People will always strive to find new and fast ways
to make money. In most instances they will just create another get quick rich
scheme; in some cases they might discover some legitimate and real ways to
increase one’s financial well being. Day trading could be placed in both
categories, depending on who tries to promote it and then use it to make
capital. In most cases day traders lose all of their money, but there
definitely are some pros who consistently take cash from the market using
reliable trading systems, good trading plan, very strict discipline and sound
risk management.
What
is day trading?
It is active trading when a trader closes his
position the same day he opens. These are usually considered to be speculators.
Let us now look at key points are necessary for you
to be successful in day trading.
Trading
with an edge would probably be number one thing for
anyone who wants to be a successful day trader. You must have a strategy that
will be profitable long term. If you are able to back test it going back ten
years or even more, do it. If you have all necessary rules for your system, but
it fails to make money in the long run you will fail. It does not matter
whether other components for trading are ok. You will still lose. Have an edge.
Find out what works best in day to day trading and put it into a system that
you will be able to use each day.
Understand
market states. Different financial markets can be in
different market states at the same time. Euro maybe going up, gold down,
S&P500 sideways and some group of stocks could be plummeting or soaring. What
is good and works under one market state will cease to work under another.
Range trading rules will not work in a trend environment. Day trading style
under different market states may also change. When market is in ranges various
fundamental news plays a very significant role in market direction and you can
actually make nice cash trading news. However, when a trend starts market often
ignores the news (good or bad) and trades with a bias in the direction of a
prevailing tendency. Negative news can actually be a good opportunity to add on
dips when market stops falling (correcting itself) and go back up (if the trend
is upwards).
Know
when to play small and when to play big. This idea comes from
professional card players (card counters) in the card game of Blackjack. They
know that a casino initially has advantage over them. So, they play small by
placing very small bets. At some point, when the players notice that the number
of remaining high value cards is very big and most of low value cards are gone
they know that the advantage shifted from the house side to the players side.
That’s when they start playing big by placing ten, twenty or even one hundred
times bigger bets than they make when the house has advantage over them. That’s
how they win in the long run. Although this example taking from gambling it is
pretty sound and can be applied to trading too. You have to know when the
market has very high odds of going up or down and knowing that you should trade
accordingly. Play bigger than and do not involve yourself too much with the
market that has no clear direction.
Wait
for trades to come to you and do not force them.
A lot of new day traders make a big mistake of trying to force trades. They
feel bored while waiting for a signal and start relying on their gut feelings
to trade. This is when they commit the sin of overtrading which definitely
leads to a significant capital loss. You have to choose whether you are going
to be a discretionary trader (relies on his own judgment to pick trades) or you
are going to follow a strict trading system. You must not mix the two because
your results will also be mixed. Discretionary trading requires very deep understanding
of fundamentals as well as a lot of practice and tremendous patience. A
legendary investor Jim Rogers could be classified as a discretionary trader.
However, he also admits that he is often too early in his decision to enter the
market, because he does not rely on technical analysis at all. Well, this is a
small detour about discretionary trading, but it illustrates my point about
forcing a trade. Wait till market is ready to go up or down (if that’s what is
your system based on) and when your system gives you ‘green light’ jump and
swim with the flow.
In
order to win you have to learn from those who have made money. Read books written by successful traders,
learn their strengths, trading strategies and other qualities that are
necessary to succeed. See what mistakes they have made as traders and how they
were able to correct them. Study how they managed difficult situations that
arose in their trading careers, how they handled big losses as well as
windfalls. I learned a lot by reading series of books on the most successful
traders (Market Wizards series) by Jack Schwager. These guys may not share
their systems, but they do share their trading mentality and mentality is
precisely what makes one a winner or a loser. If there are flaws in the way you
think about markets it will be reflected in your trading results. If your
thinking is right you will be a profitable day trader. Be an eternal student of
financial markets.
Have
a trading journal. Record your trades in a journal. Note
what you did today and what was right as well as wrong. Did you stick to your system,
or you deviated from it? Were you early to open a trade or late? Did you have
to take the trade in the first place? Did you follow your rules or you broke
them? Write down some ideas on how (if) you could have made the trade(s)
better. Do not forget also the trades that you have missed. Missed
opportunities might be even worse than bad trades taken. It means you did not
follow your system and a few missed good trades can make a huge difference when
you look at your account balance at the end of the week or the month and
finally the year. This kind of journal will help you to prepare better for next
day and with time you will learn how to avoid most common mistakes that you
make that eventually cost you a lot of money (either in a sense of bad trades
or missed opportunities).
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Learn
to deal with your emotions. If you cannot manage your
emotions how are you going to manage your money and place good trades? Trading
style that is based on following your emotions is doomed to fail one hundred
percent. Do not even think about it. It is statistics. Although trading can
sometimes be referred to as a form of art it should not be associated with
following your inspirations, revelations, hunches and similar kind of things
that elevate or push down your emotions to extreme levels. You have to keep
these under strict control and do not be allowed to be carried away by them.
Your logical mind, strict rules for following your system and patience are the
keys. Being led by your emotions in trading will lead you to gambling and force
you to adopt gambler’s mentality. Trading is neither gambling nor a lottery
where ‘God knows how’ you will succeed. No, you will succeed by very clear
principles that have already been mentioned, not by some unknown and
unpredictable factors. If you do not agree to that you’d better try playing in
Casino, not financial markets. Who knows, maybe you will be successful.
Enjoy
your profits as you increase your account. If you have a good
month you should take some profits in order to enjoy the fruits of your labor.
Let the other part stay, so that you could increase your account and the volume
of your trades with time. Good traders always take around half of the profit if
they have a windfall. It reinforces their success. You will need to ‘touch’
your reward in order to keep a winner’s mentality. Jesse Livermore taught this
to his children. He was one of the most successful technical traders of the
twentieth century and most of today’s successful trend traders follow his laid
out principles in the book “Reminiscences of a stock operator”. A lot of
traders manage to make some money at some point, but very few of them cash
their profits and they eventually lose it because they are solely motivated by greed, which is the
most effective way to lose your money in
financial markets.
Averaging
losses is the biggest pitfall in day trading. Cut them short. You will be able to make
money next time. Close your loss while it is small. The first loss is the best
loss. If you do not agree with that this is a major problem mental drawback to
your trading. The only way you can make money trading is by having bigger
profits and smaller losses. Any successful day trader can confirm that. Follow
this rule and you will survive in the markets. Neglect it at your peril and
peril will come indeed. Newbie traders falsely believe that by opening extra
trades they reduce the percentage of their losses. One day they will find out
that their account a margin call and they do not have any more funds to trade.
Never try to catch falling knives. You will hurt your account, your trading
psychology will experience a serious damage and it will be pretty difficult to
recover after this kind of failure. Be smart!
Having
a trading plan is your map for trading. If you have a plan
you know where you are going, if you don’t you will stumble sooner rather than
later. No constructor starts building a house without a plan. He does not rely
on his creativity and spontaneity. He does not create a plan on the spot. He
has it before any construction work starts. This works even in acting. Actors
have a script, which could be an equivalent of a plan. They might improvise a
lot, but they will still stick to the script a lot. Do not expect that you can
survive without a trading plan. Spontaneity is your enemy in trading, not a
friend. It may and will change your plan if you rely on it. So, be strong and
stick to your plan at all cost.
Learn
to concentrate. Concentration and focus is the key to
success. Learn specifics or a few or maybe even one security and anticipate a
change in fluctuations which can give you opportunities to make profits. They
more you analyze a specific security the more you get a feel of it and
expectation how it may behave in the nearest future. Learn technical levels of
the security, they ways and manner it moves, its’ daily, weekly and monthly
ranges, volatility and etc. Leaning about character of a specific security
enables you to develop an edge. In some cases you will even be able to define a
significant top or bottom as concentration and focus sharpen your speculative
skills beyond your imagination.
Have
an open mind. This may sound a little contradictory
to a point about having a trading plan, but it really isn’t. Having an open
mind does not mean you stop following your plan. It helps you to see possible
weak spots in your trading strategy as well as your trading assumptions. When
you spot that try to change it accordingly. Open mind helps you to see what
state market is in and when strategy stops working and you have to use another
one. I talked about it when I discussed market states.
So, these are the key things that will help you to
become a successful day trader. Before you start trading with real money you
should, however, try ‘paper trading’ or trading on a demo account. Most brokers
will give you this opportunity for a month (some as long as you want). You can
back test your strategies; see how well your money management techniques work
and what you need to improve. Good luck in day trading.
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It should not be assumed that the methods,
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HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE
CERTAIN INHERENT LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED
RESULTS DO NOT REPRESENT ACTUAL TRADING AND MAY NOT BE IMPACTED BY BROKERAGE
AND OTHER SLIPPAGE FEES. ALSO, SINCE THE TRADES HAVE NOT ACTUALLY BEEN
EXECUTED, THE RESULTS MAY HAVE UNDER- OR OVER-COMPENSATED FOR THE IMPACT, IF
ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING
PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH
THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL
OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN.
