Day Trading Strategy
Sunday, 14 November 2010
I fell that a well-defined strategy is essential in day trading. Without a specific system, traders are like soldiers without a mission. The strategy has to specify when to get in and when to get out of a position. Every step that a trader must take has to be spelled out because generalities in day trading are a disaster waiting to happen (pardon the cliché).
Many of my novice trades are surprised when they hear statistics that claim that over 80% of day traders lose money. They incorrectly conclude that day trading is a loser's game. To me, day trading is a BUSINESS - not a game. It is no different than the many small businesses that are formed every year. Statistics say that about 80% of new businesses go bankrupt in their first two years of existence.
Why is this? - It could be because most new entrepreneurs are not properly equipped to run the operations they start. Whether it is due to a lack of enough practical experience or a lack of understanding of the risks and inner workings of the business, many are probably not prepared to operate the business. They likely start a business out of impulse, thinking only about the great potential rewards that lie ahead.
Since day trading is a business too, most people that start doing it also fail to prepare themselves properly before beginning. Without plenty of learning and practice, most day traders simply become another small business statistic.
So what kind of strategy do I need to learn to day trade, you ask? There are many out there.
You are constantly being bombarded by internet, TV, and print advertising from gurus that want to sell you their "secret" trading system. Since most people are looking for shortcuts ("secrets") all the time, they wind up buying these magical systems or courses, sometimes spending thousands of dollars in the process. Eventually, they find out the hard way that these secret methods probably don't work and give up day trading altogether
The reality is that there are many different strategies that day traders can use that might work. What I feel is important is that the strategy be as well defined and as objective as possible; in other words "if this specific condition happens, then take this specific action (OBJECTIVE)," rather than, "analyze the market and get a feel for it before placing your order (SUBJECTIVE)" or, "based on your interpretation of what Bernanke (or some other important person) says about the economy, place your order (SUBJECTIVE)."
Many that use a subjective strategy might wind up making the wrong decision or staying in a trade too long because they reach a "logical" conclusion, but the market acts "illogically."
Many of these "logical" strategy traders try to determine where the market is going, instead of reacting to what the market IS doing (I will discuss this later).
What should be defined in a trading strategy?
Mastery of the day trading strategy will come over time, as the trader learns to apply it with precision and consistency. That is why it is also important that the strategy [at first] be simple enough to apply without having a Ph.D. from MIT.
When the strategy has too many indicators and conditions, a novice day trader can be easily confused, and a confused trader has a lower chance of executing successful trades. A trader also has to make sure that he's applying all the steps of the strategy correctly. The problem is that many traders tend to shift their style and start changing the strategy or abandon it altogether before they have even mastered it - a very common and costly mistake.
In my opinion, only highly experienced day traders should start experimenting with strategy modifications - but the great majority of traders should first execute the strategies they learn without any modifications (like a soldier following orders - ATTENTION!!!).
In the risk management article you will learn guidelines on how much money should be risked on each trade and how big your positions should be (an essential part of trading).
Many of my novice trades are surprised when they hear statistics that claim that over 80% of day traders lose money. They incorrectly conclude that day trading is a loser's game. To me, day trading is a BUSINESS - not a game. It is no different than the many small businesses that are formed every year. Statistics say that about 80% of new businesses go bankrupt in their first two years of existence.
Why is this? - It could be because most new entrepreneurs are not properly equipped to run the operations they start. Whether it is due to a lack of enough practical experience or a lack of understanding of the risks and inner workings of the business, many are probably not prepared to operate the business. They likely start a business out of impulse, thinking only about the great potential rewards that lie ahead.
Since day trading is a business too, most people that start doing it also fail to prepare themselves properly before beginning. Without plenty of learning and practice, most day traders simply become another small business statistic.
So what kind of strategy do I need to learn to day trade, you ask? There are many out there.
You are constantly being bombarded by internet, TV, and print advertising from gurus that want to sell you their "secret" trading system. Since most people are looking for shortcuts ("secrets") all the time, they wind up buying these magical systems or courses, sometimes spending thousands of dollars in the process. Eventually, they find out the hard way that these secret methods probably don't work and give up day trading altogether
The reality is that there are many different strategies that day traders can use that might work. What I feel is important is that the strategy be as well defined and as objective as possible; in other words "if this specific condition happens, then take this specific action (OBJECTIVE)," rather than, "analyze the market and get a feel for it before placing your order (SUBJECTIVE)" or, "based on your interpretation of what Bernanke (or some other important person) says about the economy, place your order (SUBJECTIVE)."
Many that use a subjective strategy might wind up making the wrong decision or staying in a trade too long because they reach a "logical" conclusion, but the market acts "illogically."
Many of these "logical" strategy traders try to determine where the market is going, instead of reacting to what the market IS doing (I will discuss this later).
What should be defined in a trading strategy?
- Entry and Exit Signal
- Stop Loss Placement
- Smart Money Management
Mastery of the day trading strategy will come over time, as the trader learns to apply it with precision and consistency. That is why it is also important that the strategy [at first] be simple enough to apply without having a Ph.D. from MIT.
When the strategy has too many indicators and conditions, a novice day trader can be easily confused, and a confused trader has a lower chance of executing successful trades. A trader also has to make sure that he's applying all the steps of the strategy correctly. The problem is that many traders tend to shift their style and start changing the strategy or abandon it altogether before they have even mastered it - a very common and costly mistake.
In my opinion, only highly experienced day traders should start experimenting with strategy modifications - but the great majority of traders should first execute the strategies they learn without any modifications (like a soldier following orders - ATTENTION!!!).
In the risk management article you will learn guidelines on how much money should be risked on each trade and how big your positions should be (an essential part of trading).
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Trading Strategies