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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.

Free Technical Analysis Handbook

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Today more and more investors are warming to the fact that psychology moves markets and therefore fundamental analysis, which fails to properly measure mass investor psychology, must be flawed.

Who can blame them? After all, fundamental analysis — based on past company earnings, rating agency projections and the like — proved to be of little value during the bust.

There is a better way.

Many investors who monitor investor sentiment readings, study Elliott wave patterns and employ other powerful technical indicators were — at very least — able to position themselves to survive the recent decline. Still others were able to turn crisis into opportunity and profit from the volatility.

How’d they do it?

Technical analysis.

You see, technical indicators remove the cloudy, bias-driven assumptions from your analysis and focus on the one thing that moves markets: investor psychology.

Past performance is not indicative of future results — and that’s where fundamental analysis goes wrong. It fails to factor in the psychology that not only moves markets up and down but also leads analysts to extrapolate the current or past trend into the future. That’s why fundamental analysts almost always miss major tops and bottoms.

Folks over at Elliott Wave International employ the largest team of technical analysts in the world. They recognize that optimism peaks before market tops and pessimism troughs before market bottoms. They use powerful and sometimes unconventional tools to help identify psychological extremes that signal high-probability turning points.

EWI’s brand-new 50-page eBook, The Ultimate Technical Analysis Handbook, will show you the various methods of technical analysis they use every day and teach you how to use these powerful tools for yourself.

If you’re a technician, this eBook is perfect for you. If you’re a fundamentals follower, it’s more important than ever that you give technical analysis a closer look. Even if you never completely abandoned your fundamental indicators, you WILL benefit from drawing on these valuable technical tools.

Learn more about this free eBook, and download your copy here.

Why do I do monthly review, and only monthly?

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I don’t have to write another post to tell you why do you need to keep a trading journal. I assume you should know if you are taking trading seriously. But, I guess, most of the traders might have the same problem which I used to have, ‘over review’ your trading result.

No doubt, we have to review our trading results or the accounting book of your business. Do not try to hide the losses and mistakes to yourself. After all, this is our own business, isn’t it?

But just how frequent should we do that?

After trading for a little while, I figure out, doing a monthly review is pretty much enough for day trader, like myself.

Why monthly and not weekly? Well, this is not a rule, but an observation.

I used to do a weekly review of my trading. It is useful. But, it does not really tell me my overall performance. In other words, the weekly review is kinda ‘short-sighted’.

Why is it so? Let’s take an example, during the FOMC meeting week, the market might be a little bit choppy, most likely traders are waiting for the interest rate decision. I might be trading extremely well during this kinda week, or I might be chopped to pieces. Does the result of the week itself tell me a little about my over performance as a trader? Nah, I don’t think so.

So, why do we spend time to analyse the result of the week, and feel ‘happy’ or even ‘devastated’ about it? And subsequently thinking about ‘maybe I should not trail my stops’, ‘maybe I should wait when the candle closes above yesterday’s high’ , blah, blah , blah. Maybe I should change the system rules! again?!? I don’t see a point.

In fact, it is similar to trading. Do not trap yourself in the 5-minute charts and forget about the hourly chart or even daily chart. Why? Over the long run, the big picture tells you more about the ‘truth’.

I would think a monthly, quarterly, and yearly review of the overall trading performance is pretty adequate. Tracking monthly cost of trading, reviewing mistakes, analyzing the system performance over different weeks, or even seasons. That’s more effective, well, to me.

So you want to learn trading, part I?

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I wrote this blog post back in September 2007. Sadly, today, most of the blogs I referred to had either removed or broken. I will try to update this post in the near future.

Meanwhile, if you are looking for resources to learn more about trading, please have a look at my Back to Basics of Trading series.

I have a couple of friends asking me how to start trading or do I have any tips for them to start trading. Well, I am not a pro, nor a trading coach. But, I can share some great resources that are available online, in the blogosphere.

First of all, my trades are based on technical analysis, which means I am reading charts and looking for trading opportunities and setups mostly from price charts. I am not a big fan of fundamental analysis, it is too tough for a slow man like me to understand.

So, here we go.

First, armed yourself with skills to involve in the market. Making phone calls to your broker, or getting ‘tips’ from your colleagues or uncles are not skill. Learn how to read a price chart, how to analyze the market technically or learn how to read financial reports and analyze the market fundamentally. Some nice blog posts are available on the web freely on this area.

  1. Toni Hansen’s Trading lessons
  2. Drawing Trend lines from Trader Mike
  3. More on Trend lines from Trader Mike

Once the price charts are no stranger to you, it is time to move on. So we read charts, but how are we going to deal with market? To start trading, we need to have a setup. A setup is a specific condition/situation that market presents to you and gives you the chance to enter the market. As you might know I am a big dummy fan, all my trades are based on dummy setups. Some people live and breath with indicators for trading setups, nothing wrong, as long as it works for him. Here are some good resources:

  1. How I trade, and analyzing charts from Trader-X . (The respected and mysterious trader’s site. He’d left blogsphere, but catch his blog before it is gone)
  2. Finding the right set-up(s) from Trader-X
  3. Chairman Maoxian’s trading for dummies (This is the best trading secret on the web, I really hate to share with anyone :-p)
  4. Trade setups ( a library of technical setups from Trading-naked.com)
  5. Strategies from Corey at Afraidtotrade.com
  6. OONR7’s trading setup

Alright, we have setups, looks like we are ready to make million now. Nah. The next big thing in trading is about risk and money management. You can’t trade without money. The bottom line is to protect yourself (your capital I mean!) when having bad days. Trading is a probability game, you only have high probability trade but not sure-fire trade. No setup will give you 100% success rate. Face the fact! So, how much can you afford to lose? how many contracts or shares should you trade? Money management is essential for trading.

  1. Accuracy Vs Risk/reward ratio from myself, Trader Gav 😉
  2. How to be consistently profitable in stock market from Movethmarkets.com
  3. Position sizing from Trader Mike
  4. Starting out with basic from Dr.Van K Tharp
  5. Expectancy is the next key from Dr. Van K Tharp
  6. Expectancy from Trader Mike

Enough? No. … Now you should have known that trading is a serious subject, serious business. Ok, I will continue in part II, this post is just too long.. 🙂

Structure your Entry, a suggestion

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Years ago, when I was reading Alexander Elder’s Trading for a Living: Psychology, Trading Tactics, Money Management, the triple screen idea caught my attention. I thought it was a great idea for my swing trading. The basic idea is to have a broader view of your trading time frame, looking at the bigger picture before considering your entry.

Since the beginning of this year, OK my dummy trading 2.0, I have been using this concept. I always have 3 screens on my chart, for example, NQ futures. I called these three screens Sentiment screen (the longest time frame), Value screen (intermediate time frame), and Entry screen (the shortest time frame). Again, I am not illustrating my trading setup, because, it is irrelevant to anybody. Instead, I will give a brief explanation of this structure setup.

Sentiment Screen
This is a screen with the longest time frame among the three. In this screen, you need to have your own method, be it a moving average or your very own Magic Index to determine the direction of the trend and current sentiment of the market that you are trading. For example, if we have a very bullish view in Sentiment Screen, we do not want to go short. It is either Long or no trade.

You should spend some time to find the right method for yourself to determine bullish/bearish sentiment and determine a trend. No free lunch, do your own research.

Value Screen
This screen is having a shorter time frame than the Sentiment Screen. How short is shorter? Up to you. Do your research. It can be 3x shorter or even 5 times shorter. No absolute answer. Here, I am looking for the best value to enter a position. For example, you might be looking for price to trade near a support level, moving average or Bollinger band, etc. For example, if you are trading breakout, then you might want to see congestion on this screen. If you are considering joining a trend, you might want to wait for a bounce from a pullback on this screen.
On this screen, we decide if it worth establishing a position. I don’t want to see price exhaustion on this screen.

This screen keeps me disciplined from chasing a trade. When the price runs away on this screen, I do not want to establish a position.

Entry Screen
This is the shortest time frame. In this screen, I am looking for an entry spot, be it a dummy spot or chart patterns, etc. The most important thing to remember here is, I am only interested in an entry spot in the direction of the Sentiment screen.

Of course, this is not all. This structure setup only helps in refining the entry signal. There are different ways to incorporate stop loss. The stop may be set up according to the chart in Value screen or Entry Screen. Again, this is subject to your own research.

Stephane from The Chart Strategiest applies the similar approach that I have described here, though there are differences. Check out his blog. He trades both commodity and index futures. It is good to see how he trades.

Just another piece of study that I have done to improve my trading.