MAKING money consistently from trading requires a combination of many skills and attributes—knowledge, experience, discipline, mental fortitude, and trading acumen.
It’s not always easy f to implement basic strategies like cutting losses or letting profits run. What’s more, it’s difficult to stick to one’s trading discipline in the face of challenges such as market volatility or significant losses.
Finally, trading involves pitting wits with millions of market pros who have access to cutting-edge technology, a wealth of experience and expertise, and very deep pockets.
That’s no easy task when everyone is trying to exploit inefficiencies in efficient markets.
Also, as a new trader, you may be prone to emotional and psychological biases that affect your trading—for instance, when your own capital is involved and you’re losing money on a trade.
On the other hand, experienced, skilled professional traders with deep pockets are usually able to surmount these challenges.
1. What to Buy
Day traders try to make money by exploiting minute price movements in individual assets (stocks, currencies, futures, and options). They usually leverage large amounts of capital to do so. In deciding what to buy—a stock, say—a typical day trader looks for three things:
Liquidity — A security that’s liquid allows you to buy and sell it easily, and, hopefully, at a good price. Liquidity is an advantage with tight spreads, or the difference between the bid and ask price of a stock, and for low slippage, or the difference between the expected price of a trade and the actual price.
Volatility — This is a measure of the daily price range—the range in which a day trader operates. More volatility means greater potential for profit or loss.
Trading volume — This is a measure of the number of times a stock is bought and sold in a given time period. It’s commonly known as the average daily trading volume. A high degree of volume indicates a lot of interest in a stock. An increase in a stock’s volume is often a harbinger of a price jump, either up or down.
2. When to Buy
Once you know the stocks (or other assets) you want to trade, you need to identify entry points for your trades. Tools that can help you do this include:
Define the specific conditions in which you’ll enter a position.
For instance, buy when the price breaks above the upper trendline of a triangle pattern, where the triangle is preceded by an uptrend (at least one higher swing high and higher swing low before the triangle formed) on the two-minute chart in the first two hours of the trading day.
Once you have a specific set of entry rules, scan more charts to see if your conditions are generated each day.
For instance, determine whether a candlestick chart pattern signals price moves in the direction you anticipate. If so, you have a potential entry point for a strategy.
3. When to Sell
Next, you’ll need to determine how to exit your trades. There are multiple ways to exit a winning position, including trailing stops and profit targets. Profit targets are the most common exit method. They refer to taking a profit at a predetermined price level. The profit target should also allow for more money to be made on winning trades than is lost on losing trades.
Some common profit target strategies are:
Scalping is one of the most popular strategies. It involves selling almost immediately after a trade becomes profitable. The price target is whatever figure means that you’ll make money on the trade.
Fading involves shorting stocks after rapid moves upward. This is based on the assumption that (1) they are overbought, (2) early buyers are ready to take profits, and, (3) existing buyers may be scared away. Although risky, this strategy can be extremely rewarding. Here, the price target is when buyers begin stepping in again.
This strategy involves profiting from a stock’s daily volatility. You attempt to buy at the low of the day and sell at the high of the day. Here, the price target is simply at the next sign of a reversal.
This strategy usually involves trading on news releases or finding strong trending moves supported by high volume.
One type of momentum trader will buy on news releases and ride a trend until it exhibits signs of reversal. Another type will fade the price surge. Here, the price target is when volume begins to decrease.
Just as with your entry point, define exactly how you will exit your trades before you enter them. The exit criteria must be specific enough to be repeatable and testable.