I have traded my own account for many years, trying most styles before finding my particular niche - day trading grain futures contracts. What seemed important in those early days now seems largely irrelevant. Instead, I focus exclusively on a few powerful trading concepts. This article summarizes what is important to me now. People day trade for many reasons, two of which are especially important to me.
The first is that the day trader is less exposed to event risk than a long term trader. I get in and out of the market as quickly as possible. I am in the market during primary trading sessions, so my stops are normally filled at or near the specified price. A long term trader may find that an unforeseen event triggers big moves when primary markets are shut, forcing price to gap way beyond protective stops when markets re-open. Minimizing exposure to event risk while trading leveraged instruments is a key benefit of day trading, and why I think it is one of the least risky forms of trading when done properly. Another reason I prefer day trading is that I can work through losing spells more quickly. All trading methods encounter drawdowns when traders have a losing spell. If a typical drawdown for your system spans a period of 10 trades, and the average duration of each trade is 2 weeks, you face drawdown periods averaging twenty weeks. But if you are a day trader completing one trade each day, your average drawdown period is just 10 trading days. If you complete more than one trade per day, the drawdown period is even shorter. It is never pleasant being in drawdown and it is easier to stick to your system if drawdowns are short. Twenty weeks, or more, in a loss situation tests the resolve of any trader.
Day trading can be considered as an offspring of high speed electronic communication networks. Most day traders today trades markets from a distant location such as their home or work area. They use trading software, the direct access trading platform, installed in their computer connected to internet to execute trades in real-time. In order to qualify for the trades, the trader must maintain a margin in the corresponding market. It is the day trading broker who maintains the margin for the trader and provides the direct access trading platforms. Although there are web-based trading platforms available, they are not suitable for day trading.
Discretionary trading is usually easier on the emotions than system trading because you tend to take trades that you agree with emotionally. For example, a discretionary trader that trades with the trend and looks for trade entries by reading the time and sales screen would probably avoid taking a short trade during a very bullish trend day in which there were no signs of selling on time and sales, because he would most likely be trading against the trend.
As told earlier, there are a variety of products available for day trading. The most popular ones are the stock and the forex currencies. Others include options like stock options and futures options, and futures like currency futures, stock futures, stock index futures and commodity futures. Day trading facility is available for most stock, options and futures market, but note that most brokers offers services for limited markets/exchanges. The trader also must be keen to choose markets according to the product they are trading, their financial status, the brokerage they are affiliated to, the trading system they uses, and their geographical location.
Whichever approach is chosen, it is important to manage trades in such a way that the average winning trade (including trading costs) is bigger than the average losing trade (including costs). I aim for a ratio of 2:1, that is, the average win is twice the size of the average loss. I also try to keep my winning percentage of trades greater than 50%. Finally, I want a strategy to provide a trade on at least 80% of trading days. It is not much use having a great strategy which only provides a trading opportunity once in a blue moon! If your trading plan (a) gives you a trade on 80% of trading days, (b) wins at least 50% of trades, and (c) has an average win twice as large as the average loss, you are in good shape, providing the plan uses a sensible money management scheme. (It is vital to limit the risk in each trade so that a run of losing trades does not take you out of the game.) However, you still have to implement the plan, and that can be harder than it sounds. Simple errors made in the heat of action can have quite an impact on your results. And lapses in trading discipline, where you deliberately stray from your plan, can undermine the efforts of even experienced traders. It is especially tempting to deviate from plan when you have had a few losing trades. I find the best mindset is to look upon my trading as a daily trip to the casino, where I have been granted the right to place just one bet with odds in my favour. Over time, I ought to win, providing I have enough capital to survive short term runs of bad luck. But a casino has many temptations, and I could easily be lured into placing unplanned bets, or changing my standard bet to one that looks better, but has worse odds. Strong self discipline in the adrenaline pumped atmosphere of the gaming rooms is essential.
The first is that the day trader is less exposed to event risk than a long term trader. I get in and out of the market as quickly as possible. I am in the market during primary trading sessions, so my stops are normally filled at or near the specified price. A long term trader may find that an unforeseen event triggers big moves when primary markets are shut, forcing price to gap way beyond protective stops when markets re-open. Minimizing exposure to event risk while trading leveraged instruments is a key benefit of day trading, and why I think it is one of the least risky forms of trading when done properly. Another reason I prefer day trading is that I can work through losing spells more quickly. All trading methods encounter drawdowns when traders have a losing spell. If a typical drawdown for your system spans a period of 10 trades, and the average duration of each trade is 2 weeks, you face drawdown periods averaging twenty weeks. But if you are a day trader completing one trade each day, your average drawdown period is just 10 trading days. If you complete more than one trade per day, the drawdown period is even shorter. It is never pleasant being in drawdown and it is easier to stick to your system if drawdowns are short. Twenty weeks, or more, in a loss situation tests the resolve of any trader.
Day trading can be considered as an offspring of high speed electronic communication networks. Most day traders today trades markets from a distant location such as their home or work area. They use trading software, the direct access trading platform, installed in their computer connected to internet to execute trades in real-time. In order to qualify for the trades, the trader must maintain a margin in the corresponding market. It is the day trading broker who maintains the margin for the trader and provides the direct access trading platforms. Although there are web-based trading platforms available, they are not suitable for day trading.
Discretionary trading is usually easier on the emotions than system trading because you tend to take trades that you agree with emotionally. For example, a discretionary trader that trades with the trend and looks for trade entries by reading the time and sales screen would probably avoid taking a short trade during a very bullish trend day in which there were no signs of selling on time and sales, because he would most likely be trading against the trend.
As told earlier, there are a variety of products available for day trading. The most popular ones are the stock and the forex currencies. Others include options like stock options and futures options, and futures like currency futures, stock futures, stock index futures and commodity futures. Day trading facility is available for most stock, options and futures market, but note that most brokers offers services for limited markets/exchanges. The trader also must be keen to choose markets according to the product they are trading, their financial status, the brokerage they are affiliated to, the trading system they uses, and their geographical location.
Whichever approach is chosen, it is important to manage trades in such a way that the average winning trade (including trading costs) is bigger than the average losing trade (including costs). I aim for a ratio of 2:1, that is, the average win is twice the size of the average loss. I also try to keep my winning percentage of trades greater than 50%. Finally, I want a strategy to provide a trade on at least 80% of trading days. It is not much use having a great strategy which only provides a trading opportunity once in a blue moon! If your trading plan (a) gives you a trade on 80% of trading days, (b) wins at least 50% of trades, and (c) has an average win twice as large as the average loss, you are in good shape, providing the plan uses a sensible money management scheme. (It is vital to limit the risk in each trade so that a run of losing trades does not take you out of the game.) However, you still have to implement the plan, and that can be harder than it sounds. Simple errors made in the heat of action can have quite an impact on your results. And lapses in trading discipline, where you deliberately stray from your plan, can undermine the efforts of even experienced traders. It is especially tempting to deviate from plan when you have had a few losing trades. I find the best mindset is to look upon my trading as a daily trip to the casino, where I have been granted the right to place just one bet with odds in my favour. Over time, I ought to win, providing I have enough capital to survive short term runs of bad luck. But a casino has many temptations, and I could easily be lured into placing unplanned bets, or changing my standard bet to one that looks better, but has worse odds. Strong self discipline in the adrenaline pumped atmosphere of the gaming rooms is essential.
About the Author:
Frank Miller has a Debt Consolidation Blog & Finance, these are some of the articles: Things To Consider When Choosing Companies Which Have The Best Offers You have full permission to reprint this article provided this box is kept unchanged.