Day trading is the activity of looking at a market and using your skills to adapt and succeed in the changing economic conditions, asks Steve Burns of New Trader U.
While it takes time to learn, apply, and adapt, there are a few trading tips that will shorten your learning curve. Listed below are 17 trading tips with which you should be acquainted to achieve higher odds of success in the unlevel playing field.
1. Evaluate Your Personality
You are, mostly, a unique individual with preferences and tolerances that differ from others. Take note of your personality, including all of your potential kinks.
Do you get angry easily? A long-term strategy may be best. Do you love the excitement and adrenaline? Perhaps a short-term strategy is for you. Does stress make you sick? You can create plans and strategies that help mitigate stress.
Have you figured it out? Great! Now, go to friends, family, and even strangers and ask for their opinions on your personality. Is this embarrassing? Perhaps. Will you be embarrassed if this information leads you to craft a specific strategy that generates 25% more profit? You ought to look towards your long-term goal when evaluating yourself.
2. Develop Discipline
The market is about to form a double shoulder, and you decide to go long until the second shoulder forms...after 30 minutes, the market has dropped 20 points, and you are frantic. Your plan calls for a stop loss of 50 points; however, watching your trade lose hurts too much.
You close your trade, after it goes down another five points, for a total of a 25-point loss. Another 45 minutes pass and the market is now in the middle of the second shoulder formation and has gone up 40 points, which was your original goal. If you are not disciplined and stick to your plan, you could lose money, day after day. Eventually, you will wipe out your trading account.
A winning trade does not equal winning in the long run. The discipline to stick to your plan, evaluate it, and adapt will lead to long-term profitability and success.
3. Plan Your Trades in Advance
Plan each trade and trade your plan. As long as your plan is followed, you mitigate your risk to simply what was planned. You can create variable models to determine your preferences for other possible outcomes.
If you begin to trade outside of your plan, you will find yourself in complicated situations where you have to make rushed decisions, which can seriously hurt your account balance.
Let's say that your plan calls for trading from 8:00 am to 12:00 pm. You knew the set-ups, were familiar with how the market behaved and did great! You are up 120 points and rather pleased with yourself. Now you decide to trade afternoon just to have some fun. Three hours later you are down 200 points and have no idea what went wrong. Stick to your plan. When you trade outside of your comfort zone, you trade inside of someone else’s who has a clear advantage over you.
4. Use Data Mining to Your Advantage
You are designing your strategies for a market and find that they do not adhere to what is occurring. Did you include enough historical data to make a valid assessment?
There are many resources for gathering this information. Testing your plans in a close-to-accurate environment is key to remaining successful. The data says that on the Ides of March, the market becomes erratic. What is the safest course of action? You do not trade on that day. Without this data, you may decide to trade and become sad from losses. Look at your sources and mine intelligently so that your data is accurate.
5. Develop a Trading Strategy
Much information goes into the development of your differing strategies and overall plans. What is your risk tolerance? What is your maximum drawdown? Do you pyramid your profits? What is your risk-to-reward ratio? What markets will you trade and at what timeframe?
Your plan includes these and much more. Some general categories include your risk management techniques, methodologies, and strategy testing.
Develop multiple iron-clad plans that adhere to an overall plan. Inside those plans create adaptable strategies. Once all this is complete, you will have an exact picture of what you want to do and how you need to do it.
6. Know the Types of Analysis that Affect the Markets
There are two major forms of analysis: technical and fundamental. Technical refers to using mathematics, basically—indicators are based on math, to make forecasts. You will use information such as what types of bars have formed, what is the current state of the market, how many trades are currently in progress, did a line form went up, and many other types of data.
Fundamental analysis refers to what occurs outside the market, yet impacts it. For instance, the progression of the Federal Reserve Rate from five years ago until today.
While day trading, a fundamental view will tell you certain possibilities and the technical view narrows those possibilities down. The greater your analytical abilities and the skilled use of those abilities will reduce your risk while increasing your reward.
7. Accept Failure
A high failure rate does not imply that you lose money overall. You can be quite profitable while only winning 20% of your trades. As long as your risk mitigation and profit strategies are in place and followed, you can allocate how many trades you are willing to lose.
The key is to accept that failure is just a part of the process and comes with the territory. You just need to make sure that you win enough on the profitable trades to cover your losses. If this isn’t the case, you should adjust your risk/reward ratio or change your overall strategy.
8. Set Realistic Profitability Goals
You cannot rush success. It will take time to learn the market, build strategies, and adapt them. The traders that do so usually will see consistent profits after five to 12 months. Rushing ahead with your projections or goals can cause you to take risky trades, not follow your plan, and eventually lose your capital.
9. Risk Management
Do you have a risk-management strategy? Including items such as normal risk per trade and max monthly drawdown, you must have a plan in place. This is what mitigates your losses and allows you to, ultimately, be profitable.
Remember, numbers work differently than what we may think. As an example, a trade with a drawdown of 25% requires a 33% raise to become profitable. As more risk is incurred, a loss amplifies the amount you will need to win to recover a loss.
10. Trade a Demo Account First
Yes, real money gives you real motivation. However, learn the basics with a trial run. This is an excellent chance to practice your discipline. Since the money is not real, following a specific plan is more difficult. Find the tough emotions that you face, such as fear and greed, and overcome them during this learning phase.
As a side note, many experienced traders use these accounts to test new strategies, follow the ones they have created, or just to increase their knowledge without risk. Use this great resource to your advantage.
11. Trade Only What You Can Afford
Time and time again, human nature hits and we hear stories that are quite sad. A person has a retirement account that is now down the drain due to gambling away their hard-earned money in the markets while trying to make millions.
Although risk can be mitigated, day trading is still inherently risky. When you decide to open a real account, only use money that you can comfortably afford to lose. Many traders lose their entire account multiple times before becoming profitable. Accept that whatever money you placed in the account is already lost. Starting with the mindset of a 100% capital loss will help determine your comfort level and reduce stress.
12. Choose Your Broker Wisely
Do you enjoy their in-house platform? What is their account minimum? What is the pricing structure? Do they give better prices for larger accounts? You should ponder these, and many other questions. Many traders have lost an entire account due to the broker going bankrupt. Some traders wanted to save an extra dollar or two and ended up losing when the company suddenly vanished. Use a reputable, established broker to protect yourself.
13. Use Stop-Loss Orders
In every trade, place a stop. A hard, maximum drawdown per trade stop and a variable, softer trailing stop. You are up 100 points and decide not to use a trailing stop of 20 points. The market went down by 50 points, and you close the position. If you used the trailing stop, you would have gained 80 points instead of only 50 points. Be smart with your stops and use them. A runaway loss or a spectacular winner that turns into a loser is heartbreaking.
14. Respect the Support and Resistance Levels
Technical traders use two main levels; a support level and a resistance level. The support is simply a number that the market never goes past while going down. The resistance is a number that the market has trouble passing in the upward direction. As you extend time frames, the support and resistance become more solid and reliable. A great way of using this in day trading is to find both the numbers on a higher time frame and then a lower timeframe. If during the day the market hits a higher time frame number, it is stronger than a shorter time frame number and should be looked at more carefully.
15. Keep It Simple
There are a billion and one indicators out there. Research what the majority of professionals use as indicators and use those. Some indicators combine with others. Think of it this way. You just created an indicator based on math that no one has ever seen. You used variable reference points that no one else uses. You decide to trade with it. It repeatedly loses. While it may be a great indicator, the problem is that everyone else is using other points of reference, such as the above-mentioned support and resistance levels. Using the same indicators, as the others are using, increases your chances of success.
16. Understand Black Swans
Here is a wonderfully illustrative story. Myron Scholes and Robert Merton, two finance geniuses who won a Nobel Memorial Prize, associated themselves with a hedge fund. Their formulas were amazing. They made money day after day. The sky was golden, and the rainbows were bright…until to keep it short, Russia happened. An unforeseen black swan event occurred. The typical formulas no longer held sway and losses were staggering. The fund collapsed, Scholes and Merton lost their reputation, and the Federal Reserve intervened in certain ways. Black Swans are no fun. Mitigate the risk, even if it is rare.
17. Understand Volatility
The fluctuations in prices create volatility. It is the measure of a rapid change in numbers. A market with a volatility of two points will be much easier to trade than one with 20 points. While some strategies utilize volatility, it is best for beginners not to attempt these strategies when just starting. Understand volatility and mitigate your risk of price changes.
Learn more about Steve Burns at NewTraderU.com.