Before we proceed any farther in this guide, let’s put some ground rules. The objective of this guide is to supply you with the base for how to create a prosperous daytrading livelihood. To be honest with you, it’s kind of absurd for some one to propose they are able to explain for you in 1 informative article just how to day trade. I’d compare it with logging on your favourite internet search engine and typing in “How to Pilot Airplanes”. If you would like ‘t obtain the analogy, then you have landed in the right place.
So, where do we begin? If I had to define a blue print for how to day trade I would group it into 7 core components.
- Money Management
- Mastering One’s Emotions
- Strict Adherence to the Rules of the Game
- Taking Profits
- Simple Technical Analysis
- Trading in the Morning
- Practice Makes Perfect
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You may read the above list and think there are a few things missing or I have listed too many. That’s A-ok, remember this is my list of what builds a successful day trading career.
Do you have enough money to pay your bills and trade? How many are you willing to lose on each trade? How many money do you use on each trade? These are the basic types of questions you will need to ask yourself throughout the trading day. Remember, this is day trading, so you will not have a lot of time to work through every scenario. Whatever your money management rules are you will need to stick to them. Finding a position and sticking to it will be a common theme throughout this article. Below are my rules for money management, pick and choose what works for you:
- Only use 10% of your margin. For example, if you have 100k cash which would afford you 400k in margin only use 40k on any one position.
- Never have more than 30% of your margin in float at any given time. If you figured out that this translates to holding a maximum of three trades at once, you are pretty sharp!
- Never lose more than 2% of your trading capital in one trade. This would mean if you have 100k in cash the maximum you can lose is 2 thousand dollars. This would translate to a lost of 5$. Just in case you are wondering you should never lose 5% on a day trade.
- You need 50 times more cash than your monthly expenses. If this sounds excessive to you, well it is. The goal here is for you to have a successful day trading career and not an expensive vacation from your day job. If this explanation was not enough for you, feel free to read through – How Much Money do I need to Start Day Trading?
- You need to pay yourself. If you are a fan of shark tank like me, one of the before all else things Mr. Wonderful will ask you is how many have you paid yourself. So, every quarter you need to pay yourself 20% of your benefits. If this isn’t enough to pay for your accounts, you don’t have enough money to become a day trader.
- If you go on a one week losing streak, reduce the amount of money you allow yourself to trade by 25%. If you have another losing week, drop down to 50%. If you have a third losing week drop down to only using 25%. I guarantee you if you go from using 40k per trade down to 10 thousand per trade, discipline will have a funny way of finding you.
- If you go on a winning streak don’t even permit you to ultimately make use of more perimeter. Unlike reducing streaks at which you decrease the sum of float every trade, you can’t boost your percent usage of margin when things are moving well. Greed is just a cancer and it must be your mission to endure a very long life.
Mastering One’s Emotions
I love martial arts films and Not for the fight scenes. Have you noticed the way a Senseis come in a constant condition of control. However intense the student or perhaps the situation available, the Master never loses his cool. Like a trader you want to obtain for the Zen state. The mentally charged trader you will find on T.V. crying at his screen might be great for ratings, but this absence of control will eventually cause financial ruin. Below are floor guidelines on controlling your emotions:
- You will need to have balance in your own life. A trader taking a look at displays daily doesn’t make for someone other people want to hang around. Spend time with those you love, it will recharge your soul.
- Like the greatest athletes of the world who can shrug off a bad game and turn around the next night and light it up, you to must have a short memory. Beating yourself up will accomplish two things: (1) stress and (2) financial ruin.
- Staying focus for the long haul. For those of you that have run a marathon do you remember what mile 26 feels like? How you have to keep a clear mind and completely focus on your goal of completing the race. Well day trading requires this similarly level of focus.
If you feel you need more time in the “seat “, please read through our day trading psychology section.
Strict Adherence to the Rules of the Game
Like most Americans I spend a good portion of my Sundays watching football. I’ll be the before all else to admit football is a violent sport; however, over the years the league has worked to protect its players through a number of decree changes. Imagine what it would feel like to watch football without the referees. There would likely be complete chaos on the filed. If you do not have rules for how you are trading and adhere to those rules 100% of the time, you are in essence watching a tackle football game without the referees. Below is the one thing you need to know from this core component:
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- Your rules must reflect your goals and risk profile as a trader. What works for Joe Trader may prove disastrous for you
- Always follow your rules to the letter
- Never break decree 1 or 2.
When Apple makes a new IPhone to sell it is priced accordingly. You as a consumer are able to understand this pricing structure and determine if you can afford to join the Apple faithful. For some comprehension traders obtain caught in the trap of “letting the trade perform “. I have yet to meet a trader who has made money always letting the trade “perform “. The people that make money in the marketplace are those who have a clear target and take their benefits as the trade is going in the favor. You never want to be the person who had the winning trade only to see things go horribly defame. So, to make sure you do not end up on that long list of victims try the following:
- Have a set cost target for when you will exit a trade. Remember, day trading is more than getting every single penny out of the trade. There is something called “period ” which is an important factor. If you are able to win 2 trades in the time it takes for you to wait for your grand slam then who cares. You may not have the glorious trade to talk with your friends about over dinner, but you will not go break taking benefits
Simple Technical Analysis
As long as people could plot cost action on a piece of paper there has been a chart prophet running around. In the old days there was the trader with his weekly charts and today it’s the automated trading system gurus. Let me save you all kinds of time and money and stress to you the importance of keeping things simple. A million indicators on your chart only does one thing, give you a false sense of security going into battle before you kindly give your money over to the more seasoned traders. So, when you obtain the urge to add just one more indicator please read the following:
- You need to see the cost action in the form of candlesticks
- You will need volume on your chart
- You will need a simple moving average to monitor the trend
- You can have a maximum of two additional indicators
I can already hear the naysayers complaining that there are a million more ways to make money in technical analysis. Guess what, they are right! That’s the entire point of limiting the amount of technical information you assess on the chart. It is better to be a master of a few things versus knowing a little about everything and bouncing around from one gimmick to the next.
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Trading in the Morning
All of you day traders who say money can be made all day, please go sit down. It takes years upon years of trading to be able to march out there and trade from 9:3o to 4 and make money. Your goal as a new trader is to be the master of few things if you haven’t picked up that in the content thusfar. Daytrading is a work of volatility. You require some one on the opposing hand of this deal because a willing player to perform the order in your price. Therefore, for me personally it’s consistently made sense to concentrate your attention at the afternoon. Where else could you find numerous plays, using higher liquidity at precisely the similarly location. If you would like ‘t believe me bore yourself to death trading from 11am – 2pm; don’forget traders ‘ are individual who have to take breaks and eat lunch exactly enjoy the others people. Below are a couple of ground rules for trading at the afternoon:
- Wait until 9:50 to start the before all else trade. The before all else 20 minutes of gambling would be therefore random you may lose your marbles hoping to piece it altogether.
- Do not input any fresh trades after 10:20. By keeping your self locked to some 30-minute window to launching fresh rankings it compels one to get laser attention and reduces the risk of over-trading.
- Only trade explosive assets. If you’re in the company of creating money in that case your asset has to own enough on her to maneuver the necessary space to your trade to be worth every time and effort.
Practice Makes Perfect
If you want to be effective at everything in existence it takes everything? It needs one to clinic. In the event that you harbor ‘t read the book Outliers, I strongly recommend you do so. One of the key points from the book is the belief that it takes 10,000 hours to become a true master of any craft. So, I dare to say why would trading be any different? Why do so many people fall victim to depositing money into a trading account only to start their venture prematurely. There are many people in the world that could have avoided financial ruin if they just paused, took a breath and slowly eased into their trading careers. If you are thinking about trading ask yourself the following:
- Have I actually practiced my new trading scheme in a true marketplace environment?
- While the back testing graph shows Iwould have made money, was I able to reproduce the similarly results?
- Do I spend more time watching T.V. or some other frivolous hobby more than I practice trading?
- Do I have access to a trading simulator that I can use outside of marketplace hours?
- Have you practiced day trading for partially 5oo hours?
If you have answered no to any of the above questions, you really need to rethink if day trading is the right business for you. Day trading has a weird way of weeding out those who are not built for this type of lifestyle. If you are looking for a way to make some additional income there are a number of other ways to make a little money on the side. However, if you are thinking of day trading this is more of a calling and less about the money. There will be a number of down days where you will question yourself and what it is your doing with your life and unless you are truly committed to the journey you will likely fail. So, now that you have read this monster of a post, let’s turn the title of the article on itself. Do you feel that you know how to day trade and are you up for the challenge?