What is day trading

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Contents

What is Day Trading? 7 Simple Day Trading Strategies for Beginners

Day trading is the practice of buying and selling financial instruments throughout the day. As the day progresses, prices will rise and fall in value, creating both the opportunity for gain and the possibility of loss.

At 10:15am, a day trader might buy 1,000 shares of Amazon.com’s stocks just as the price begins to rise on good news, and then sell it at 10:25am, when it’s up by $1 per share.

In this example, the day trader makes $1,000, minus commission. With today’s cheap commissions of $10 or less per trade, that’s a quick $990 in just 10 minutes!

When traded strategically, the trends and fluctuations in the markets allow for quick profits to be made in brief periods of time.

Keep in mind, however, that day trading is specifically designed to result in smaller earnings on a regular basis; it is NOT designed to result in huge fortunes through a single trade.

Day trading can be very profitable, but it isn’t a get-rich-quick scheme (though many seminars convincingly sell it as such). Nor is day trading a sure road to immeasurable wealth and success (as some hyped-up websites would have you believe).

Quite simply, day trading is just like any other business venture: in order to be successful at it, you need to have a plan. It would be very risky to dive in head-first without looking. However, with the right tools — and with the knowledge to use those tools efficiently and effectively — the risks of day trading can be greatly reduced. With perseverance and commitment, you can find trading success.

Who Should Be Day Trading?

Day trading is not for everyone. Yes, there are many advantages, but there are also some “negative” factors. One of them is that you WILL face losses. As a trader, losses are part of our business. If you can’t accept that fact, you simply shouldn’t trade.

And you need a PLAN:

Traders who enjoy the most success in day trading, regardless of whether they’re in it for a living or for some extra income on the side, generally have solid trading strategies and the discipline to stick to their trading plan.

Keep in mind that day trading is a very competitive field. In order to succeed, you need to maintain focus on a set of strategies which you can implement immediately, without hesitation. Remember, a proven, strategic trading plan can give you an edge over the rest of the market.

Unfortunately, even with a tested, proven trading strategy, you are not guaranteed trading success. It takes something else. It takes discipline. A profitable strategy is useless without discipline.

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Successful day traders must have the discipline to follow their system rigorously, because they know that only trades which are indicated by that system have the highest probability of resulting in a profit.

Whether you’re new to trading or have been trading for years, it’s all too tempting to place the entirety of your trust in graphs, charts, and software. If only trading was as easy as that!

Simply purchasing trading templates and computer programs does not guarantee your success as a trader.

Too many hobby traders have tried that, and, unsurprisingly, they’ve failed. They bought the tools, but they didn’t have the knowledge they needed to succeed. As in all things, education will do wonders for the aspiring — and experienced — trader.

Of course, this is not to say that software programs and markers are not helpful when it comes to day trading. On the contrary, many traders use technical indicators which are instrumental to their success — a few examples of these are the MACD, moving averages, and Stochastics. However, though profitable day traders DO follow their indicators, they are also aware that nothing is 100% foolproof.

You will not get rich on just a single trade.

Successful traders know that trying to hit a lucrative home run on just one trade is a sure way to get burned. The key is consistency. You need to devise a solid strategy that produces consistent trading profits, and you need to learn and adapt as your experience with day trading grows and evolves.

If you want to succeed with trading, then you MUST invest both time and money to acquire the knowledge that you need, the discipline to follow your trading strategy, and the patience to wait for the “perfect trade.”

Mindset For Day Trading

You need the following mindset for day trading:

Play Above the Line

Playing above the line means taking OWNERSHIP for everything that’s happening in your trading. Rather than blaming, making excuses, or denying that there’s a problem, be ACCOUNTABLE for your trading decisions and actions, and take RESPONSIBILITY for doing something about it. There is no “bad market,” there’s just a “bad trading approach to the market.” Nobody forces you to trade a certain market. If a market becomes un-tradable, you can change to another market. And you can change your trading approach and adjust your trading plan. There are many things YOU can do. As a trader, YOU are responsible for your trading results, nobody else.

Have a Positive Attitude

Trading can be simple, but it is not easy. Along the line, you will face losses, but you need to get up every single morning believing in you, your strategy, and WINNING. Have you ever heard of “The Law of Attraction?” Basically, it states that in order to achieve success, you need to focus and concentrate on attaining that success. And the opposite applies too: if you focus on the negative — on losses — then you’ll probably experience losses. It’s extremely important that you ARE positive and that you STAY positive.

Exercise Honesty

You overtraded this week? You let your emotions get the best of you? You didn’t stick to the strategy? Fine — these things happen to the best of us. But don’t lie to yourself, and don’t make excuses. Take responsibility for your actions and your decisions. Admit a mistake, learn from it, and move on.

Be Committed

Trading success will not happen overnight. It requires commitment, time, and effort on your part. There are already too many “traders” in the market who think they know everything they need to, who think they don’t have to learn anything; they believe a “magic system” will place their trades for them and make them rich. You and I know that this is a sure path to failure.

Trading is like every other profession: you learn the basics, you apply them, you gain experience and then you refine your trading. The learning never stops. Do you really expect to make millions of dollars after only investing a few hours of time into your education? You wouldn’t trust a doctor whose only education was from free, downloaded Internet eBooks, would you?

There’s no doubt about it: day trading can be a profitable and exciting way to earn money. With the right knowledge, you can radically reduce the risk, which will create even more opportunities for achieving trading success.

If you’re not willing to spend the time learning the techniques of trading, reading about new and improved trading strategies, and working wholeheartedly in a fast-paced trading environment, then day trading is probably not for you.

However, if you have the drive, dedication, and discipline, day trading could seriously impact the shape and success of your financial future.

Day Trading Action Items

  • Decide right now that you will have the discipline to follow your plan, that you will play above the line in your trading, that you will maintain a positive attitude, that you exercise honesty, and that you are 100% committed to your trading success.
  • Start a trading journal. Most successful traders have one. Get your hands on a nice notebook and begin to record your trading progress and your feelings every day. You can start now. Write down today’s resolutions; you will NOT use day trading to get rich quick. Circle it three times and read it frequently. It will help, trust me.

Can You Make a Living As a Day Trader?

This question is asked over and over and over again by many, many people. The answer is: “Yes, it is possible!” And, better yet, you yourself can do it. Sometimes people don’t believe me when I say that they can become successful, full-time day traders, but it’s true. And I’m going to prove it to you right now.

Trading for a Living

Before we get started, I need you to ask yourself one very important question: “How much is ‘a living?’” Many people want to be ‘rich,’ but they fail to quantify what ‘rich’ means to them. Are you ‘rich’ if you have one million dollars?

Maybe so, but if you told Donald Trump that he had one million dollars in his bank account, he’d wonder what had happened to the rest of his money. He’d be furious!

One million dollars to Donald Trump equals broke!

Over the past couple of years, I’ve taught hundreds of people how to make money with day trading.

I’ve taught people in countries where $2,000 allows you to live like a king in a 6,000 square foot mansion with a butler, a gardener, and a cook.

And I’ve taught people who live in California, where they have to make at least $20,000 just to pay for their mortgage, their utility bills, and gas for their cars.

I’ve taught musicians who wanted to make $5,000 per month, which is twice as much as they have made throughout their whole career.

And I’ve taught business executives and successful business owners, who needed at least $50,000 per month to maintain their current lifestyle. As you can see, “making a living” is a very broad term.

Things You Should Know While Day Trading

Since I don’t want to get into a deep discussion about “how much money is a decent living for you,” let’s just assume that you would be pretty happy if you were making $150,000 per year, and let’s say that you are making this money with your trading. Does that sound reasonable?

Let’s break it down: $150,000 per year would be $12,500 per month, or, if you prefer, $3,000 per week. This is assuming that you are taking two weeks of vacation per year.

IMPORTANT: Don’t set daily targets when you trade. In order to make money, two conditions have to be met:

  1. YOU have to be ready to trade.
  2. THE MARKET must be ready to be traded.

There will be days when YOU are not at your best (sickness, emotional stress, no time because of an emergency, etc.), and there will be days when the market is not ready to be traded (e.g. holidays, including the days before and after holidays, days before a major news release, like the Federal announcement regarding interest rates or the unemployment report, etc.).

How To Trade Successfully?

In order to trade successfully, you shouldn’t raise the bar too high too fast. Put it at a level that you can manage every single time. You can always increase it at a later date, once you’ve proven that you can meet your goal consistently.

In the first four weeks of your trading, you might set your weekly target at $100 per contract. This might sound too easy for you, but keep in mind that 90% of traders lose money in the markets. When you can make $100 per contract consistently, you can start “raising the bar.” Try $150 per contract per week. Raise the bar again and again, but make sure that you’re still comfortable in achieving your goals.

When day trading futures, options, or forex, you can use leverage and trade multiple contracts on a rather small account. If you’re thinking about trading the futures market, then you can easily find a broker who will enable you to trade one contract of almost any futures instrument that’s out there — E-mini S&P, E-mini Russell, currency futures, interest rates, commodities, etc. — on a $2,000 account.

After awhile, you might raise the bar to $300 per contract per week. So, if you want to make $3,000 per week, then you need to trade ten contracts. The same applies to stock trading: if you can make $300 per week trading 100 shares, then you need to trade 1,000 shares in order to make $3,000 per week.

At this point, you might not have enough money in your trading account to trade in these increments, but don’t worry — we’ll get there.

The key element to trading success is having a sound trading strategy that produces consistent profits. If you can make money day trading one contract or 100 shares of stock, then you can make money day trading ten contracts or 1,000 shares of stock.

Ideally, to achieve your weekly goal, you’ll have a high average profit per trade. The average profit should be at least 50% higher than your average loss, preferably even twice as high.

One of the strategies that I use and teach to my students calls for a profit target of $300 per contract and a stop loss of $200 per contract. You’ll notice that the profit target is greater than the stop loss. That’s the beauty of it: all you need is one net winning trade, and you’ll have achieved your weekly goal of making $300 per contract.

So if you’re lucky, you could achieve your weekly profit target on Monday morning with the first trade.

But what if you lose?

As everyone in trading knows, losses are a part of the business, and you can’t avoid them. If that’s something you have trouble accepting, then you shouldn’t be trading. However, there’s a huge difference between losing big on a regular basis and losing small in a controlled trading plan. You already know that you should keep your losses small; the key is to keep them smaller that your average wins.

Let’s go back to the scenario I mentioned before: you have a trading strategy that produces $300 in profits for every win and costs you $200 for every loss. Now, if your weekly goal is $300, and if your first trade was a loss of $200, then you need to make two winning trades to achieve your weekly profit goal.

Let me take this a little farther and actually break it down for you: you’ve lost $200 on your one losing trade, and then you make $600 on your two winning trades ($300 each). Your net profit = $400. Goal achieved. Now, STOP TRADING. Otherwise, you’ll end up giving back the money you just made to the markets. Lock in your profits!

Of course, you’re not always guaranteed a week with only one loss. Let’s look at a week that starts off with three losses. With three losses, you are now down $600 ($200 each). So you would need to have three wins that result in $900 ($300 each). Subtract the $600 you lost on the losing trades from the $900 you won on the winning trades, and your resulting net profit is $300. Goal achieved. Stop trading.

“Wait a minute — you’re saying that I will achieve my goals with a winning percentage of only 50%?”

YES! That’s exactly what I’m saying! Read the example above again: you lost $600 on three losing trades, made $900 on three winning trades, and came out with a net profit of $300. This means that you could pick a losing trade every other time and STILL achieve your weekly profit goals!

I want to stress this point again, because many traders neglect this important concept of setting weekly goals. They define daily goals, which create an enormous psychological pressure, and then they trade markets when they shouldn’t, and they lose.

So let’s just assume for a minute that you do end up achieving an actual winning percentage of only 50%. Now, when you start trading again on Monday morning, what are your chances of having a winning trade? 50%! You have a one in two chance of meeting your weekly profit goal in just one, single trade!

So if you DO achieve your weekly profit goal on the first trade Monday morning, what next?

Stop trading for that week! Just enjoy life! It doesn’t get any better than that.

Remember, you need to stick to your trading plan and your weekly goal. Do NOT enter into another trade once you’ve already achieved your weekly goal; the chance that your second trade may be a losing trade is too great, and you would be giving your money and profits back to the market. Overtrading and greediness are a trader’s downfall, so resist them and stick to your strategies.

Some More Resources Fro Stock Trading Beginners

How To Get Started — Define Your Goals And Make a Plan

When it comes to trading, many first time traders want to jump right in with both feet. Unfortunately, very few of those traders are successful; successful trading requires knowledge, skill and experience.

Before you dive in, you need to determine what your goals are. What do you hope to achieve with your trading activities? Why do you want to trade?

  1. To buy a new sports car?
  2. To buy a bigger house?
  3. To make $100,000 a year / month / week?
  4. To finance a college education for your children?
  5. To make a full-time income to support your entire family?
  6. Freedom to choose what, when, and who you do things with?
  7. To have a fun, exciting life full of extraordinary experiences?
  8. To work less and enjoy more time with your loved ones?
  9. Or are you just planning to make some extra cash on weekends?

Before you trade a single penny, really think about what you hope to achieve with that investment. Knowing what your goal is will help you stay motivated when you’re facing a tough spell of trading, and it’ll help you make smarter investment decisions along the way.

But be realistic:

Too often, people start day trading with dreams of becoming rich overnight. I’m not going to say that it is impossible (because it is possible), but let me remind you that it’s also very rare. It’s much safer to create a trading strategy that will allow your account to grow at a slower pace over time, which can ultimately be used for retirement or a child’s education.

So let’s talk about how to define your goals and make a plan for your day trading endeavors.

Here are the three important steps:

#1 Define Your SMART Goal

SMART is an acronym which stands for:

Fortunately, when it comes to day trading, it’s very easy to define a goal that meets all of these criteria. You simply specify exactly how much money you would like to make per month with your day trading.

I want to make $10,000 per month with day trading.

  • Is this SPECIFIC? — Yes, a dollar amount of $10,000 is very specific.
  • Is this MEASURABLE? — Absolutely! Just check the balance of your trading account at the beginning of the month and at the end of the month. Your account balance is the easiest way to measure the achievement of your goal.
  • Is this ATTRACTIVE? — That depends on you. $10,000 is definitely attractive for someone who currently makes $4,000 per month, but it wouldn’t be attractive to someone who’s already paying $10,000 just in mortgage payments for his 6,000 square foot home. Make sure that YOU are motivated by this goal.
  • Is this REALISTIC? — We talked about this in the previous chapter. Successful people believe that there are no unrealistic goals; only unrealistic timeframes. Right now, your trading account may not be big enough for you to realistically trade enough shares or contracts to achieve your long-term trading goal, but if you follow the steps outlined in this book, it’s very possible that your long-term goal WILL become realistic in the near future.
  • Does it have a TIMEFRAME? — Of course it does: you want to make $10,000 per month; the timeframe is 30 days.

#2 Make a Plan

Developing a plan is essential to your success, but we’re getting a little ahead of ourselves. We’ll talk about your trading plan in detail in the second part of the book, “Your Trading Strategy — The Cornerstone to Your Trading Success.” Just make sure you don’t mix up the order: you first define your trading goals, and then you develop a trading plan.

Many traders look for a trading strategy first and then hope that the trading strategy will help them achieve their goals. That’s putting the cart in front of the horse.

Regardless of what you’re doing, you should first define WHAT you want to accomplish, and then plan HOW to achieve that goal. Otherwise you might find out that you started climbing up the wrong ladder right at the very beginning.

#3 Execute the Plan

This is where the rubber meets the road. Once you have your plan, you’ll need to actually execute it. And naturally, that’s where most of us fail.

Let me give you an example:

Amazon lists 18,361 books for “Weight Loss” and another 28,707 books for “Exercising and Fitness.” That’s a total of 47,068 books on the popular topic “How to Lose Weight” (compared to only 4,463 books in the category “Stock Trading and Investing”).

If I wrote a book on weight loss, it would be a very, very short:

Come on, it’s simple: we all know that we can lose 10 pounds in 10 weeks if we just follow those two rules.

We reduce our calorie intake to 1,500 or 2,000 calories per day, and then we do some aerobic exercises at least three times a week for a minimum of 30 minutes.

We have a SMART goal (“lose 10 pounds in 10 weeks”), and we have a plan (“eat less and exercise more”), so why do we keep buying these books and magazines that promise a new diet, a new way to lose weight?

Because we fail to execute our plan.

And then we blame the plan: “it’s too hard,” “it’s impossible,” “it doesn’t work.” This isn’t true. We didn’t succeed because we were simply too lazy, or we didn’t have the discipline to execute our plan. But instead of working on the true problem — the execution — we change the plan itself, hoping that there’s an easier way.

Successful people will realize that their problem doesn’t lie in the plan, but in the execution.

Here’s what you can do in order to ensure your own motivation and discipline when it comes to executing your plan:

It’s important to focus on the big picture. It’ll help you stay motivated when your learning reaches a plateau, or when you face a couple of losses. All great accomplishments start with a great vision.

Once you’ve defined your SMART goal and the amount of money you want to make with trading, ask yourself this: “How would achieving this goal impact your family life?” and “how would it affect you personally?”

Take your time to answer these questions and write down the answers.

As you know, human beings are great at procrastination. We don’t like to be outside of our comfort zone, and that’s why sometimes we do nothing and just “hope” that we will achieve our goals. As you can imagine, the chances of achieving a goal by doing nothing are slim to none. So, answering the next question will help you to take action immediately.

Ask yourself: “Why should you act NOW?”

When you take the time to actually think about the answer, it will be a huge motivator. Little tricks like this will help you stay focused on your long-term goal, which will help you to execute your plan.

How Much Money Do You Need to Get Started?

The answer to that question depends on the market you want to trade. Using a systematic approach, we’ll determine the best market for you over the course of the next few chapters, but the information below will give you a basic idea of your options:

  1. If you want to day trade stocks, then you need at least $25,000 in your trading account.
  2. If you want to day trade futures, then you should have between $5,000 and $10,000 in your trading account.
  3. When trading options, you should have between $1,000 and $5,000 in your trading account.
  4. If you’re thinking about trading forex, then you can start with as little as $500 in your trading account.

Financial considerations are always important, but don’t make the common mistake of letting your current financial situation dictate which market you’re going to trade. Remember: you first define your goal, and then you plan how to achieve it.

If you don’t have sufficient funds to trade the markets you’ve outlined in your goals, then start doing something about it now — save more money or put in overtime hours. There are a lot of ways to make a few more bucks, and it’s better to wait for the funds you need than to begin trading in a market that isn’t right for you and your goals.

For those of you who already have the right amount of money in your savings account, let’s talk about the question, “ How much money SHOULD you trade?”

Many first-time traders think they should trade all of their savings. This isn’t true! To determine how much money you should trade, you must first determine how much you can actually afford to lose, and what your financial goals are.

Let’s begin by determining how much of your savings should remain in your savings account. It’s important to keep three to six months of living expenses in a readily accessible savings account, so set that money aside, and don’t trade it! You should never trade money that you may need immediately. Unless you have funds from another source, such as a recent inheritance, the remaining amount of money will probably be what you currently have to trade with.

Take a good look at how much money you can currently afford to trade. You don’t want other parts of your life to suffer when you tie your money up in a trade, so make sure to consider what these savings were originally for.

Next, determine how much you can add to your trading activities in the future. If you are currently employed, you will continue to receive an income, and you can plan to use a portion of that income to build your investment portfolio over time.

7 Steps To Develop Your Own Profitable Day Trading Strategies

Developing a profitable trading strategy is not as complicated as you might be led to believe. Many people will tell you that it’s extremely difficult to build your own trading system, but it’s actually pretty straightforward. So here I’ll show you how to develop your own trading strategy in seven simple, but very important, steps.

  • Step 1: Selecting a Market
  • Step 2: Selecting a Timeframe
  • Step 3: Selecting a Trading Style
  • Step 4: Defining Entry Points
  • Step 5: Defining Exit Points
  • Step 6: Evaluating Your Trading Strategy
  • Step 7: Improving Your Trading Strategy

Selecting a Market — Day Trading Strategies

With the fame of online trading, more and more financial instruments are available to trade. You have a variety of choices, not just stocks, options, and futures. In recent years, financial instruments like Exchange Traded Funds (ETFs), Single Stock Futures (SSF), and the Foreign Exchange Market (forex) have become available for the private investor.

In addition, the existing financial instruments have been enhanced. Exchanges started introducing electronic contracts and mini contracts of popular commodities like gold, silver, crude oil, natural gas, and grains. These futures contracts have become very popular amongst day traders, and the volume of the mini and electronic contracts quickly surpassed the volume of the pit-traded commodities.

These days, you can basically trade ANYTHING. For example, if you want to participate in the real estate market without owning properties, you can invest in Real Estate Investment Trusts (REITs), or even Real Estate Futures of a particular area, like Chicago or Denver (traded at the CME). Always do your own research before investing. Here is the best tool I recommend.

Selecting a Timeframe — Day Trading Strategies

When day trading, you’ll obviously select a timeframe that is less than one day.

Popular intraday timeframes are 60-minute, 30-minute, 15-minute, 10- minute, 5-minute, 3-minute, and 1-minute. When you select a smaller timeframe (less than 60 minutes), usually your average profit per trade is relatively low. On the other hand, you get more trading opportunities. When trading on a larger timeframe, your average profit per trade will be bigger, but you’ll have fewer trading opportunities.

Smaller timeframes mean smaller profits, but usually smaller risk, too. When you’re starting with a small trading account, you might want to select a small timeframe to make sure that you’re not over-leveraging your account.

However, when selecting a very small timeframe like 1-minute, 3- minute, or 5-minute, you might experience a lot of “noise” that is cause by hedge funds, by scalpers, and by automated trading.

You might think that you see an emerging trend just to realize that it was only a short manipulated move and that the trend is over as soon as you enter the market.

Therefore I recommend using 15-minute charts. This timeframe is small enough for you to capture the nice intraday moves, but it’s big enough to eliminate the noise in the market and correctly displays the “true trends.”

When developing a trading strategy, you should always experiment with different timeframes. A trading strategy that doesn’t work on a small timeframe might work on a larger timeframe and vice versa.

Start developing your trading strategy using 15-minute charts, and if you’re unhappy with the results, change the timeframe first before changing the entry or exit rules.

Selecting a Trading Approach — Day Trading Strategies

After selecting a market, you need to decide which trading approach you would like to use. The main question is whether you’ll use fundamental or technical analysis to decide which instrument to trade and when to enter and exit.

Fundamental Analysis

Fundamental stock analysis requires, among other things, a close examination of the financial statements for the company to determine its current financial strength, future growth and profitability prospects, and current management skills, in order to estimate whether the stock’s price is undervalued or overvalued. A good deal of reliance is placed on annual and quarterly earnings reports, the economic, political and competitive environment facing the company, as well as any current news items or rumors relating to the company’s operations.

Technical Analysis

The basic foundations or premises of technical analysis are that a stock’s current price discounts all information available in the market, that price movements are not random, and that patterns in price movements, in very many cases, tend to repeat themselves or trend in some direction. Therefore technical analysis involves the study of a stock’s trading patterns through the use of charts, trendlines, support and resistance levels, and many other mathematical analysis tools, in order to predict future movements in a stock’s price, and to help identify trading opportunities.

Defining Entry Points — Day Trading Strategies

As you saw in the previous examples, most of the trading approaches or indicators already provide you with entry rules. When defining entry points, you want to keep it simple and specific. You can’t freeze the market. A market is constantly moving, and you have to make your trading decisions fast.

Most trading approaches and indicators require a decision at the end of the bar. Even when you’re watching 60 minute bars, and you’ve spent the past hour doing nothing except waiting for your signal, now — at the end of the bar — you only have a split second to make your decision. Use as few entry rules as possible and be as specific as you can. The best trading strategies have entry rules that you can specify in only two lines.

Defining Exit Points — Day Trading Strategies

I once heard the saying: “A monkey can enter a trade, but money is made (and lost) when you EXIT it.”

This couldn’t be truer. Most traders are right about the direction of the market when they enter a trade, but they end up taking a loss because they fail to capture profits at the right time.

Knowing HOW and WHEN to exit a trade will ultimately determine your success or failure as a trader. There are three different exit rules you should apply:

  1. Stop loss rules to protect your capital.
  2. Profit-taking exits to realize your gains.
  3. Time-stops to get you out of a trade and free your capital if the market is not moving at all.

Stop loss and profit-taking exit rules can be expressed in four ways:

  1. A fixed dollar amount (e.g. $1,000)
  2. A percentage of the current price (e.g. 1% of the entry price)
  3. A percentage of the volatility (e.g. 50% of the average daily movement)
  4. Based on technical analysis (e.g. support and resistance levels)

Evaluating Your Strategy

Once you’ve determined which markets you want to trade, selected a timeframe, and defined your entry and exit rules, it’s time to test and evaluate your trading strategy. There are three ways to test your trading strategy:

Back-Testing

Back-testing is a method of testing which will run your strategy against prior time periods. Basically, you’re performing a simulation: you use your strategy with relevant past data to test its effectiveness. By using the historical data, you’re saving a ton of time; if you tried to test your strategy by applying it to the time periods yet to come, it might take you years.

The Monte-Carlo Simulation

The Monte-Carlo Simulation is a problem-solving technique used to approximate the probability of certain outcomes by running multiple trial runs — called simulations — using random variables. It is a way to account for the randomness in a trading parameter — typically, the sequence of trades. In Monte Carlo simulations, the basic idea is to take a sequence of trades generated by a trading system, randomize the order of trades, and calculate the rate of return and the maximum drawdown, assuming that x% of the account is risked on each trade.

Paper Trading

Paper trading is a method of “risk-free” trading. Basically, you set up a dummy account, through which you can test your trading strategy with paper money. There are two methods to this: you can either pretend to buy and sell stocks, bonds, commodities, etc., and keep track of your profits and losses on paper, or you can open an account online, usually through your broker (and usually for free).

Improving Your Strategy

There is a difference between “improving” and “curve-fitting” a system. You can improve your system by testing different exit methods. If you’re using a fixed stop, try a trailing stop instead. Add a time-stop and evaluate the results again.

Don’t look only at the net profit; look also at the profit factor, the average profit per trade, and the maximum drawdown. Many times, you’ll see that the net profit slightly decreases when you add different stops, but the other figures might improve dramatically.

Don’t fall into the trap of over-optimizing: you can eliminate almost all losers by adding enough rules, but your resulting strategy will be almost worthless.

Conclusion

So this was a complete guide for day trading. Day trading is risky but with proper plan you can definitely make living with it. Follow above mentioned 7 day trading strategies and succeed in your trading journey.

Everything You Need to Know about Day-Trading

What is Day-Trading?

Day Trading is when someone tries to make a profit by rapidly trading many securities with positions lasting just hours or minutes. These trades are known as intraday trades because a day trader will not hold positions overnight.

Day trading is easy. It requires in-depth understanding of markets, advanced real-time data, and complete focus. Day traders will usually continually monitor their positions while they are open. This is why positions last just a few hours and are usually closed before the closing bell.

Trading commissions and expensive analysis tools handicap day traders which is why day traders must make large investments even when getting started. To be successful at day trading it has to be a full-time job.

Day-Trading vs Swing Trading

Swing-Traders, like day-traders, seek to make large profits from short-term stock movements as opposed to long-term investments. Both strategies have pros and cons.

Swing Traders hopes to take advantage of changes in securities’ prices over a few days to several weeks. Due to these slightly longer term investments, swing trading is less likely to become a full-time career like day-trading.

Why Day-Trade?

The reasons people start day trading are obvious. The potential for huge monetary gains draw in investors from all over the globe. With the introduction of Electronic Communication Networks (ECNs) into the stock trading world in the late 90’s, investors no longer need to be on the market floor to place trades. Now investors can place trades almost instantly from anywhere in the world.

In addition to the large potential gains, you also get to be your own boss. However, you are still tied to working certain hours when the stock market is open.

How to Day-Trade

Getting started day trading is easy. All you need to do is set up an account with a reputable online brokerage firm. Staring a trading account is a lot like opening a bank account. It requires some personal information and an initial deposit.

Once you account is opened and funded you will be able to begin trading immediately. Be sure to compare the fee structures of the different online brokers. Many exchanges will give you free trading for a certain amount of time or they might give you your first couple trades free. Fees depend upon several factors but $10 to $20 per trade is average.

To be a successful day-trader, you have to study the market diligently and make timely, accurate decisions every time. Day trading is not for the faint of heart.

Risks of Day-Trading

Any investing involves risk and the higher the potential rewards, the larger the risk in the investment. Day-trading has one of the largest potential returns on investment and is one of the riskiest kinds of investing.

The market is unpredictable and there is no going back after a trade has been placed. You always trade at your own risk and risk losing everything you invest.

Day traders are competing against high-frequency traders, hedge funds, and other market professionals. US Securities and Exchange Commission warns that “days traders typically suffer financial losses in their first months of trading, and many never graduate to profit-making status.”

However, the rewards of successful day trading can be great and many people choose to make it their full-time career.

Day trading: a definitive guide

As a day trader, you can be your own boss. You can trade from an office or at home, or even while travelling – thanks to advances in mobile technology.

But day trading is not for everyone, and there are some things you should be aware of before you start day trading the financial markets. In this guide, we discuss day trading for beginners and some key things to remember.

The rise of the day trader

The idea of day trading has increased in popularity over recent years. Technology has played a big part in this – thanks to fast broadband and mobile connections we have a wealth of real-time market information at our fingertips. This has led to many more people accessing the markets through day trading, in other words, placing trades throughout the day to try and profit from volatility as market prices go up and down.

But what strategies can you use? Should you keep it simple, or use something a bit more complicated?

Day trading strategies

Day trading is a popular short-term trading strategy, which involves the buying and selling of financial instruments, with the aim of closing out of the positions by the end of the day to profit from small movements in price.

Day trading strategies can differ from longer-term trading strategies, in that they focus more on profiting from shorter-term movements in the market, as opposed to moves that take place over a number of days or weeks. Day traders need to be continuously focused, as markets can move suddenly in the short term.

Technical analysis trading

Many day traders use technical analysis and charts and would recommend a ‘clean’ approach to their trading strategy. These traders prefer not to load their charts with lots of different indicators in order to try and second-guess direction. Rather, they will focus solely on price; this is often referred to as ‘price-action trading’. When trading in this way, you still have some key reference points based on what has happened previously, to help you plan future trades.

For some day traders, the previous day’s high and low are important levels to watch when it comes to planning a strategy for that day. This is actually quite logical: yesterday’s high marked the point where sentiment changed and the sellers came back into the market, pushing the price lower. The market consensus, therefore, was that the price was too high. And of course, the previous day’s low shows where the buyers regained confidence as they felt the market was undervalued – they voted with their wallets and bought. These levels could be important if they come into play again, and can provide the cornerstone of a day trading strategy.

Example day trade: GBP/USD

On the morning of 22 April, the day trader could look at the previous day’s high and low in the popular GBP/USD forex pair. During the previous day, when the price dipped back to the 1.4300 level, the buyers came back in. Of course, there was no way of knowing what would happen on 22 April, but there was a reasonable chance that 1.4300 could end up being an important level for that day’s trading. The expectation would be for buyers to step back in again ahead of that 1.4300 mark.

Support and resistance

As can be seen in the chart, this is exactly what happened. There were actually two occasions over the course of a couple of hours where the GBP/USD rate slid back towards that level, trading down to 1.4320. The day trader would consider buying here as there had been demand on the previous day.

Another big advantage of using absolute levels like this to plan trades is the all-important management of risk. Day trading is of course all about trying to make profits, but it’s just as important to limit losses when things do not go as planned. If the GBP/USD rate slid below the 1.4300 level then clearly something has changed and the day trade could be exited for a small manageable loss.

Determining your best strategy

No strategy works all the time, but even a simple day trading strategy can help a trader try to pinpoint low-risk, high-reward trades at important points throughout the day. Some traders would also use the failure of one trade as an opportunity to set up another. If the level breaks, it can signal a new trend is starting, presenting another opportunity to try and profit.

Day trading tips

Follow your own rules

Discipline is one of the most important attributes that experienced traders have in common. Keep a watchful eye on your bad habits, and look to resolve them as soon as possible. You are trading in a disciplined way if you decide on a carefully considered set of rules to govern your trading decisions, and then follow them.

Find ways to stop yourself from breaking your rules and look to address it if it is becoming a problem. As a day trader, it’s a good idea to re-evaluate your rules at the end of each month, due to the shorter time frame of this style of trading.

Manage your money

Money management is essential when day trading. In fact, it is one of the essential elements of trading over any time frame. Certainly, if you are planning to trade for many years to come, you are going to need to apply successful money management strategies. There are whole books dedicated to this topic, containing many different approaches, and you need to take the time to find a method that you’re comfortable with.

The risk-to-reward ratio is important. Remember, it doesn’t matter if you win 90% of the time if your losses are much larger than your wins. What’s important is that your wins are larger than your losses.

Always use risk management

Never forget to use stop losses to manage your risk when you are placing your orders to enter the market. This is your insurance. You need to be aware of exactly where your stops should be prior to entering the trade. This is a good habit to have and will help protect yourself from trades that go against you.

Standard stop losses can be prone to slippage when price gapping occurs, however, guaranteed stop losses will always close out positions at your chosen level.

The psychology of day trading

Once you have developed an informed opinion – try to act decisively.

Stay level-headed. You should always try to remain calm – this is especially true when you are faced with a loss. Maintain a calm disposition and react in accordance with your rules. Mentally rehearse your worst-case scenarios so that, if they do occur, you are prepared and can keep a level head. Remember that when trading on leverage, your loss can exceed the amount you have deposited on a trade.

Don’t let other traders’ opinions influence your trading strategy. Sometimes other traders will offer their views on the market and give advice without considering your trading methodology. If you want advice you should consult a qualified professional who will be able to appreciate your style of trading and give their thoughts accordingly, without throwing you off course.

Be patient. Emphasis needs to be placed on the importance of patience when trading. If you can’t find any viable trading opportunities, don’t trade for the sake of it. As you get to know a market you may find that knowing when to open or close a trade becomes easier. Your intuition is something that sharpens as you become more experienced as a trader.

Be aware of your stress levels. Day trading can be stressful as it requires constant attention and motivation. You can counter this by taking time to think about your priorities. Get some perspective on trading and its place in your life. Increased stress levels can have a negative impact on your trading decisions so, if you feel like your stress levels are rising, it’s probably a good time to step away. You can come back to trading later when you are in the right frame of mind.

Have a flexible approach. When you’re trading it’s also necessary to be flexible with your positions. Market conditions can change rapidly and so you need to be flexible in your approach. You need to be ready to adapt to changing market conditions, and to alter your trading strategy accordingly.

Stick to your chosen market and a particular timeframe. These are two parameters you can control in an environment that can change very quickly.

Never be afraid of realising your profits. If you find that you have exited a trade at a profit but the trend continues, don’t regret your decision. You have made a profit, so start looking for the next opportunity. If you worry that you are frequently exiting too early and are missing out, you could design and test a re-entry technique.

Keep detailed trading records

When you are running a particular trade you could write down your reasons for entering it. This will help you later as you can evaluate your past trades in order to learn from them. By keeping good records and writing down precisely why you entered the trade, you can increase your learning curve.

You also need to have a clear picture of whether you are where you hoped to be for the day, week or month. After you have been day trading for a month, take some time to evaluate what you have done. Look at your trades and ask yourself what you would do differently if you could do the trade again.

This can help you to become a more consistent trader in the long term.

The bottom line

Day trading is a common short-term trading method as it focuses on small movements in price and doesn’t run the risk of any overnight gapping.

Many day traders rely on price charts and technical analysis to form their particular day trading strategy, however, whichever strategy is chosen, they must be able to follow several principles. These include using risk management tools and being able to stay level-headed in spite of the fast-paced and high-risk market environment.

Disclaimer

CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

CMC Markets does not endorse or offer opinion on the trading strategies used by the author. Their trading strategies do not guarantee any return and CMC Markets shall not be held responsible for any loss that you may incur, either directly or indirectly, arising from any investment based on any information contained herein.

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