Day trading is an art, not a science. Even though artists study techniques of the masters who came before them, ultimately every artist needs to find his or her own way, his or her own style of creating art. So it is with day trading. There is no one correct way to day trade. This article asks you the questions you need to consider in order derive your own trading style.
On days you trade, how much time do you have to completely devote to trading?
Let's face it, if you are reading this article, most likely you are not a professional day trader. Rather, you are a market enthusiast who trades occasionally and are looking for ways to hone your strategy. I will discuss specific educational tools below, but for now let's consider how much time in the day you really have to devote to trading. This is the crucial first step toward developing your own effective trading style. If you only wish to devote an hour or two each time you trade, then holding numerous trading positions in any given trading session probably does not make sense. Know your time constraints; know how many open positions you are willing to manage simultaneously. Once you get an idea of how many trades you are willing to manage at once, then you need to hone in on your research. This brings us to the next important question.
How will you research and identify stocks for trading?
Here is where the art of day trading comes into play. There are numerous ways to identify potential winners. Most experienced traders do their own research based on a number of technical analyses. This is not hard to do, but it does require an upfront commitment to educating yourself. There are a variety of study materials available (cd-rom packages, live seminars, webinars, on-line forums, etc.) There are also a number of stock market on-line newsletters and stock research services that can help you identify stocks that are set to move. Whatever method you employ to pick your trades, whether you identify stocks to trade on your own or opt to use a fellow trader's research, you need to use this research to derive a trading plan for each trading session you undertake. This brings us to the next question.
What elements will you incorporate into your daily trading plan?
An effective trading plan includes much more than stocks identified for trading. For each stock you identify for potential trading, you need 3 parameters which reflect your personal risk to reward ratio: a targeted entry price, a targeted exit price and a stop loss. A targeted entry price helps ensure that you don't enter a trade without considering the current day's momentum. A targeted exit price helps ensure that you don't stay in a trade too long and put your profits at risk. And finally, stop losses help preserve your trading capital in the event a trade goes against you. Incorporating these 3 elements into your daily trading plan will not only add structure to your trading session, but will also help control emotional trading. This leads us to the last big question to ask yourself.
How will you handle the inevitable losing trade?
Every trader has losing trades. Your reaction to losing trades can have a big impact on your overall success as a day trader. Don't let a losing trade affect how you manage your next trade. Be wary of trying to "win back" lost capital in subsequent trades. Manage each and every trade separately. When you lose, accept it and move on. As noted above, stop losses will help preserve your trading capital, but you also need to remember to stay within your personal trading parameters on each and every trade.
Taking the time to define your personal trading style will pay dividends in the long run. Each trader's style is different. When you have clearly defined the time you are able to devote to trading, identified your research methods, derived your trading plan and eliminated emotional trading, you will have provided yourself with the necessary structure to carry out successful day trading.