Starting out as a trader… about day trading
Once you make the decision to learn about day trading you must do yourself a favour and approach this matter with professional discipline. The arena or market you are trading responds to different kinds of input in various ways that can or cannot be expected. Here I only want to name a few but there are loads of other small factors as well. You will need to learn about them as you proceed with your trading career:
Mayor economic announcements (you have to know the ones scheduled for your trading day)
News releases (After 9/11 all markets immediately went into tailspin as the news broke – and believe me, Stock Exchanges will get notified before you)
Arbitrary changes in market sentiment (sometimes the market falls or rises in spite of expectations, e.g. after a very positive piece of news comes out buyers enter long positions (buy) just to be massacred by the “smart money” or big investors like hedge funds who wish to take profit at those price levels)
Know “When to trade…” and “When to stay away…” Professional traders have a discipline to stay out of volatile markets! They are smart in the game. That`s how they make money while 80 – 90 % of people loose. You can`t cross a busy road at will. Money can only be made in TRENDING MARKETS.
Why do consolidations go sideways for a long time sometimes even days with very little price action. The big players are waiting for more information to make intelligent decisions thus price becomes range bound by the struggle between retail investors or the “small guys.”
For these and numerous other reasons you need to have contingency measures in place:
You MUST use stop loss orders (preferably very close stops)
You can`t risk too much of your trading capital on one trade, best is to keep it at 1-2 % of the whole account.
You must be familiar with the concepts of WIN/LOSS ratio and RISK/REWARD ratio
You must use a trading log and a trading plan
Now let me do you a favour!
There are so many books written about this subject that it would be impossible to read all of them even if you discarded the outdated ones. I can`t bore you to death with this any longer on a website like this…
There is way too much information and what is relevant for you can easily be picked up by doing a bit of trading.
To engage the markets in a profitable manner on a daily basis you need IMMERSION TRAINING …or to put it plainly “EXPERIENCE”. The little bird gets thrown out of the nest to see that it can fly.
You can read as much as you wish, of course, and it will profit you but what I am saying is that you do not need to learn the telephone book to make a phone call. Once you make a few calls you will be proficient in using the telephone itself.
I am pretty sure that you want to be a winner in this business. Give it time …and start with a Demo Account, Paper Trading Account or Micro Account (some brokerages let you trade for pennies per point instead of pounds so that the money you make or lose is real money but it won`t hurt you that much in case you first lose). Losing money is part of the learning process. Even the best traders lose on lots of trades but they manage the trades with precision and are very profitable overall.
Trading is so contrary to human nature that 90% of people who start trading will not apply professional rules even if they know them! Chances are that a beginner trader will empty their trading account very quick even if they have a winning strategy (the very same one a pro uses to get constantly amazing profits). When I started trading I fell in this trap so I know what I am talking about.
I met someone at a trading course who had lost £150.000 in one month and then decided to do a course. He was not crying but even then…it is very sad. You get this feeling that you are invincible and you can get your initial losses back but that is not trading… that is gambling. Your emotions make you risk it all to get even. Neither trading or gambling are zero sum games, meaning the more you play or trade the more the odds will favour the “House” or “Market.” In Roulette you have the number “zero” not only Black or Red (so in reality you do not have a fifty-fifty chance to win) and in trading you have the spread or the broker`s fees to make up for before making any profit. The difference between the two is that gambling is based on pure luck whereas trading has the economy behind it and at times market movements are very predictable!
Please be the minority and start sensibly with a non-risk Demo Account until you become constantly profitable on paper (it can happen relatively quickly if you find the right education). Even if you become profitable always calculate the risk wisely, know what risk you are exposed to in the given market and trade only with money you can afford to loose. Hopefully, your experience in this new endeavour will be a lot better then.
“I entered a competition for losers and I won.” – Will Mobberley
Just to share a few more snippets of information regarding this
The market does not crash upwards, only downwards, unless it breaks out of a dull low volume state (at support levels for example) in a particularly volatile period. In both cases it is better to stay away until a clear trend is established again unless there is solid evidence that the move will continue in the same direction. Usually the upward movement of markets is slow and gradual while downward movements can be sudden and aggressive. Markets are very quick to crash while always a lot slower to rise as a rule of thumb. This shows once again the importance of experience, you must know the nature of the “beast” to fight it.
Look at this chart of the S&P 500 which is one of the main US indices:
View this chart in interactive mode on www.ProRealTime.com
Attitude to risk
Having this principle sorted out is the foundation to trading. This is going to determine whether you succeed or fail… Naturally, based on deeply rooted human instincts everyone will do exactly the opposite of what would be needed in order to make profits! When we start losing on a trade we tend to hope the market will reverse and we come out even so we move that protective stop loss. Even professional traders are tempted to do it but they know better… On the other hand we tend to terminate a winning trade too quickly to lock in the profit. Thinking for a moment here what does it really mean? It means we love SMALL PROFITS and HUGE LOSSES! Now is it what we really want? No.
It is a market trading axiom as old as the hills: “Cut your losers short and let your winners run…!”
You do face risk every time you put a trade through but there are ways to minimise risk. I have recently watched a new series on History Channel called Vikings. The Vikings were formidable warriors, the film was made to give a historically correct picture of their society and was brutally realistic. However for me as a trader it was particularly interesting to realise that their main combat principle was the same as the ultimate key to success in trading:
“We only fight when the odds are in our favour.”
They pretty much conquered the whole of Europe …and if you personally know investment bankers who trade the markets every day they can tell you that the warriors who rule the “rough waters” of the financial markets do it by the exact same “combat principle.” Disciplined… and rock hard disciplined trade management in practice is what you will find on a trading floor, there is no room for emotions, hopes or maybe`s.