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TITLE AND SUBJECT OF ARTICLE
How To Become A Day
Trader
Like
all businesses, day trading can be extremely lucrative.
I suppose that is the reason why so many people want to
become day traders. However, the risks are equally great
and it is important to know what it takes to become a
day trader.
There are a few things you need to
consider before you decide whether a day trader job is
suitable for you.
A day trader’s job can be very
stressful and taxing. Since you have to sit all day
looking at a computer terminal spotting mar...
day trading, currency trading, currency day trading,
forex, trading, forex trader, day trader
Like all
businesses, day trading can be extremely lucrative. I
suppose that is the reason why so many people want to
become day traders. However, the risks are equally great
and it is important to know what it takes to become a
day trader.
There are a few things you need to
consider before you decide whether a day trader job is
suitable for you.
A day trader’s job can be very
stressful and taxing. Since you have to sit all day
looking at a computer terminal spotting market trends
and movements, some people may not be suitable for this
type of job.
You need to have an analytic mind to
analyze large amounts of data and derive which stock to
trade and profit. This isn’t easy and comes about partly
from experience. However, you need to have lots of
patience to analyze such data.
When you are first
starting out in day trading, the odds are you will lose
money first. Therefore it is important you have enough
financial banking to cover the losses especially when
you are starting out.
Always remember a day
trader does not invest in stocks, they ride with the
stocks. It means they buy a particular stock when it’s
rising and sell them the moment it’s heading the other
direction. All done in a single day.
Day traders
do not buy stocks and hold them. You should also not get
emotional with any stocks you have. You should treat
stocks like commodities, buy when low and sell when
high.
If possible, you can join a trading company
and learn the ropes. Usually, if you are new to day
trading, a mentor will offer advice and show you the day
to day trading. Most trading companies have expert
traders who can provide you with tips and experience.
You can also try trading simulations that mirror the
real world to test your knowledge of day trading. Using
trading simulations are a great way for you to learn the
in and out of day trading without actually losing money.
It is very important you seek the right advice when
you start a career as a day trading. You want to look
for day traders or trading companies who have made their
clients money.
Day trading can be an easy way to
make money in a short period of time but also remember
you can lose a lot of money in a short period of time as
well. That’s why it’s important you have the knowledge,
experience and financial resources before pursuing day
trading.
How to Find a Day
Trading System that Works
Find out the steps that would enable you to
find a Day Trading System that works wonders for you and
allow you to start from scrath and grow big with time.
Daytrading system
Trading with a system will
dramatically improve your chances of making money in the
markets.
The next challenge is to find a <a
href="http://www.rockwelltrading.com/daytradingcoach/01_dtc_moreinfo.html#STRATEGIES"><b>daytrading
system</b></a> that works. Today you have the chance to
choose from more than 300 trading systems available.
Unfortunately just 10% of them are trading profitably.
In the next three minutes I will present you the 10
Power Principles for Successful Day Trading Systems,
which will help and support you in your research.
Principle #1: Few rules - easy to understand
It may
surprise you that the best <a
href="http://www.rockwelltrading.com/daytradingcoach/01_dtc_moreinfo.html#STRATEGIES"><b>daytrading
systems</b></a> have less than 10 rules. The more rules
you have, the more likely you "curve-fitted" your
trading system to the past, and such an over-optimized
system is very unlikely to produce profits in real
markets.
It's important that your rules are easy to
understand and execute. The markets can behave very wild
and move fast, and you won't have the time to calculate
complicated formulas in order to make a trading
decision. Think about successful floor traders: The only
tool they use is a calculator, and they make thousands
of dollars every day.
Principle #2: Trade
electronic and liquid markets
We strongly recommend
that you trade electronic markets because the
commissions are lower and you receive instant fills. You
need to know as fast as possible if your order was
filled and at what price, because based on this
information you plan your exit.
You should never
place an exit order before you know that your entry
order is filled. When you trade open outcry markets
(non-electronic) you might have to wait awhile before
you receive your fill. By that time, the market might
have already turned and your profitable trade has turned
into a loss!
When trading electronic markets you
receive your fills in less than one second and can
immediately place your exit orders. Trading liquid
markets you can avoid slippage, which will save you
hundreds or even thousands of dollars.
Principle
#3: Make consistent profits
You should always look
for a trading system that produces a nice and smooth
equity curve, even if in the long run the net profit is
slightly smaller. Most professional traders prefer to
take small profits every day instead of big profits
every now and then. If you trade for a living, you need
to pay your bills from your trading profits, and
therefore you should regularly deposit profits into your
trading account.
Making consistent profits is the
secret of successful traders!
Principle #4: Maintain
a healthy balance between risk and reward
Let me give
you an example: If you go to a casino and bet everything
you have on "red", then you have a 49% chance of
doubling your money and a 51% chance of losing
everything. The same applies to trading: You can make a
lot of money if you are risking a lot, but then risk of
ruin is very high. You need to find a healthy balance
between risk and reward.
Let's say you define "ruin"
as losing 20% of your account, and you define "success"
as making 20% profits. Having a trading system with past
performance results let you calculate the "risk of ruin"
and "chance of success".
Your risk of ruin should be
always less than 5%, and your chance of success should
be 5-10 times higher, e.g. if your risk of ruin is 4%,
then your chance of success should be 40% or higher.
Principle #5: Find a system that produces at least
five trades per week
The higher the trading frequency
the smaller the chances of having a losing month. If you
have a trading system that has a winning percentage of
70%, but only produces 1 trade per month, then 1 loser
is enough to have a losing month. In this example, you
could have several losing months in a row before you
finally start making profits. In the meantime, how do
you pay for your bills?
If your trading system
produces five trades per week, then you have on average
20 trades per month. Having a winning percentage of 70%
- your chances of a winning month are extremely high.
That's the goal of all traders: Having as many
winning months as possible!
Principle #6: Start
small - grow big
Your trading system should allow you
to start small and grow big. A good trading system
allows you to start with one or two contracts, and then
increase your position as your trading account grows.
This is in contrast to many "martingale" trading systems
that require increasing position sizes when you are in a
losing streak.
You probably heard about this
strategy: Double your contracts every time you lose, and
one winner will win back all the money you previously
lost. It's not unusual to have 4-5 losing trades in a
row, and this would already require to trade 16
contracts after just 4 losses! Trading the e-mini S&P
you would then need an account size of at least $63,200,
just to meet the margin requirement. That's why
martingale systems don't work.
Principle #7:
Automate your trading
Emotions and human errors are
the most common mistakes that traders make. By all means
you have to avoid these mistakes. Especially during fast
markets, it is crucial that you determine the entry and
exit points fast and accurately; otherwise, you might
miss a trade or find yourself in a losing position.
Therefore you should automate your trading and look for
a trading system that either already is or can be
automated. Automating your trading makes it free of
human emotion. The buy and sell operations are all
automatic, hands-free, with no manual interventions and
you can be sure that you make profits when you should
according to your plan.
Principle #8: Have a high
percentage of winning trades
Your trading strategy
should produce more than 50% winners. There's no doubt
that trading systems with smaller winning percentages
can be profitable, too, but the psychological pressure
is enormous. Taking 7 losers out of 10 trades and not
doubting the system takes great discipline, and many
traders can't stand the pressure. After the sixth loser
they start "improving" the system or stop trading it
completely.
Especially for beginners it is a big help
to gain confidence in your trading and your system if
you have a high winning percentage of more than 65%.
Principle #9: Look for a system that is tested on at
least 200 trades
The more trades you use in your back
testing (without curve-fitting), the higher the
probabilities that your trading system will succeed in
the future. Look at the following table:
Number of
Trades 50 100 200 300 500 Margin of Error 14% 10% 7% 6%
4%
The more trades you have in your back testing,
the smaller the margin of error, and the higher the
probability of producing profits in the future.
Principle #10: Chose a valid back testing period
I
recently saw the following ad: "Since 1994 I've taught
thousands of traders worldwide a Simple and Reliable
E-Mini trading methodology".
That's very
interesting, because the e-mini S&P was introduced in
September 1997, and the e-mini Nasdaq in June 1999,
therefore, none of these contracts existed before 1997.
What kind of e-mini trading did this vendor teach from
1994-1997???
The same applies to your back testing:
If you developed an e-mini S&P trading strategy, then
you should back test it only for the past 2-4 years,
because even though the contract has existed since 1997,
there was practically nobody trading it (see chart
below):
Now you know how to separate the scam from
good working trading systems. By applying this checklist
you will easily identify trading systems that work and
those that will never make it.
Author’s name
Markus Heitkoetter
Author's Info:
Markus
Heitkoetter is a 19 year veteran of the markets and the
CEO of Rockwell Trading. For more free information and
tips and trick how to make consistent profits with
online daytrading, visit his website
www.rockwelltrading.com.
How to Develop a
Profitable Day trading System
Developing a day trading system can be
tricky, but it’s by far not as complicated as many
vendors make you think. In the following we will present
you a simple trading system that we developed using
these steps.
day trading system
In this
article I will explain to you how to develop a
profitable <a
href="http://www.rockwelltrading.com/daytradingcoach/01_dtc_moreinfo.html#STRATEGIES"><b>day
trading system</b></a> in five steps:
Step 1: Select
a market and a timeframe
Step 2: Define entry rules
Step 3: Define exit rules
Step 4: Evaluate your day
trading system
Step 5: Improving the day trading
system
Let’s take a closer look at these steps.
Step 1: Select a market and a timeframe
Every market
and every timeframe can be traded with a day trading
system. But if you want to look at 50 different futures
markets and 6 major timeframes (e.g. 5min, 10min, 15min,
30min, 60min and daily), then you need to evaluate 300
possible options. Here are some hints on how to limit
your choices:
• Though you can trade every futures
markets, we recommend that you stick to the electronic
markets (e.g. e-mini S&P and other indices, Treasury
Bonds and Notes, Currencies, etc). Usually these markets
are very liquid, and you won’t have a problem entering
and exiting a trade. Another advantage of electronic
markets is lower commissions: Expect to pay at least
half the commissions you pay on non-electronic markets.
Sometimes the difference can be as high as 75%.
•
When you select a smaller timeframes (less than 60min)
your average profit per trade is usually comparably low.
On the other hand you get more trading opportunities.
When trading on a larger timeframe your profits per
trade will be bigger, but you will have less trading
opportunities. It’s up to you to decide which timeframe
suits you best.
• Smaller timeframes mean smaller
profits, but usually smaller risk, too. When you are
starting with a small trading account, then you might
want to select a small timeframe to make sure that you
are not overtrading your account.
Most profitable <a
href="http://www.rockwelltrading.com/daytradingcoach/01_dtc_moreinfo.html#STRATEGIES"><b>day
trading systems</b></a> use larger timeframes like daily
and weekly. These systems work, too, but, be prepared
for less trading action and bigger drawdowns.
Step 2:
Define entry rules
Let’s simplify the myths of “entry
rules”:
Basically there are 2 different kinds of
entry setups:
• Trend-following
When prices are
moving up, you buy, and when prices are going down, you
sell.
• Trend-fading
When prices are trading at an
extreme (e.g. upper band of a channel), you sell, and
you try to catch the small move while prices are moving
back into “normalcy”. The same applies for selling.
In my opinion swing trading is actually one of the best
trading strategies for the beginning trader to get his
or her feet wet. By contrast, trend trading offers
greater profit potential if a trader is able to catch a
major market trend of weeks or months, but few are the
traders with sufficient discipline to hold a position
for that period of time without getting distracted.
Most indicators that you will find in your charting
software belong to one of these two categories: You have
either indicators for identifying trends (e.g. Moving
Averages) or indicators that define overbought or
oversold situations and therefore offer you a trade
setup for a short term swing trade.
So don’t become
confused by all the possibilities of entering a trade.
Just make sure that you understand why you are using a
certain indicator or what the indicator is measuring. An
example of a simple swing daytrading strategy can be
found in the next chapter.
Step 3: Define exit rules
Let’s keep it simple here, too: There are two different
exit rules you want to apply:
• Stop Loss Rules to
protect your capital and
• Profit Taking Exits to
realize your profits
Both exit rules can be expressed
in four ways:
• A fixed dollar amount (e.g. $1,000)
• A percentage of the current price (e.g. 1% of the
entry price)
• A percentage of the volatility (e.g.
50% of the average daily movement) or
• A time stop
(e.g. exit after 3 days)
We don’t recommend using a
fixed dollar amount, because markets are too different.
For example, natural gas changes an average of a few
thousand dollars per day per contract; however,
Eurodollars change an average of a few hundred dollars a
day per contract. You need to balance and normalize this
difference when developing a day trading system and
testing it on different markets. That’s why you should
always use percentages for stops and profit targets
(e.g. 1% stop) or a volatility stop instead of a fixed
dollar amount.
A time stop gets you out of a trade if
it is not moving in any direction, therefore freeing
your capital for other trades.
Step 4: Evaluate your
day trading system
The first figure to look for is
the net profit. Obviously you want your system to
generate profits. But don’t be frustrated when during
the development stage your day trading system shows a
loss; try to reverse your entry signals. On our website
www.rockwelltrading.com you already learned that trading
is a zero sum game: So if you are going long at a
certain price level, and you lose, then try to go short
instead. Many times this is the easiest way to turn a
losing system into a winning one.
The next figure you
want to look at is the average profit per trade. Make
sure this number is greater than slippage and
commissions, and that it makes your day trading
worthwhile. Day trading is all about risk and reward,
and you want to make sure you get a decent reward for
your risk.
Take a look at the Profit Factor (Gross
Profit / Gross Loss). This will tell you how many
dollars you are likely to win for every dollar you lose.
The higher the profit factor the better the day trading
system. A system should have a profit factor of 1.5 or
more, but watch out when you see profit factors above
3.0, because it might be that you over-optimized the
system.
Here are some more characteristics you might
want to consider besides the net profit of a system:
• Winning percentage
Many profitable day trading
systems achieve a nice net profit with a rather small
winning percentage, sometimes even below 30%. These
systems follow the principle “Cut your losses short and
let your profits run”. However, YOU need to decide
whether you can stand 7 losers and only 3 winners in 10
trades. If you want to be “right” most of the time, then
you should pick a system with a high winning percentage.
• Number of Trades per Month
Do you need daily
action? If you want to see something happening every
day, then you should pick a day trading system with a
high number of trades per month. Many profitable day
trading systems generate only 2-3 trades per month, but
if you are not patient enough to wait for it, then you
should select a day trading system with a higher trading
frequency.
• Average Time in Trade
Some people get
really nervous when they are in a trade. I have heard of
people who can’t even sleep at night when they have an
open position. If that’s you, then you should make sure
that the average time in a trade is as short as
possible. You might want to choose a system that does
not hold any positions overnight.
• Maximum Drawdown
A famous trader once said: “If you want your system to
double or triple your account, you should expect a
drawdown of up to 30% on your way to trading riches.”
Not every trader can stand a 30% drawdown. Look at the
maximum drawdown the system produced so far, and double
it. If you can stand this drawdown, then you found the
right day trading system. Why doubling? Remember: your
worst drawdown is always ahead of you.
• Most
consecutive losses
The amount of most consecutive
losses has a huge impact on your trading, especially
when you are using certain types of money management
techniques. Five or six consecutive losses can cause you
a lot of trouble when using an aggressive money
management.
In addition this number will help you to
determine whether you have enough discipline to trade
the system: Will you still trade the system after you
have experienced 10 losses in a row? It’s not unusual
for a profitable trading system to have 10-12 losses in
a row.
Step 5: Improving your system
There is a
difference between “improving” and “curve-fitting” a
system. You can improve your day trading system by
testing different exit methods: If you are using a fixed
stop, try a trailing stop instead. Add a time stop and
evaluate the results again. Don’t look at the net profit
only; look also at the profit factor, average profit per
trade and maximum drawdown. Many times you will see that
the net profit slightly decreases when you add different
stops, but the other figures might improve dramatically.
Don’t fall into the trap of over-optimizing: You
can eliminate almost all losers by adding enough rules.
Simple example: If you see that on Tuesdays you had more
losers than on the other weekdays, you might be tempted
to add a “filter” that prevents your day trading system
from entering trades on Tuesdays. Next you find that in
January you had much worse results than in other months,
so you add a filter that enters trades only from
February – December. You add more and more filters to
avoid losses, and eventually you end up with a trading
rule that I saw recently:
IF FVE > -1 And Regression
Slope (Close , 35) / Close.35 * 100 > -.35 And
Regression Slope (Close , 35) / Close.35 * 100 < .4 And
Regression Slope (Close , 70) / Close.70 * 100 > -.4 And
Regression Slope (Close , 70) / Close.70 * 100 < .4 And
Regression Slope (Close , 170) / Close.170 * 100 > -.2
And MACD Diff (Close , 12 , 26 , 9) > -.003 And Not
Tuesday And Not DayOfMonth = 12 and not Month = August
and Time > 9:30 ...
Though you eliminated all
possibilities of losing (in the past) and this trading
system is now producing fantastic profits, it’s very
unlikely that it will continue to do so when it hits
reality.
Author’s name
Markus Heitkoetter
Author's Info:
Markus Heitkoetter is a 19 year
veteran of the markets and the CEO of Rockwell Trading.
For more free information and tips and trick how to make
consistent profits with online daytrading, visit his
website www.rockwelltrading.com.