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How to Succeed as a Day Trader - Pt. 1: © 2009 Chief Chimp Jacob |
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There are thousands of day traders out there in stock market land. The good news is that day traders can make great profits in these volatile markets.
The bad news is that many day traders have nothing to show for their efforts but LOSSES! Is it that their trading methods are no good? Is it that they have limited experience in day trading? Or is it that they lack the discipline to be successful in ANY form of trading? The odds are that all three of the above are probably limiting factors in the success of most traders. It is, however, a lack of discipline that is most often the culprit. The simple fact is that most day traders do not possess the essential qualities for success . They are the weakest link in the chain. Even a good trading method in the hands of an undisciplined trader can become a ticket to losses. Part I of this article will help acquaint you with the qualities that I consider to be important in the quest for success as a day traders. Note that these qualities are also important to short term traders and investors. Part II will give you specific direction in the area of analytical tools. Systems, methods, and timing indicators. Discipline Certainly by now you've heard the word “discipline” hundreds, if not thousands, of times. It is probably one of the most worn-out terms in all of stock and commodity trading. The problem is that merely saying the word is one thing, but understanding its true definition operationally, or on a behavioral level, is a far more important thing . What do I mean by discipline? • Discipline is not just the ability to develop a trading plan and to stay with it, it is also the ability to know when your trading plan is not working and, therefore, knowing when to abandon it. Discipline is also the ability to give your day-trading positions sufficient time to work in your favor, or for that matter sufficient time to work against you.You can see, therefore, that discipline consists of many different things. Discipline is not any one particular skill. Perhaps the best way to understand trading discipline is to examine some of its component behaviors. Let's look at a few of these. Persistence This is, perhaps, the single most important of all qualities that a trader can possess. Day trading, and for that matter all trading, is an endeavor which requires the ability to continue trading even when results have not been good. Due to the nature of markets and trading systems, bad times are frequently followed by good times and good times are frequently followed by bad. Some of a trader's greatest successes will occur following a string of losses. This is why it is extremely important for traders to be persistent in applying their trading methods and to continue using them for a reasonable period of time. Those who quit too soon will not be in the markets when their systems begin to work; and those who quit too late will run out of trading capital. Therefore, while persistence is important, it is also important to know when a trader has been too patient when it is time to quit and not play any longer using the system, which you have been using. If persistence is so important, then how does the trader develop it? While the answer is simple, the implementation is not. Persistence is developed by being persistent. While this may sound to you like a circular answer, it is truly not. The only way to be persistent is to force yourself initially to do everything which must be done according to the dictates of your systems or method. If you're having difficulty, try this - make a commitment to a trading system or method. Follow-through with that approach for a specific amount of time taking every trade according to the rules or, if the system is subjective, attempting to trade the system with as much consistency as possible. If you have been consistent in applying your rules, then you will find that, in most cases, your consistency will have paid off and you will have profits to show for your efforts. Even if your trading was not successful, you will have learned a great deal. You will have learned: • You can follow a system or methodCompare this to the ignorance and confusion that comes from haphazard trading or by applying trading rules inconsistently. Think back to your experiences as a trader. Remember your worst losing trades. You will find that those losses, which have been taken according to a system or method, are easier to accept psychologically. And, those who have not been accepted according to the rules have often turned into terrible monsters - ultimately costing you much, much more than they should have, financially as well as psychologically. If you would like to master the skill of persistence, then you will need to practice it. Make the commitment and I think you will see some wonderful results, even over the short term. Willingness to Accept Losses Here is yet another important quality that the effective day trader must possess, acquire or develop. Perhaps the single greatest downfall of all traders is the inability to take a loss when it should be taken. Losses have a nasty habit of becoming worse rather than better. Unless they are taken when they should be, the results will not be to your liking. Although it is easier on one hand for the day trader to take a loss than it is for the position trader - because a loss must be accepted by the end of the trading day - it is still the downfall of many a day trader who is unwilling to accept the loss when it is a reasonable one. The good day trader must have the ability to take a loss when the time to take that loss is right. What's right is dictated by the particular trading system or risk management technique which is being used. I would venture to say from my experience and observations that perhaps 75% or more of all large losses are due to the fact that losses were not taken when they were small or relatively small or when they should have been taken. The day trader has two opportunities to take a loss: • The first one is at the stop loss point as determined by a system or at the predetermined dollar risk stop.A day trader is, therefore, fortunate inasmuch as he or she is forced to liquidate all positions at the end of the day. This will keep losses smaller than they would be if losing positions were carried over night. Here are some suggestions as to how you may improve your ability to take losses when they should be taken: • Formulate your stop loss rules very specifically whether they relate to systems or dollar risk amount, and type or write your rules in large print.These suggestions will, I feel, help you master the ability to take losses in a timely and objective (systematic) fashion. The Ability to Avoid Over Trading Too many day traders feel that they must trade every day. Let's face it, some traders are addicted to trading . A day without a trade for them is like a day without a meal. The fact is that there are some days which offer fewer if any trading opportunities. The day trader who wishes to preserve capital and avoid losses as well as unnecessary commission charges should understand that day trading is not an every day event. There will be days when no trades are indicated. Believe me when I tell you that things are better that way. One of the telltale signs of the day trader about to go astray is the “searching for a good trade ” syndrome: • Have you ever found yourself sitting at the computer or quotation screen, bored because there have been no trades that day?Yes, my friend, this is the first sign of trouble. Should you ever find yourself in this position, do yourself a favor and stop looking. Good day-trading opportunities within the parameters I have set forth in this course are plentiful, however, they do not occur every day. Consequently, set yourself standards as to which markets you will day trade and if there are no day trades in these markets do not allow yourself to endlessly wander about the keyboard looking for day trades in such things as orange juice or palladium. They may work for you from time to time, however, the odds of success are very slim. Take my word for it, the successful day trader will specialize in only a handful of markets and will do well at these. Do not attempt to spread yourself too thin by looking for trading opportunities where in fact they do not exist. And this brings me to my next point. The Ability to Specialize Successful day trading is a time consuming undertaking, which requires close attention. In many cases it requires diligence, follow-through and persistence. Although some of day trading techniques lend themselves to strictly mechanical trading, many do not. However, the vast majority of techniques require close attention. Therefore it is unfeasible for most day traders to be involved in too many markets at one time. I suggest that day trading 4-8 stocks is sufficient for the majority of traders. In fact, for new day traders, I would recommend specializing in only a few stocks, attending to each one thoroughly and carefully in order to develop your skills and to increase your overall profits. This concludes Part I of How to Succeed as a Day-Trader. In the next part I'll give you specific ideas on technical indicators and methods to help you master market timing. In the meantime you might be interested in my book The Compleat Guide to Day-Trading Stocks, which is available at many book vendors. |