:  Edwin Lefevre

Getting Started in Technical Analysis:  Jack Schwager

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24 Responses to “Free Proprietary Trading Training”

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    • webmaster says:

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