By Edward Kingston
Trading for a living is probably the number one reason that makes many people enter the day trading arena. Trading also offers many benefits that can never be matched by traditional nine to five jobs. But, it is also a trap that many want to be traders fall into if they come totally unprepared. Many traders make mistakes and learn from them, and then there are other traders who make the same mistakes and never learn from them. Below, we take a look at the five most common mistakes made by the novice day trader.
(1) Not Having a proper Trading Plan in place : Most people start trading without any kind of plan in place. That is a very serious mistake to make. Every business is built on and thrives on proper planning. A trader should know in advance how much risk capital they are willing to trade with. Traders must stop looking for the Holy Grail and try to get good at one or two setups and execute them religiously. Traders must plan to cut losers off quickly and hang on to winners as long as possible. By not planning their trading, traders set themselves up for failure.
(2) Failure to Preserve their Trading Capital : Trading Capital is the most essential element in the trading business. Without it one cannot trade to make the profits one wishes for. Hence, it is very critical for the day trader to preserve their trading capital. Trading Capital Preservation will ensure a trader of his or her survival in the long run. The best way a trader can do this is by taking small losses and moving on to the next trade rather than try to make up for losses in one trade.
(3) Improper Risk Management : Managing risk is the number one priority, goal and job of the successful day trader. This is done by proper position sizing. A trader must have a decent sized account to focus on and trade the instrument of his choice. This means the account should be able to withstand a number of losses in a row without wiping out the trader's account or draining the trader mentally and physically. A trader must not use up all the margin available to him or her in a single trade. And a trader must definitely avoid the trap of over-trading the account.
(4) Not having proper Discipline : Discipline is a very important virtue that needs to be possessed by all traders. It is probably the most common virtue possessed by successful day traders. Discipline can be in many forms. A trader must be disciplined in his approach to trading. Discipline starts off by having a solid plan and following that plan during live trading. A trader must have the discipline to accept losses when they come and take profits when called for in the plan. Fear and greed can cause a trader to have total disregard for discipline. Discipline is the art of dealing with the stress that comes with the loss of trading capital. It is very difficult to trade and succeed without proper discipline.
(5) Not using Trading Stops : Using proper trading stops is the key to success in trading. Trading stops go hand in hand with managing risk and capital preservation. A trading stop helps the trader get out of a losing position without thinking too much. It is a part of most execution platforms today. A trading stop tells a trader that their analysis of the market move was wrong. A trading stop can be based on the amount of money a trader is willing to pay the market to find out if he or she is right about their analysis. Having stops placed automatically helps build confidence in a trader as they know they will not have to think too much when the market moves against them by a certain amount. They know they will get taken out of the position automatically when the stop is triggered. After all, the first loss is usually the smallest loss.
Wednesday, September 2, 2009
Tuesday, August 25, 2009
FOREX - Day Traders Discipline Is The Key
By Steve John Cowan
Although it has been some years since I was actively involved in trading, I have just returned to the markets and have begun to trade a small account on my own behalf.
This has perhaps given me a slightly skewed perspective of the markets, almost like a new entrant, but one with a lot of experience.
There have been some big changes whilst I have been inactive, not least in the number of online brokerages fighting for every dollar.
But many things stay the same, at the heart of which is one, I guess, unbreakable truth. Trading is basically a very simple business, with any trading – stocks, options, FOREX, whatever – only really involving three steps:
1. Find several possible trades evaluate them and decide which to go for,
2. Calculate how much to trade, and decide at what points to enter and exit the market
3. Keeping an eye on, or monitoring, open market positions
Now, these three steps were basically all there was to it a few years ago, and they still And, guess what, people are still getting totally bogged down right here, at this early stage of the trading process, generally, for one of two reasons.
The first possible reason is that they simply are not aware that these are the steps involved in the trading process, or (the second reason) they have no clearly defined rules for actioning these steps.
Thus, less experienced, more nervous, traders can often take hours to evaluate a small number of potential trades.
Experienced day traders, on the other hand, are fully aware that, with little time available to execute their trading, they must have a process plan and they must stick to it.
A day trader will set out his (or her) plan of action something like this:
1. Recognize the opportunity, enter the market
2. Stay in the trade for as long as possible if it is going for him or
3. Get the heck out of there with minimum losses, as soon as it is clear it is going to go the wrong way
That’s it!
That’s essentially what a day trader in any market was doing years ago, and that is what a day trader is still doing today, with little or no change to their working practices brought about by the vastly more advanced technology of today.
Savvy day traders learn very quickly that they must plan ahead of time, so that they are in prime position to take full advantages of the opportunities that occur in real time.
Thus, day trading, which on paper at least is a pretty dangerous and risky manner of working markets is, in fact, one of the most disciplined trading schools!
By the nature of market movements and the way they operate, day traders simply cannot afford to run their trading business on a wing and a prayer!
Day trade with discipline and there is good money to be made. Trade without it, it’s a one way ticket to the loans queue!
Although it has been some years since I was actively involved in trading, I have just returned to the markets and have begun to trade a small account on my own behalf.
This has perhaps given me a slightly skewed perspective of the markets, almost like a new entrant, but one with a lot of experience.
There have been some big changes whilst I have been inactive, not least in the number of online brokerages fighting for every dollar.
But many things stay the same, at the heart of which is one, I guess, unbreakable truth. Trading is basically a very simple business, with any trading – stocks, options, FOREX, whatever – only really involving three steps:
1. Find several possible trades evaluate them and decide which to go for,
2. Calculate how much to trade, and decide at what points to enter and exit the market
3. Keeping an eye on, or monitoring, open market positions
Now, these three steps were basically all there was to it a few years ago, and they still And, guess what, people are still getting totally bogged down right here, at this early stage of the trading process, generally, for one of two reasons.
The first possible reason is that they simply are not aware that these are the steps involved in the trading process, or (the second reason) they have no clearly defined rules for actioning these steps.
Thus, less experienced, more nervous, traders can often take hours to evaluate a small number of potential trades.
Experienced day traders, on the other hand, are fully aware that, with little time available to execute their trading, they must have a process plan and they must stick to it.
A day trader will set out his (or her) plan of action something like this:
1. Recognize the opportunity, enter the market
2. Stay in the trade for as long as possible if it is going for him or
3. Get the heck out of there with minimum losses, as soon as it is clear it is going to go the wrong way
That’s it!
That’s essentially what a day trader in any market was doing years ago, and that is what a day trader is still doing today, with little or no change to their working practices brought about by the vastly more advanced technology of today.
Savvy day traders learn very quickly that they must plan ahead of time, so that they are in prime position to take full advantages of the opportunities that occur in real time.
Thus, day trading, which on paper at least is a pretty dangerous and risky manner of working markets is, in fact, one of the most disciplined trading schools!
By the nature of market movements and the way they operate, day traders simply cannot afford to run their trading business on a wing and a prayer!
Day trade with discipline and there is good money to be made. Trade without it, it’s a one way ticket to the loans queue!
Tuesday, August 11, 2009
How to Become a Successful Day Trader - 7 Quick Tips
By Peter Skotnicky
No matter which direction the stock market seems to be going, there are always stories people learning to become successful day traders. Even during difficult down-turns in the market these people are making serious incomes from successful stock trading.
So what do these successful traders know that the average trader doesn't know? How do they continue to keep their stock trading profitable, regardless of what the market is doing?
Here are some traits you might want to consider if you're interested in growing a successful trading business.
1. Understanding the Market
Successful trading comes from understanding that the individual shares listed on the stock market never move as one single unit. Each individual stock represents a portion of a much larger, publicly listed company. Just because you might see the average NASDAQ index is moving up or down, this doesn't automatically mean that every stock listed is going in the same direction.
While the average movement may appear to be going down, there will always be individual stocks that trend upwards. The same is true in reverse too. If you think the average market movement is going up, there will always be some stocks that drop in value.
This could mean that it's possible to select stocks that move in the opposite direction to the average movement in the market and continue to profit from stock trading even during downturns.
2. Risk Tolerance
Understanding and accepting your own personal levels of risk tolerance are vitally important factors if you wish to build a successful trading business. Learning about day trading from a person with a much higher level of risk tolerance means that you could potentially end up trading much more than you're comfortable with.
The same thing is true of listening to advice from well meaning friends and family who have much lower risk tolerance levels to your own. While they may see what you're doing with stock trading to be 'too risky' for their own preferences, you may be happy with the levels you have accepted.
Always base your stock trading strategies within your own risk tolerance levels.
3. Continuing Education
Choosing a hot stock pick based on the advice of someone else is never a great strategy for successful trading. Always take time to learn a little about the company behind the stock you intend to trade and base your stock trading decisions on the information you learn for yourself. The more you learn about how to analyze the trends of whichever stocks you're trading, the more likely it will be that you'll increase your day trading profitability.
4. Lose The Greed Mentality
Truly successful stock trading means not allowing greed to get in the way of your day trading strategy. If your chosen stocks have made their profit, sell up and realize the profits. You can always buy back into the market at a later point, but you can't always guarantee a profit unless you lock it away with a sell trade order.
Many newer day traders set themselves a strategy and plan to sell any stocks they have bought once it reaches a specific point. When the values reach the point they first considered being a good sell point, greed gets in the way and they talk themselves into waiting until the stock goes just a little higher, just a little further for just a little longer.
5. Be Prepared to Cut Losses
When the price of a particular stock begins to trend downwards, an experienced or more successful day trader will cut their losses and get out of the market before those losses compound any further. In fact, many of them would have set an automated stop loss order to sell out once the price begins to fall too far.
Newer traders seem to have a different mentality where they go into a form of panic mode and hang onto losing stocks, hoping like crazy that the price will recover and they'll make some of their money back. In order to be successful with stock trading, you'll need to be prepared to cut losses and continue trading.
6. Remove Emotion
A successful stock trading business is not an emotional venture. You need to learn to view your buying and selling as nothing more than a business transaction. Remain objective about the stocks you have chosen and stick firmly to your trading strategy. No matter what your heart or your gut instincts are screaming at you, run your trading business with your head. If your strategy says you should sell your stocks at a predetermined profit margin, then follow your strategy.
7. Day Trading Robot
Successful day trading can often depend on the trading platforms and stock analysis software you're using. While it's still possible to make good profits using only your stock broker's trading platform, as your trading business profits grow you should consider using automated software that can help you track and monitor the movements of many stocks at once. Some software can offer the ability to create pricing signals using charts of pricing movements, which are able to send you a buy signal and a sell signal based on trends for each individual stock you're trading.
No matter which direction the stock market seems to be going, there are always stories people learning to become successful day traders. Even during difficult down-turns in the market these people are making serious incomes from successful stock trading.
So what do these successful traders know that the average trader doesn't know? How do they continue to keep their stock trading profitable, regardless of what the market is doing?
Here are some traits you might want to consider if you're interested in growing a successful trading business.
1. Understanding the Market
Successful trading comes from understanding that the individual shares listed on the stock market never move as one single unit. Each individual stock represents a portion of a much larger, publicly listed company. Just because you might see the average NASDAQ index is moving up or down, this doesn't automatically mean that every stock listed is going in the same direction.
While the average movement may appear to be going down, there will always be individual stocks that trend upwards. The same is true in reverse too. If you think the average market movement is going up, there will always be some stocks that drop in value.
This could mean that it's possible to select stocks that move in the opposite direction to the average movement in the market and continue to profit from stock trading even during downturns.
2. Risk Tolerance
Understanding and accepting your own personal levels of risk tolerance are vitally important factors if you wish to build a successful trading business. Learning about day trading from a person with a much higher level of risk tolerance means that you could potentially end up trading much more than you're comfortable with.
The same thing is true of listening to advice from well meaning friends and family who have much lower risk tolerance levels to your own. While they may see what you're doing with stock trading to be 'too risky' for their own preferences, you may be happy with the levels you have accepted.
Always base your stock trading strategies within your own risk tolerance levels.
3. Continuing Education
Choosing a hot stock pick based on the advice of someone else is never a great strategy for successful trading. Always take time to learn a little about the company behind the stock you intend to trade and base your stock trading decisions on the information you learn for yourself. The more you learn about how to analyze the trends of whichever stocks you're trading, the more likely it will be that you'll increase your day trading profitability.
4. Lose The Greed Mentality
Truly successful stock trading means not allowing greed to get in the way of your day trading strategy. If your chosen stocks have made their profit, sell up and realize the profits. You can always buy back into the market at a later point, but you can't always guarantee a profit unless you lock it away with a sell trade order.
Many newer day traders set themselves a strategy and plan to sell any stocks they have bought once it reaches a specific point. When the values reach the point they first considered being a good sell point, greed gets in the way and they talk themselves into waiting until the stock goes just a little higher, just a little further for just a little longer.
5. Be Prepared to Cut Losses
When the price of a particular stock begins to trend downwards, an experienced or more successful day trader will cut their losses and get out of the market before those losses compound any further. In fact, many of them would have set an automated stop loss order to sell out once the price begins to fall too far.
Newer traders seem to have a different mentality where they go into a form of panic mode and hang onto losing stocks, hoping like crazy that the price will recover and they'll make some of their money back. In order to be successful with stock trading, you'll need to be prepared to cut losses and continue trading.
6. Remove Emotion
A successful stock trading business is not an emotional venture. You need to learn to view your buying and selling as nothing more than a business transaction. Remain objective about the stocks you have chosen and stick firmly to your trading strategy. No matter what your heart or your gut instincts are screaming at you, run your trading business with your head. If your strategy says you should sell your stocks at a predetermined profit margin, then follow your strategy.
7. Day Trading Robot
Successful day trading can often depend on the trading platforms and stock analysis software you're using. While it's still possible to make good profits using only your stock broker's trading platform, as your trading business profits grow you should consider using automated software that can help you track and monitor the movements of many stocks at once. Some software can offer the ability to create pricing signals using charts of pricing movements, which are able to send you a buy signal and a sell signal based on trends for each individual stock you're trading.
Monday, August 3, 2009
How Professional Day Traders Handle Their Trading Losses
By Edward Kingston
Day trading can be considered as one of the most rewarding careers on the planet. It is probably the only business out there that has literally no overheads and also unique because a trader unlike a regular worker can pick and choose his or her trading work hours.
Because trading can be started so easily as a business, it tends to attract people from all walks of life very easily. It also has a high failure rate because people that are drawn to it approach it without much thought. The biggest reason that leads to about 90% of traders failing is because of the inability of these people to deal with trading losses.
Trading, like all other businesses has to deal with losses that come naturally as a cost of doing business. This very ability to deal with trading losses brilliantly is what separates the 10% of successful traders from the rest who do not make it. So how do these professional traders handle their trading losses? Below are just some of the things that these successful traders do that keeps them going in this business for a very long time.
1) Patience and Discipline are of utmost importance. They follow their plan that they made for themselves very religiously. They know they do not need to take every setup and wait very patiently to take only those trades that meet their trading rules.
2) They are confident in their trading systems. They know that every system will go through a drawdown at some point. Their ability to navigate around those tough periods is what makes them winners.
3) Professional traders refrain from overtrading. They avoid it like the plague. Overtrading is the easiest way to run a trading account into the ground. They know that being in the market all the time increases the chance of being blown out too soon. They only trade one or two markets and do not overstay their welcome either.
4) Professional traders keep a detailed log of all their trading activity. They realize their trading losses as mistakes and work hard to not repeat them again. They also do not aim to make large sums of money in any one or two trades. They prefer to make small sums of money on each trade where possible. They know that even small consistent winners can add up to something big at the end of the trading quarter or year. After all trading is a journey, not a race.
5) Professional traders have the mindsets of athletes. They are always working on their game and never give up. They are always looking for ways to improve their performance. They know they need to work very hard at trading to achieve some great results. They also know when not to trade and take a break from trading when it gets too overwhelming for them.
Good luck with your trading journey.
Day trading can be considered as one of the most rewarding careers on the planet. It is probably the only business out there that has literally no overheads and also unique because a trader unlike a regular worker can pick and choose his or her trading work hours.
Because trading can be started so easily as a business, it tends to attract people from all walks of life very easily. It also has a high failure rate because people that are drawn to it approach it without much thought. The biggest reason that leads to about 90% of traders failing is because of the inability of these people to deal with trading losses.
Trading, like all other businesses has to deal with losses that come naturally as a cost of doing business. This very ability to deal with trading losses brilliantly is what separates the 10% of successful traders from the rest who do not make it. So how do these professional traders handle their trading losses? Below are just some of the things that these successful traders do that keeps them going in this business for a very long time.
1) Patience and Discipline are of utmost importance. They follow their plan that they made for themselves very religiously. They know they do not need to take every setup and wait very patiently to take only those trades that meet their trading rules.
2) They are confident in their trading systems. They know that every system will go through a drawdown at some point. Their ability to navigate around those tough periods is what makes them winners.
3) Professional traders refrain from overtrading. They avoid it like the plague. Overtrading is the easiest way to run a trading account into the ground. They know that being in the market all the time increases the chance of being blown out too soon. They only trade one or two markets and do not overstay their welcome either.
4) Professional traders keep a detailed log of all their trading activity. They realize their trading losses as mistakes and work hard to not repeat them again. They also do not aim to make large sums of money in any one or two trades. They prefer to make small sums of money on each trade where possible. They know that even small consistent winners can add up to something big at the end of the trading quarter or year. After all trading is a journey, not a race.
5) Professional traders have the mindsets of athletes. They are always working on their game and never give up. They are always looking for ways to improve their performance. They know they need to work very hard at trading to achieve some great results. They also know when not to trade and take a break from trading when it gets too overwhelming for them.
Good luck with your trading journey.
Thursday, June 18, 2009
How to Become a Successful Day Trader - Few Tips
By Peter Skotnicky
Becoming a successful day trader is the dream of many people. Being able to work the hours that you want and make the money that you deserve is what a lot of investors wish they could do. However, they find that trading is not as easy as it's cracked up to be. Stock trading is something that takes a lot of skill and knowledge in order to do. You don't just sit down in front of a computer for the first time and be a whiz at day trading. So what does it take to become successful at day trading?
The most important characteristic is perseverance. Nothing worthwhile can be accomplished without perseverance, but in day trading it is even that much more important. You're going to have some losses along the way and perseverance will help get you through alright. Stock trading is all about buying low and selling high. When you stick with it for a long time, you'll start to learn when those times are.
Another critical component of becoming successful at day trading is developing a stock trading strategy. There are many different stock trading strategies out there and each one of them is different. Before you buy anything from anyone, you'll want to do your research. Every trading system out there has benefits and negatives. Regardless of which strategy you choose, the important thing is to stick with it. You don't want to be trading on pure emotion. You want to be trading based upon a strict system of rules. These rules will present you with a number of scenarios and you'll need to meet every single one of them with flying colors.
Day trading isn't something that you can do without a lot of practice. You're going to need to get a practice account and trade stocks for awhile. In this manner, you can develop winning strategies that are convenient for you. Once you've developed these strategies, it is imperative that you actually stick to them. You can't do them for a few days and then switch to something else.
Another great tool for day trading is a robot called Day Trading Robot. This is a tool that was developed by some of the best traders in the industry. It gives you buy and sell signals for a number of different penny stocks on the market. When it tells you to buy, you buy. When it tells you to sell, you sell. This is one of the most accurate forms of stock trading available. Day Trading Robot is for those that have money to buy stocks, but don't have the time to do it. It is not just for practice or education either. It's here to make money for it's owners.
Overall, day trading is a very rewarding career for you to go into. While it is risky, you will reap the rewards that come with working from home. You can trade whenever the market is on and you can finally start realizing some of the return that you deserve.
Becoming a successful day trader is the dream of many people. Being able to work the hours that you want and make the money that you deserve is what a lot of investors wish they could do. However, they find that trading is not as easy as it's cracked up to be. Stock trading is something that takes a lot of skill and knowledge in order to do. You don't just sit down in front of a computer for the first time and be a whiz at day trading. So what does it take to become successful at day trading?
The most important characteristic is perseverance. Nothing worthwhile can be accomplished without perseverance, but in day trading it is even that much more important. You're going to have some losses along the way and perseverance will help get you through alright. Stock trading is all about buying low and selling high. When you stick with it for a long time, you'll start to learn when those times are.
Another critical component of becoming successful at day trading is developing a stock trading strategy. There are many different stock trading strategies out there and each one of them is different. Before you buy anything from anyone, you'll want to do your research. Every trading system out there has benefits and negatives. Regardless of which strategy you choose, the important thing is to stick with it. You don't want to be trading on pure emotion. You want to be trading based upon a strict system of rules. These rules will present you with a number of scenarios and you'll need to meet every single one of them with flying colors.
Day trading isn't something that you can do without a lot of practice. You're going to need to get a practice account and trade stocks for awhile. In this manner, you can develop winning strategies that are convenient for you. Once you've developed these strategies, it is imperative that you actually stick to them. You can't do them for a few days and then switch to something else.
Another great tool for day trading is a robot called Day Trading Robot. This is a tool that was developed by some of the best traders in the industry. It gives you buy and sell signals for a number of different penny stocks on the market. When it tells you to buy, you buy. When it tells you to sell, you sell. This is one of the most accurate forms of stock trading available. Day Trading Robot is for those that have money to buy stocks, but don't have the time to do it. It is not just for practice or education either. It's here to make money for it's owners.
Overall, day trading is a very rewarding career for you to go into. While it is risky, you will reap the rewards that come with working from home. You can trade whenever the market is on and you can finally start realizing some of the return that you deserve.
Sunday, May 17, 2009
Day Trading Tutorials For Starters
By Rick Goldfeller
When you want to enter the day trading business, you should be prepared. Just like in a battle, day traders only want one thing and that is to succeed. Success in the trade means earning big profits. Being a trader is not very easy as you think. It takes experience, luck and right strategies in order to gain. Perhaps you've read from magazines various individuals doing well in the business. They're probably experts and know what they're doing. You can't be an expert overnight even though you will read many books related to the field. Before you start as a trader, it's advisable to enroll in day trading tutorials.What's good with the said tutorials is you'll learn much stuff which you will need. There's no question on the money you will be investing but you should be aware of the trading effects. Even if you have enough capital, you can never tell whether your transactions will be a success or a failure. Let's face the fact here, day trading is a very risky business. You don't know what will happen next in the market. In an instance, the market can be in your favor but with just a blink of an eye, it can go unfavorable too. Day trading involves quick decision-making on your part because you need to trade your commodity before the market close in a given trading day.It's not only about luck-you should have skills. Some says it's like a gamble for traders will never know the result of the trade. It's really important to have day trading tutorials. Like starting a business, you must understand first how the industry works. In the tutorial lessons, you will be familiar with the trading stuff. Essential in the trade is the strategies you will do to realize a profit. Losing is a very common thing especially to those amateur traders. Most starters are still learning and it's just normal to incur losses. Another thing, traders wanted to earn big profits in an instant.They don't have any patience and wanted to trade right away even when it's not yet the right time. Many failures occur because most don't have the proper skills and just depend on pure luck. In order to avoid losing, day trading tutorials can really be a big help. You will know what it takes to win in the trade rather than lose your hard-earned money. Education is such an integral part of the trade. As you go doing with your transactions, you will know much about the business. However, when you are still starting, better concentrate first in day trading tutorials. Sometimes, it's hard to understand some terminologies used in the trade. You need to study the different terms used so as not to be an idiot once you're already doing your own dealings. You must be familiar with the financial instruments traded like stocks, currencies, and others. In day trading tutorials, it will teach you how to trade intelligently. Focusing on the winning side and make profits you desire.
When you want to enter the day trading business, you should be prepared. Just like in a battle, day traders only want one thing and that is to succeed. Success in the trade means earning big profits. Being a trader is not very easy as you think. It takes experience, luck and right strategies in order to gain. Perhaps you've read from magazines various individuals doing well in the business. They're probably experts and know what they're doing. You can't be an expert overnight even though you will read many books related to the field. Before you start as a trader, it's advisable to enroll in day trading tutorials.What's good with the said tutorials is you'll learn much stuff which you will need. There's no question on the money you will be investing but you should be aware of the trading effects. Even if you have enough capital, you can never tell whether your transactions will be a success or a failure. Let's face the fact here, day trading is a very risky business. You don't know what will happen next in the market. In an instance, the market can be in your favor but with just a blink of an eye, it can go unfavorable too. Day trading involves quick decision-making on your part because you need to trade your commodity before the market close in a given trading day.It's not only about luck-you should have skills. Some says it's like a gamble for traders will never know the result of the trade. It's really important to have day trading tutorials. Like starting a business, you must understand first how the industry works. In the tutorial lessons, you will be familiar with the trading stuff. Essential in the trade is the strategies you will do to realize a profit. Losing is a very common thing especially to those amateur traders. Most starters are still learning and it's just normal to incur losses. Another thing, traders wanted to earn big profits in an instant.They don't have any patience and wanted to trade right away even when it's not yet the right time. Many failures occur because most don't have the proper skills and just depend on pure luck. In order to avoid losing, day trading tutorials can really be a big help. You will know what it takes to win in the trade rather than lose your hard-earned money. Education is such an integral part of the trade. As you go doing with your transactions, you will know much about the business. However, when you are still starting, better concentrate first in day trading tutorials. Sometimes, it's hard to understand some terminologies used in the trade. You need to study the different terms used so as not to be an idiot once you're already doing your own dealings. You must be familiar with the financial instruments traded like stocks, currencies, and others. In day trading tutorials, it will teach you how to trade intelligently. Focusing on the winning side and make profits you desire.
Saturday, May 16, 2009
Entry Problems For Day Traders
By D Bennett
If you are one of those traders who buy at support or sell at resistance, then your entries take care of themselves. But if, like me, your strategy is to trade breakouts through support and resistance levels, then the economics of your planned trade may very well be perverted by slippage.
Suppose you see price rising toward resistance at 900 and your strategy is to sell near the resistance level. Your plan may be to sell one pip below resistance at 899.75, with a 1.5 point stop at 901.25, taking profit at 895.25. To implement this you place a sell limit order at 899.75, a buy stop order at 901.25, and (after the trade is entered) a buy limit order at 895.25. There will be no slippage on a winning trade because if a limit order is filled you are guaranteed your specified price (or better).
If the trade works, you make 4.5 points profit, which is three times your planned risk of 1.5 points.
On the other hand, if you are a breakout trader, your plan may be to buy one pip above resistance at 900.25, with a 1.5 point stop at 898.75, taking profit at 904.75. You implement this by placing a buy stop order at 900.25 to enter your trade. Once you are in the position, enter a sell stop order at 898.75 to protect your trade, and a sell limit order at 904.75 to take your profit.
Again, if the trade works, you hope to make 4.5 points profit, three times the risk of 1.5 points. So essentially in both strategies you are planning trades at the resistance level with a potential 3:1 reward to risk ratio, quite a reasonable plan of attack. Here is where trading practicalities start to creep in...
First of all, that 4.5 points of profit is not going to be quite 4.5 - it will be 4.5 points less commission on the trade. Using a good deep discount broker helps to minimize this problem.
Secondly, in both cases, that 1.5 point risk assumes your stop loss order will be executed at exactly the price specified. In the markets I trade (grain futures), there is more likely to be one or two pips of slippage, sometimes more. What this means is that if a sell stop order at 898.75 is triggered, my actual fill may be at 898.25. This is a feature of stop orders where execution at the specified price is not guaranteed. In fast moving markets, the fill price can be quite a distance from what you expected.
If the trade fails, and there is 2 pips of slippage on the stop loss, the reward to risk ratio becomes 4.5 points profit to 2 points of risk, closer to 2:1 than the 3:1 you wanted.
It is worse for the breakout trader, because he or she enters the trade with a stop order, which may also suffer slippage.
In the breakout trade described above, entry was made with a Buy stop order at 900.25. Suppose the market is moving quickly when resistance breaks, so you suffer two pips of slippage and get filled at 900.75. Sticking to your original plan to take profit at 904.75, your target profit is reduced from 4.5 to 4 points.
In a losing trade, the breakout trader can be hit with slippage both ways. The entry might be filled at 900.75, and then slippage might see the stop filled 898.25. In this scenario, the planned 1.5 point risk has blown out to 2.5 points. In fact, given 2 pips of slippage on the entry, I am now risking 2.5 points for a potential 4 point profit. My comfortable 3:1 reward to risk ratio has been ravaged by slippage and is now just 1.6:1!
These problems are of most significance to day traders because they work with small profit targets. Obviously, longer term traders shooting for 50 or 100 points of profit are not going to be worried so much by a couple of pips slippage, but for the day trader - particularly using a breakout strategy - it is the greatest single trading cost.
Can anything be done about it?
The first thing is to recognize and understand the problem. Personally, I accept slippage as a fact of life, and I make sure my theoretical reward to risk ratio is big enough to ensure that it is still worthwhile after slippage. You need to understand that what you may think is a 4:1 ratio may very well end up as 2:1 in real life.
Some traders I have mentored try to get over the problem by simply shifting the goal posts. They adjust the profit and stop levels around the specific entry achieved. In the example we have been considering, the desired entry for the long trade was 900.25, but the fill after stoppage was 900.75. These traders simply adjust the target to 905.25 and the stop loss to 899.25, maintaining the 4.5 point profit target and the 1.5 point risk level. This approach is OK, except that is might distort some important logic of the trade. For example, your original stop level may have been chosen because it was just below a support level, or it may have been at some important Fibonacci level. This technique should ensure that potential profit is not reduced by slippage, but of course the stop loss order could still suffer slippage if the trade fails.
Another trader I know uses stop limit orders to ENTER trades. Effectively, the stop limit order lets you control how much slippage you are prepared to tolerate. You can even specify a stop limit order which will only be filled if it can be executed at your specified price (zero slippage). When I use them, I normally allow one pip of slippage. The danger is that the market moves through the breakout level so quickly that your trade can not be executed at all and you miss the trade completely. On the other hand, you often find that there is a bit of a pullback after a fast break through resistance (or support) levels, so stop limit orders may often be filled some time after the original break.
One thing you must NEVER do is use a stop limit as a stop loss order. You want stop loss orders to be executed even if the market is moving fast and you get significant slippage. Better that than having to watch the market continue to rocket away from you and your losses mounting. If you want to try stop limit orders, use them only for entering positions. Then, if the market trades right through the order, the worst that happens is that you miss out on a trade.
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