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There are two key principles you must master to become a good day
trader. You must become disciplined and you must learn to focus
intently. A scary truth about day trading: about 80% of people who
engage in this type of trading would be better of taking their money to
a casino and playing at the slot machines. Making money as a day trader
really depends upon a keen awareness of the right information and
excellent discipline.
Discipline: Think Like A Trader
Poker players have to be disciplined. Day traders should follow in
their footsteps. Good discipline is about maintaining habits; good
habits that can help you, most particularly, when things are not going
the way you want.
As in a poker game, what makes the real difference, what separates the
good players from the great players, is how well you respond to the
losses.
Trading, you need to be consistent. You have to make a lot of decisions
as a day trader and you probably won’t have that much time to make
them. If you are disciplined, you will manage to act consistently, and
in accordance with the pre-determined trading strategy or system set
forth in your trading plan, even when, and most particularly when,
things don’t seem to be going as you had planned, hoped, or expected.
To be a good trader, you should establish a trading plan and system
that will govern your practices. Systems generally impose parameters
and set out criteria. Habitually following such a plan or system is the
exercise of good trading discipline. Reviewing your plan when you have
found that it has not worked well is also a disciplined act.
Emotions: Develop a Poker Face
Never allow your emotions to rule your trading. Countless inexperienced
traders respond to their emotions about a particular stock. Many become
afraid and reluctant to take losses. They act on their fears; they
respond by refusing to sell the stock, hoping, often in vain, that it
will rise again. Unfortunately, it’s only by accepting losses and
responding to them in an unemotional way that you can hope to minimize
them and thus become a successful trader, able to capitalize on your
wins.
On a related subject, you should never let greed influence your
decision making either. Even the best day traders make this mistake. As
the prices rise, they grow reluctant to sell. You can see the wheels
turning: their trading plan and system go flying out of the window as
they watch the ticks, thinking all the while of the profits increasing
and increasing. The stock price will rise and they will make even more
of a profit for the day. However, and it happens more often than not,
the share price subsequently drops, causing their gains to dwindle. If
you don’t act fast enough, if you’ve become sufficiently distracted,
you’re gains can easily become losses. Fear and greed have no role to
play in the life of a disciplined day trader.
Trade What You Know
This story applies slightly less to day trading than it does to more
long-term trades but it’s worth knowing about. In “Beating the Street”,
Peter Lynch describes the impressive portfolio of a group of seventh
graders, making several important observations about how the simple and
straightforward approach to trading used by these children lead to
better overall results than are achieved by most major portfolio
management companies.
The children picked stock that they knew; everything from Disney to
Wal-Mart. They watched stock that they understood, and, according to
Lynch, a veritable wizard of the stock market, their techniques are
quite groundbreaking.
While most of his advice applies to standard stocks trading, some of it
does apply to good day trading. Peter Lynch is just one of the
authorities you should consult to become a better trader.
Another authority is Alexander Elder. In his book, “Come Into My
Trading Room”, Elder establishes a number of examples of the behavior
for the well disciplined trader.
The experts agree the world over on what seems to make a good day
trader.
It’s important to stay neutral. If you allow yourself to become
depressed every time you lose a couple of hundred dollars; if you’re
jumping for joy every time you make some money, you’re not neutral. The
best traders have a poker face so tough you can’t tell their good from
their bad days. Follow their example.
When you go into trading, it’s like starting any other business, even
if you decide to trade part-time for a supplementary income. Every
successful trader, no matter what type of trading they’re going for,
they always have a business plan. So should you.
Trading is a business. You need to establish the hours your going to
work, how you’re going to work, what your annual and monthly expenses
are going to be, what you maximum loss can be per day and per week,
what your financial and business objectives are, and how you’re going
to record your progress. A comprehensive business plan is going to be
necessary before you go into business as a trader. You need to decide
which companies and programs you are going to trade with and this
requires work. Plan well ahead and follow through with your plans to
avoid unnecessary problems down the line.
Another habit of the very best traders is keeping a detailed journal of
their trading activities. This is a great way to have an accurate
reference of your trades and it’s also a good way to build on your
habits of being analytical and focused when it comes to picking stocks
and trades.
Many traders contact friends and colleagues for help. Advisors are
usually on standby at the major investment companies as well. The point
is, if you go to someone for advice about trades, the first thing
they’re going to ask you is which trades you’ve had problems with. If
you can’t answer this question is some detail, you’re not going to get
much meaningful advice and you’re probably going to be told to start
keeping a journal anyway.
Keep a journal of all the trades you take. Include the time you got in,
out, the prices, why you took the trade, what was going on in the
market, how did the stock act, what did you do well, what could you
have done better. In time, this will become second nature to you and it
really will be worth the time and effort.
When it comes to your trading habits, the best advice is generally to
follow two or three techniques that you’ve seen work well. This is
definitely a trait of the great traders, who focus on between one and
three techniques. The advantage of this is focus. If you’re watching
several different stocks and using several different techniques, you’re
thinking about too much. Mistakes are almost a foregone conclusion.
Another way of putting it: a jack of all trades, master of none is
typically a low paid unskilled worker. Experts are always better paid
and if you focus on just a few techniques for stock trading, you’ll
become an expert on the technique you are using. Use it again and
again; it will keep working, so will you.
If you manage to become an expert in only one to three trading
techniques, you’ve also have enough energy left to become an expert in
money management as well. Great poker players are great money managers
and risk managers. Great traders are also great money managers and risk
managers.
Traders and poker players respect the risks they take. The best poker
players are tight aggressive players. They play sensibly, betting small
amounts and backing down when they don’t have good hands. The
difference is: when they play with a good hand, they’re aggressive.
They are ruthless about following through. Great traders need to behave
the same way.
Great traders protect their accounts. They trade usually with as little
as ¼% to 1% per position; no more than 2%. Before you blow out your
seed money chasing down hopeless stock, you need to realize: if you
lose all your money today, there’s no way you’re going to make any
money back tomorrow. Discipline in money management is what’s going to
get you through the dry patches, the small and careless mistakes. It
will also help you to manage your emotions to prevent a whole host of
problems from plaguing you.
Not all traders have large accounts to work with. Many have very small
accounts, but if you apply the ¼% to 2% rule, you’ll be betting amounts
so small you’re hardly going to blink an eye about losing a little here
and there.
The final tip to becoming a great trader: only trade with money that
you can afford to lose. We’ve said this once and we’ll say it again. If
you do your reading on day trading, you’ll definitely hear this again.
Great traders use what’s called risk capital. They definitely do not
trade anything close to all the money they have in the world because,
if you do this and lose, there’s no way you’re going to make up what
you’ve lost. Trade with money you can’t afford to lose and you will
compound many of your potential problems. You will make a whole range
of unnecessary mistakes and, before you know it, your assets will be at
risk.
If you are disciplined and sensible enough to trade with risk capital,
you can rest easy at night. You can have a bad day and maintain your
poker face. You can remain unattached to each of your trades and you
will be able to follow your trading strategies and plans without
blinking an eye.
Most successful people become successful by following the example of
others. Reading and learning are part and parcel of any job, any
profession; particularly when you want to become successful. Follow the
guidelines above to become a better day trader, but be sure to make use
of the internet and your local library and bookstore to explore other
perspectives and more advice.
The information
in this guide and on this
site should not be construed as financial advice and are for
information purposes only. The authors and publishers are not financial
advisers. You should rely on your advisers and lawyers for financial
advice.
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