The Art of Day Trading

Day Trading continues to be one of the most alluring professions as it is one of the few professions that allows you to be self employed and completely independent of bosses, employees and even clients.  It is a profession that you can also do easily from home.  All you need is a computer and high speed access to the internet.

 However, Day Trading is also one of the most difficult professions, with a failure rate estimated by most as at least 90%.  The biggest reason for this high failure rate is that most new day traders start out with too little capital, and the expectation of being able to pay their bills with their trading profits.  Another big reason for this high failure rate is that most new traders start without a coherent game plan or strategy to trade.

 Due to the nature of the financial markets as being one of the few ways an individual can make a lot of money in a short period of time, there is a substantial amount of information trading that is forced down the throats of new traders.  Much of this information is usually the typical package of indicators that may indicate whether a stock or market is overbought/oversold, or some kind of price pattern or price/volume relationship that may identify a favorable time to trade.  There is also the more radical type of information based upon Elliott Wave, Fibonacci, cycles and even astronomy. 

 However, it is rare that you will actually read any information that provides you with a strategy for identifying a market to trade, when to trade, how much equity to risk, when to exit when the trade goes against you, when to take profits, etc.  Once you are provided with their magic indicator, you are forced to come up with this information on your own. 

 Well, here are a few tips for successful Day Trading. 

1. When you are Day Trading individual stocks, look for stocks that have significant volume and liquidity.  The same can be said for other markets, such as commodities, currencies, interest rate futures and stock index futures.

2. When you begin Day Trading, keep your initial profit goals modest, and never start Day Trading without another means of income to pay your bills.

3. Before you begin Day Trading, you should have a well thought out, basic strategy for trading the markets you plan to trade.  For instance, if you are looking to scalp in and out of the markets throughout the day, develop a strategy that allows you to utilize 5 minute charts or even shorter time frames, that looks for a specific trading set up that allows you to enter a trade while minimizing your risk. 

4. Once you have developed your plan of attack, think about potential situations where you may have to deviate from your plan.  For instance, you may enter a trade based upon your strategy, but the market does not act as it should.  Sometimes, it just pays to exit, rather than wait for the market to stop you out.  You can always move on to the next trade.  The best trades will usually move in your favor quickly if you enter at the right time. 

5. Consider multiple entries and exits for a single trade.  For instance, on a short-term scalp trade, set a profit target that allows you to lock in some profits fairly quickly.  Once you have locked in that bit of profit, you can let the rest of the position ride in order to shoot for a more significant profit with little risk.

6. When trading individual stocks or stock index futures, consider learning how to read the tape to put the odds more in your favor.  For instance, trade only in the direction of the underlying trend of the market for the day, and confirm this trend with such indicators as the Advance/Decline ratio, TRIN, Tick, and the performance of all of the major indexes. 

7. Look for price patterns on the daily charts that may hint at a directional bias for your market of choice, then trade in the direction of that bias.

8. Avoid taking trades in the first 15 minutes after the market has opened.  This is amateur hour.  The true direction of the market you are trading will usually reveal itself after this period of trading. 

9. Make sure your strategy adjusts your position sizes to account for changes in market volatility.  As volatility rises, lower your position size, and as it falls, increase your position size. 

These are just a few tips worth considering as you embark on Day Trading.  Remember, there is no perfect strategy that will be profitable 100% of the time.  However, if you develop a strategy that puts the odds in your favor, and you are able to stick with it in the long run, you should find yourself to be profitable in the long run.  

Scott Cole www.bestdaytradingstocks.com www.kungfutrader.com