5 Tips to Become a Successful Day Trader
Successful day trading requires hard work and discipline and a trading plan that will allow you to be successful over the long term. Not only do you need a strategy that will allow you to consistently make money over time, but you also need to diversify the assets you trade as well as have a robust trader mentality. Here are 5-Tips to becoming a successful day trader.
What is Day Trading?
Day trading describes an activity where an investor initiates a position and closes that positions within the same trading day. The idea is to avoid carrying the position overnight and therefore remove the risk that the price of the security gaps against you without having the control of stopping out of your position during active market hours. While there are many securities such as forex that trade 24-7, products such as equities have specific market hours and are subject to market price gaps.
Create a Strategy You are Comfortable Trading
When you day trade, it’s important to find a strategy that fits your trading personality. There are two distinct types of trading strategies, discretionary and systematic. A discretionary strategy is one where you are making all the trading decisions based on several factors that you believe are important to generating a successful trading strategy.
A systematic strategy is one where you do not employ discretion. You use a systematic approach where a signal is created to initiate your position and a signal is generated to exit your position. The initiation of risk and your risk management is handled completely by the system you are using. If you decide you want to use a system that you developed or purchased, make sure you understand all the nuances before you deploy your strategy using real capital. This could include backtesting using historical data as well as, forward testing in a real-time environment using a demonstration account.
If your strategy is a discretionary strategy, find one that fits your trading personality. If you are a breakout trader and like to catch a trend, avoid using mean reversion strategies where you buy on dips and sell on rallies. You don’t want to stop out just because the market moves against you. You should pick a strategy that fits your comfort zone.
Diversify the Assets You Are Trading
One of the issues that day traders face is that you need market volatility to generate returns. If a market is stagnant and is moving sideways it can be very difficult to make money, especially if you are concentrating on only one asset class. For example, if the dollar is rangebound, it might be trading sideways against all the major currencies, making it difficult to trade the forex markets.
One of the best ways to avoid a stagnant market is to find the markets that are moving. This could include commodities, equities, equity indices and debt. You should find a reputable broker like markets.com that can provide trading in several types of asset classes. Additionally, by diversifying your portfolio, you will experience prices changes that are not correlated. This means that not all assets are moving in the same direction at the same time. You will then be able to employ multiple trading strategies against many assets at the same time.
Keep Your Cool
When you trade you must remember that investing is a business. It requires a plan that needs to be executed. It is important that you avoid overriding your plan during the middle of a trading session, and only go back to the drawing board when you realize that your plan does not have merit. Part of trading is losing money and the goal is to make more money than you lose. No trading strategy will make money all the time, and you need to find a way to cut your losses and allow your profits to run. If you get frustrated each time you lose money, and you alter your strategy to avoid losing money, there is a chance that you will completely reduce your opportunity to make money. If you have stop loss levels that you have calculated, let the market hit these levels and avoid exiting early because you cannot stand the pain of losing money. One of the worst mistakes a novice trader can make is cutting trades before they play out.
Keep your Cost Low
Like any business, the net is the bottom line. If you spend more money than you make, your trading business will not be profitable. This includes making sure the fees you are paying to trade the markets will allow you to generate net gains. For example, if your strategy is to scalp the markets and generate gains of 0.25% on your gains without losing more than 0.25% on your losses, but your commissions are 0.1%, you will need to win 70% of the time for the strategy to break even. Here is the calculation on 10-trades: commissions = 10 * 0.1% = 1%, winning trades 0.25% * 7 = 1.75%, losing trades 0.25% * 3 = 0.75%. Total = 1.75% – 0.75% = 1% minus 1% commissions = zero.
Another way to keep your cost low and leverage your account is through Contract for difference CFD’s trading. A contract for differences is a security that allows you to trade the difference in the price of an asset without owning the security. It is a beneficial way to speculate an instrument fluctuation with minimal investment.
Find a Robust and Simple Platform
It is also important to find a trading platform that is easy to use and provides all the tools you need to generate revenue. Make sure you find a broker like markets.com that offer many tools such as charting and technical analysis tools. Also look for a broker that will provide you with multiple assets to trade along with up to date news and analysis.
Before you take the plunge and begin to trade using real capital make sure you generate a trading that you are comfortable trading. You need to find a broker that provides you with several assets to trade as well as a low-cost trading environment. It’s also important to find a platform that is easy to use and has robust tools that will allow you to make sound trading decisions.