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5 facts about day trading

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5 facts about day trading

This post was written back in November 2007. I thought it offers some food for thoughts to new traders. I have edited and rewritten part of the original post with what I have learned over the years.

Here is the blog post.

5 facts about day trading

I have been day trading for quite a while. I am not a pro yet. But I guess, I can share a little bit about day trading. Since my friend, Faith Lu, a young gentleman from China, is keen to learn all about trading, I guess this might be a little helpful to him. Remember, these are not the rules, just some observation from experience.

#1

You are a day trader, not an analyst.

All you need to know is basic Technical Analysis, be cool, and trust your instinct. Bull shit? I don’t think so.

Our goal is to generate profit from trading. Very often, traders tend to spend too much time studying. While it is good to keep learning, all you need is to be well-versed in the tools that you use to trade.

For example, I rely heavily on volume profile in my trading, that’s what I focus on. I learn everything about volume profile, learn the best way to use the tool.

You don’t have to be a master technical analyst to day trade. Be good with the tools that matter to your trading, it might be drawing trend lines, Moving average, or reading market volume, etc.

Detailed market analysis is for gentlemen who get paid by writing reports, but not trading. Your job is to start the day with cash and end the day with more cash. Thinking too much is not helpful.

#2

You need to know a little bit about mathematics

Mathematics

Hold on, don’t panic. I know you probably hate Math in the school.

One of the most important math concepts you need to understand as a trader is the concept of Probability.

You will never know what is going to happen on the right side of your chart. We are playing with probability. We stack the odds before taking a trade.

Most of the time, it is 50:50. In this case, bear in mind that we want to earn $1, but with the only potential loss of $0.5.

When the market is moving in our favor, let it run, otherwise, leave, please. You don’t need a degree in Mathematics to know, risk $1 to earn $0.5, with a 50% winning chance, it doesn’t work in the long run.

#3

Tea break

A day trader does not need to trade every day

This is for retail traders. There are days that you would be better off sitting on your hands. If you’ve just pocket $1000 today, do not expect to earn another $1000 tomorrow. Every day is a new day. There are days that you just can’t trade.

For example, If you are not into trading news, then do not try to trade during big announcements like Non-Farm payroll, or Interest rate statements.

A professional trader who plays the order book can and normally, trade day in and day out. For retail traders, some days are better to stay away from the market. Go for a walk or jog in the park.

Day trading as a retail trader is just like doing your own business. We do not need to sit in the office every day.

#4

Focus on playing chess

Day trading is a mind game, and a decision-making task

Make sure you are in good condition mentally before start trading. For example, it is a damn bad idea to trade right after fighting with your spouse. You’ve to make decisions when trading, you need a clear mind for this task.

So if you are not ready for the task today, then come back tomorrow.

#5

Focus is required to trade well

You need energy and focus to day trade

This is particularly important to Asia Pacific traders who trade U.S or European markets. Trading in the late evening or even midnight puts you at a serious disadvantage.

Yes, it is possible to adjust your routine to trade in the evening. But the potential health issues are something you need to think about.

Secondly, day trading is a tedious task. You need to bring your 100% to the game. Can you focus and be energetic enough in the late evening? Don’t kid yourself, have a serious thought about this.

5 Facts About Day Trading: Wrap Up

Day trading is a business that allows you to earn a living. But choosing the right instruments, markets, and style is crucial.

There are skills that you need to acquire and there are facts such as your physical location or living environment you need to consider before starting to day trade.

Do you still have something to add on? Shoot me a comment.

Lecture notes series: Percent Risk Model

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Reading notes for percent risk model

This blog post was written back in 2006 when I first started trading. I thought there are some key concepts that are useful to new traders.

I have a habit of writing down whatever I learned, this helps me to ‘burn’ the information into my mind. I did this during my school time as well. I decided to jot down what I have read from books so far in the Lecture Note series.

As mentioned in my previous posting, I am following Percent Risk Model for my position sizing. Of course, this is not the only model available, it is just the approach I applied in my trading.

I have amended the approach to suit my style. Basically, I will define the initial stop level base on the chart. It can be a support/resistance level, straight trend line, Count backline, or swing high/low.

Definition:

RISK – the point at which I will get out of the position in order to preserve my capital. It is x percent of my trading equity, for example, I will risk not more than 2% of trading equity in any trade.

Percent Risk Model – Controlling my position size as a function of the risk. For example, with account size of $50,000, 2% of $50,000 is $1000. That means in any trade, I shall not risk more than $1000 with this account size.

If I got a Long signal for SIMSCI at 289 and I have figured out from the chart, the proper stop loss level is at 287.5. On a one-contract basis, this trade requires a $300 risk. With a maximum risk amount of $1000 available to me, I will be able to buy ($1000/$300=3.33) 3 contracts in this trade.

I quote a portion of Dr. Van Tharp’s explanation from his book

Just how much risk should you accept per position with risk position sizing? Your overall risk using risk position sizing depends upon the size of the stops you’ve set to preserve your capital and the expectancy of the system you are trading.

Dr. Van Tharp

Here goes on the explanation:

if you are trading other people’s money, you probably should risk less than 1 percent per position. If you are trading your own money, your risk depends upon your own comfort level. Anything under 3 percent is probably fine, if you are risking over 3 percent, you are a “gun-slinger” and had better understand the risk you are taking for the reward you seek.

Dr. Van Tharp

He explained the relationship with system expectancy as well:

if you have high expectancies in your system (i.e your reliability is above 50% and your reward to risk ratio is 3 or better), then you can probably risk a higher percentage of your equity fairly safely.

Dr. Van Tharp

The percent risk model is the first model that gives the trader a legitimate way to make sure that a 1-R risk means the same for each item he is trading.

The advantage of this model is, it allows both large and small accounts to grow steadily. It equalizes performance in the portfolio by the actual risk. On the other hand, the disadvantage will have you reject some trades because they are too risky.

These concepts are very important for new traders to understand.

Talking about $Risk/Reward and winning%, in Twitter-style

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Risk/reward vs Winning %

Back in 2009, I was very active on Twitter, so did a lot of old-time trader-friends. There weren’t so many “gurus”/”Furus” back then. Twitter discussions were solid and helpful.

Some of them (Twitter friends) had since stopped trading or left social media. It was the good old time. I learned a lot. This blog recorded one of the many conversations I had on the Twitter platform.

The original blog post was written back in 2009. Over the years of blogging, it has been buried. I decided to refresh this blog post since it provides some food for thoughts to new readers of this blog.

We had a short conversation over at Twitter to discuss the importance of a higher probability setup (I assume this implies the setup provides a higher winning rate) and risk/reward ratio. I quoted the Twitter messages here. I thought this is an interesting discussion, and it shows the different risk perceptions, tolerance, and expectation of each trader.

There is no absolute right or wrong. That was just a casual discussion, and we were not trying to convince each other about anything.

Phileo99: speaking of risk/reward, isn’t it a bit overrated? I think the probability of the setup is more important than the risk/reward ratio

you can have a 5:1 reward/risk ratio, but if the trade setup is poor quality and low probability, it is a bad trade to take.

instead of thinking risk/reward ratio, i prefer to think, “where can this instrument go?” “when are the odds in my favour?”

Trader Gav: @Phileo99 No.RR and probability should work together. Nobody is more important. low prob setups need higher RR to survive.

Phileo99 :@tradergav if consistency is the goal, then i’d have to disagree – probability of the setup is way more important than risk/reward

Phileo99 :i’d prefer to hit 10 singles vs. striking out 9times before i hit the homer …. easier on the psyche. losing streaks are hard to take.

Trader Gav: @Phileo99 it depends on your mentality. Profitable strategies can be 40% winning% with 1:3 RR consistently.

Phileo99: @tradergav true – there are different paths to +ve expectancy. we all choose our paths 🙂

Trader Gav:@Phileo99 Right. Common goal is +ve expectancy. Each has his/her own way.

Prospectus: @tradergav I’d rather have a higher probability setup so that the roll of the dice is less likely to bite me. But it’s my preference

Trader Gav:@Prospectus that’s normal. nothing wrong with that. Just personal preference. I weight more on RR and expectancy.

Phileo99: @tradergav I would agree that for system trading, neither is more important than the other. I was speaking from discretionary trading PoV

Prospectus :@tradergav I think that the right personality can clean up on big R:R–we see it all the time among the greats. That’s just not me.

I had some thoughts on this topic.

Firstly, regular readers might have known I favor the R/R concept. In other words, before establishing any trade, the risk/reward ratio is the first figure that being calculated on my screen. And, Yes, it determines if I am going to take the trade.

However, I do not expect every trader or any trader to have the same temperament or risk tolerance. One of my strategies is, in fact, running at around less than 50% winning rate but with high expectancy, in other words, each trade provides a high risk/reward ratio. Man, are you able to accept to be wrong 6 out of 10 times? Who doesn’t love to be always right? But I love $$ more.

Back then, out of curiosity, I took a trial of a signal service of two prominent analysts/traders (guess who? I’m not telling you). The selling point of their strategy was a high winning rate. If I still remember correctly, they claimed to have a 70% winning rate. However, after reviewing their trade history, I noticed, on average, they were making 30 pips by risking 70 or more on each trade.

Here is the calculation.

  • Reward: 30 pips
  • Risk: 70 pips
  • winning rate:70%
  • number of trade =100

Profit = [70 trades x 30 pips profit + 30 trades x (-70 pips loss)] = 0

Assuming trade size is constant, and all losses are taking at full risk amount (i.e 70 pips). This calculation is not the exact math, it is meant to demonstrate the possible effect of risking more than potential reward.

Well, so, with the impressive 70% winning rate, over a period of time, net profit is impressive 0. I did not consider break-even trade, since It did not happen too much in the trade history. 

Winning % and Risk/Reward ratio is a pair of tools. They have to work together. Nobody loves losing streaks. However, you can win 70% of the time, with just a couple of losing trades to wipe out your previous earnings. So…you got the point.

There are two points that come out from here:

  1. You do not need to be right frequently in order to profit from this business. Winning % is not the only factor in profitability.
  2. Consistency, We are talking about trading profitable over the long haul. Trading is not an activity for one to feel good about being right all the time. It is for profit. If you are looking for the ‘Feeling good’ activity, then, look elsewhere. At the end of the day, you need the dollar to pay the bill.

Of course, I am not suggesting one to take sub-par set up with a big risk/reward ratio. That depends on your overall strategies, and that’s a different topic.

The point is risk/reward ratio should part of your consideration when determining if your setup is a quality setup. A high-quality setup should not come with an inferior risk/reward ratio. Be it discretionary trading or system trading. The math remains the same. You got to know why you are taking the trade.

To play around with risk/reward calculation, have a look at my old post Accuracy vs Risk/Reward ratio.

OK, I talked too much.

Are you trading with Indicators? – A few Suggestions

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Trading with Indicators
Trading with Indicators – 4 Suggestions

I have been working on coding my indicator and strategy on tradingview lately. I thought I would write a short post related to trading with indicators.

There is no shame or a sin using an indicator to trade. Our brains are wired differently.

Some of us can do quick math and analysis on the fly. Some of us rely on graphical presentations to make a decision.

If you have to use a technical indicator or indicators in your chart analysis, I have a few suggestions for you.

Trading with Indicators – 4 Suggestions

#1 Understand the math behind the indicator.

I can’t stress enough the importance of understanding the math behind any technical indicator that you are about to use.

You do not need to be a math genius. You do need to be able to understand basic math operations.

A technical indicator is basically a mathematical blend of data.

We receive open, high, low, close, and volume as the raw data on our chart. We can calculate the average of closing prices, finding the highest volume, or calculating the differences of mean, etc.

What is a moving average? It is the average closing price over a defined period. And What about MACD? It is the difference between long term and short term moving average.

You got what I mean? Indicators are the calculations of the raw data. Each calculation serves a purpose.

Why would you want to use a tool that you don’t understand to help you make financial decisions?

#2 Trade location first, indicator triggers second

Oh boy, the crossover of any lines on the chart always gets traders excited, isn’t it?

Hang on, don’t click that “Buy/Sell” button just yet.

One of the most common mistakes an indicator-trader makes is to follow the trigger signal blindly.

What is the secret of using an indicator trigger effectively?

Trade location.

Over the years of trading and learning, it was the recognition of trade location that turns my trading around.

What is a trade location?

A trade location is an area that is derived from the market structure. Traders are expected to take action at these locations.

A trade location could be a major support and resistance area, high/low volume node of volume profile, borders or trading range, or major swing high/low, etc.

Knowing a potential trade location gives you an edge. But knowing the location alone is not enough. You have to work on your entry technique.

There are many entry techniques. For example, in Futures trading, I am using order flow, while in Forex I have candlesticks patterns and other indicators to help me.

Same thing goes for indicators. After you have identified a valid trade location, a trigger of indicator might give you a good entry.

The point is, don’t use indicators alone. Use it to your advantage.

#3 Indicator, the less is more

One of the common mistakes newbie traders tend to make is having way too many indicators on a chart.

By stuffing the chart with indicators, you are complicating the decision making process. And to worsen the situation, indicators give you conflicting signals.

Try to limit the number of indicators on the chart. The lesser the better. Trying to simplify your decision making process is the key.

#4 Create your own indicator

I encourage you to create your own indicator. Why? Because it is a great learning experience.

By working on the code and the logic, you will learn to look at market data quantitatively. You will learn to understand the market you are trading better.

I always enjoy working on my own technical indicator. It gives me the focus I need, and helps to prove the concepts I have in mind.

You don’t need to create an indicator to start trading. Just take this exercise for the sake of learning.

Trading with indicator – Closing words

There is absolutely nothing wrong with trading with indicators. If it helps your trading, by all means, using it.

Having an indicator on your chart does not make you less professional.

Trading involves a series of decision making. From trade entry, to management, and to exit a trade. It involves different skill sets.

Indicator is one of the tools that can potentially help us in the decision making process. I hope the suggestions above help you to use your indicator more effectively.

If you are interested in learning more about trading, make sure to check out my Back to Basics series.

Do you use an indicator in trading? How do you use them?

Do you have any questions or comments? Feel free to drop me a line in the comment section.

My dinner conversation with a new trader

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Dinner conversation with a new trader
A Dinner conversation with a new trader

I do not normally discuss or talk about my trading outside cyberspace. The longer I traded, the more I feel uncomfortable talking about it. Maybe, I am just being lazy to explain ‘what is currency trading…bla bla bla’ or maybe I am just a person who is really bad in explaining thing clearly 🙂

Conversation with a new trader

I was having a great dinner at my friend’s place. I still miss the delicious roasted turkey, baked rice, sweet potatoes, etc 🙂 One young gentleman from India mentioned that he is interested in learning Forex trading and consider taking some expensive trading courses. He saw his friends playing with Fibonacci lines, indicators, etc (wow, he knows these terms..) which is accurate 80% of the time. I kept quiet. I really did not want to get into the discussion. However, one of my friends who knows I am trading actively pointed him to me. Oh well…

In the hindsight, probably I was not too friendly to him. My ‘advice’ to him was:

“Yes, I am trading currency actively. However, I do not teach. The risk of this business is too high, so I do not encourage young people to go into that. I am in this business long enough to tell you that. 90% of retail traders failed. I am a little lucky to manage to earn some small money. But, seriously, I really don’t encourage”

Looking at his face…I know my words are not encouraging. ‘Go and try demo accounts, make sure you are able to make some money there, then only start thinking about forex trading’

picture-059

What kind of advice is this? I had just given a cold blanket to a young trader wannabe. My bad.

I am not sure if I did the right thing. He might probably go for some expensive trading courses and start with his friend’s 80% accuracy system. That’s not my problem. He might even think I am being arrogant by not sharing anything with him. At least, I did not commit a sin that by telling him, ‘forex is a wonderful 24-hour market, where you can make money anytime, anywhere you want’.

Well…I think I did the right thing after all.

The lesson here? Don’t ask Gav out for dinner and talk about trading.

This blog post was first written back in June 8, 2009. I review it and repost it again as I thought it might be useful to new traders.

If you really keen to learn trading, check out my posts in the Back to Basics of Trading series.

Next trade is more important

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I was having a walk after buying food from the supermarket with my fiancee.

The next trade is more important

I told her about my recent trades, I was pretty happy with my performance. She smiled and told me ‘ It is good, but the next trade is more important’.

This gives me some thoughts. Exactly, the next trade is always more important. And the very next trade has totally nothing to do with our recent trades which we turned a profit or loss. However, human natures make us think it may. We will end up with overconfident, or timid when making the next trade.

Forget about your past trades. Keep the focus on the price action, and the next trade is always more important. You have to give the best performance for the next trade, it might not be perfect, but it will be your best shot!

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