DAY TRADING BEGINNERS
& (OFTEN LOOSING) TRADERS
PLEASE READ THIS FIRST....ITS ALL AN EXPERIENCE PALS..
Trading for a living is the dream of many and the good news is anyone can become a professional trader. It is the aim of this section to give you clear concise advice on how to follow your dream.
In this section you will find all you need to know in terms of getting started from how to adopt the right mindset and how to construct and implement a trading plan for profit.
Let's get started and look at the exciting world of trading financial and commodity markets for profit.
Trading is the final frontier of the free market economy and represents one of the few businesses where you can start with small stakes and build real wealth.
Everything about trading can be specifically learned however the majority of people who trade lose. This is simply because they don't understand how the markets really work.
So what mistakes do traders make?
1.Having a method that is too complicated
Many traders think the more complicated their method is the more likely it is to be successful, but the exact opposite is true. The simpler a trading method is the more likely it is to succeed in the face of ever changing market conditions.
There is absolutely no correlation between how complicated a trading method is and how successful it will be.
A method should be simple to understand and implement
2.Not understanding the logic of a method Many traders try and follow a method devised by someone else or a black box trading system where the logic is not revealed.
The problem here is that if you don't understand how the method works you wont have the discipline to follow it through inevitable periods of drawdown and losses.
Discipline is an essential element of trading and to have it you need to understand and be confident in your trading method.
3.Not understanding money management
If you trade at some point you are going to have a string of losses and its nothing to be embarrassed about it happens to all traders including the best.
What you do need to do however is be prepared for them and make sure you can ride them out and this involves proper money management.
Keep in mind the old gambling saying:
If you want to win you have to bet but you can't bet if you are not at the table.
4.Trying to trade market noise
Another huge mistake made by traders.
The best way to trade any market is to lock into and follow the long term trend. Look at any chart of anything and you will see the longer term trends that last for months or even years and it's these trends that are the ones to focus on.
Many traders try and day trade but these moves are essentially random. There is a huge market in day trading systems, often promoted by brokers as it's in their interest - they make more commission!
Fact is however that when you take into account most daily movements the profit is not big enough to cover commission, slippage and inevitable loses.
5.Emotions & Discipline
Traders who are emotional tend to lose, but keeping your emotions out of trading is difficult as money for most people is an emotional commodity!
If you read any of the great traders interviewed they will tend to focus a lot on one word and that word is DISCIPLINE.
If you have a trading method you must have the discipline to follow it exactly. In fact, if you don't follow your trading method with discipline you won't have a trading method at all.
Above are the major mistakes made by traders
How to get started trading successfully ?
Here I have provided you with specific information that if followed can make you a lot of money and turn you into a professional trader.
I have also included the background to one of the most successful trading systems of all time.
I hope you enjoy the blog and please feel free to email us with any questions or queries you may have.
Market Analysis
The best way to trade any financial or commodity market is by using technical analysis.
Here we will contrast it with fundamental analysis and why a technical approach is best.
It is simply defined as the study of price action through the use of charts - for the purpose of identifying price trends.
It's not a science, it's an art, and it works!
Why? The reason technical analysis works is because it reflects human psychology.
What about supply demand fundamentals, you may ask - well it reflects them to. Let's take a closer look.
Technical analysis uses the following equation:
Market Perception (trader psychology) + Fundamentals = Price Action
All technical analysis does, is to put forward the idea that all fundamentals are quickly reflected in price action (and in the 21st century with our advanced communications this is true as market news is flashed across the world in a split second) - therefore it simply concentrates on the price action.
The above is simple but leads to a compelling conclusion:
Price action reflects ALL the fundamentals.
There is however something else technical analysis does which is just as important:
It reflects how the participants in the market actually perceive the fundamentals.
Traders who study fundamentals claim that you can't use technical analysis - because you need to know and study the fundamentals, to know where price action will go next.
This is not true!
Most of the largest price moves in history have occurred with little or no change in the fundamentals.
Markets are generally most bullish at market tops and most bearish at market bottoms - and these turning points occurred with little or no change in the fundamentals.
Why Technical Analysis Works?
Quite simply Human psychology was at work and technical analysis factors in how the participants perceive the fundamentals as well as fundamentals themselves.
Using technical analysis allows you to get a clear detached view of the market you are trading and see the reality as it is, rather than reading or listening to the opinions of others.
Keep in mind that 90% of traders
lose money - because they're influenced by
greed and fear
and this is driven by market news.
The more bullish the news the more greedy people become and this has never changed because people's emotions are constant.
Of course, eventually they push the price so far away from fair value that a crash occurs and their caught and take losses.
Technical analysis allows you to see prices in historical terms and also the greed and fear present in bull and bear markets.
Charts therefore allow you to see the reality - and that's a huge advantage.
Technical analysis makes the following assumptions:
1. Markets Discount
All fundamentals show up quickly in the price action.
When you use technical analysis, you are studying the fundamentals as they are - not trying to guess their impact.
At the same time you're studying human psychology as well.
2. Trends Persist
Currency technical analysis can prove this - just get out a chart of any currency, and you'll see long term trends - many lasting for several years.
3. History Repeats
The basis of technical analysis is that what has happened in the past will happen again in the future.
This is why it's so effective.
Human behavior tends to repeat itself.
As price patterns on charts reflect shifts in human psychology, we can assume that certain patterns and trends will repeat themselves.
Using technical analysis
Your aim when using technical analysis is to catch, and hold the longer-term trends.
Human behavior does repeat itself - but humans can be unpredictable as well and that's why charting is an art not a science.
Always be skeptical of theories that say they can predict with scientific accuracy - they can't!
If they could, we'd all traders would know the price in advance - and then of course there'd be no market.
Using technical analysis means, you can get the odds on your favour - and make big long-term profits.
Trade the Odds
In gambling, the aim is to get the odds in your favour and bet when they are.
In trading, your aim should be to trade only when the odds are in your favour you make a trade.
You won't win every trade - but neither can great football players score from every kick at the goal.
Technical analysis is the best way to trade today's markets and with a simple robust system focusing on the big trends you can make great long term capital gains.
Trading Methods for Profit
If you want to make big profits, then you should know that the best way is do it for yourself - and not rely on others.
Any trader can build and implement a successful trading method.
This article shows you how to build a profitable trading method in five simple steps.
There are of course many other methods that will work but here we are going to focus on one that all traders can understand, implement with discipline and trade with confidence - Which are the essential ingredients of any successful trading method.
What are the specific components of a Successful Trading method?
Successful trading methods may be different but they all have three core principles.
1. They are Simple
Forget complicated systems with lots of rules and complicated equations - it's a proven fact that simple systems work better and are more successful.
As they are simple they tend to be more robust and are less likely to fail, in the brutal world of trading.
2. They Run Profits and Cut Losses
3. Follow Long Term Trends
There is no point in trading for small profits, as you will never cover your inevitable loses with small profits - You need to catch the big profitable trends that last for months or years and milk them.
Now let's look at the 5 simple steps you need to follow to get your trading method off the ground:
1. Your Method
We have said to keep it simple, and this is exactly what you need to do - just a few rules, that you understand and a robust money management system to cover you through your inevitable losing periods.
2. Spotting Trends
Look for the long-term weekly trends, and then move to daily charts to time your entry and get in on the action.
By long-term trends, I mean months, or years - NOT just a week or two.
3. The Best Way is via a Breakout Method.
Breakouts occur in all financial markets - so base your system on a trend following breakout system.
It's a fact that most of the world's most successful traders use breakout systems in their trading - and if it's good enough for them it's good enough for you.
4. Timing Entry Levels
The best way to time an entry is to watch for a break on the chart, confirmed by stochastics crossing with bullish or bearish divergence
This is the ultimate entry tool.
When a market trends you can also use Bollinger bands, to time your entry - and also lock in profits.
The Bollinger band is a fantastic indicator, and all traders should consider using it as part of their trading strategy.
5. Money Management
If you are following a breakout method, either the trade runs quickly in your favor - or the break is "false" and the break does not follow through.
Don't put your stop just below the breakout point.
If the trade does not follow through within a day, simply exit the trade, and use a monetary stop on the day of entry.
With the above method, you will focus on the longer-term trends only and trade in frequently, but that won't stop you making a lot of money over the longer term.
You will also liquidate losers quickly and therefore preserve your equity
Trading is all about cutting losses and running profits.
With a bit of research and testing the above indicators you will see why a trading method built on the above principles, will work, and will continue to work.
It seems every day some new and up coming superstar day trader (ok wannabe superstar day trader) asks me the same questions. It always strikes me as funny that everybody always seems to have the same questions when to me the answers just seem so obvious.
I will admit I've been trading for living now and I've seen and read all the doom and gloom numbers about how 90% of all day traders bust their accounts in the first year. Why? I mean seriously why does this keep happening over and over again?
I think it boils down to a couple of really simple but important rules that too many new traders either don't learn soon enough in order to save some of their trading capital. Or they don't really understand the concepts. Let's look at a couple of the major ones that you have to understand and have mastered before you can really hope to earn a living at this day trading game.
In day trading, different shares are bound to undergo different resistance and support levels. As the name indicates, resistance is basically a price level of a stock or perhaps an average that finds it difficult to break through.
First of all and I know this will ruffle some feathers, I am not a big fan of demo trading accounts. I know some old time traders swear by them. But the way I look at it, is if you want to demo trade to understand how your platform works, how to place different types of orders etc, ok do it.
But if you honestly believe that placing fake trades with fake money is teaching you anything of value well you are going to bust your account and likely sooner rather than later. Why you ask, well because when you're in a live trade and you have "real" money on the line you react much differently to being in a loss position than when it's play money.
Oh I can assure you as strong willed as you think you are, when that first trade moves in a hurry against you and you see the loss mounting I don't care how experienced you are panic does start to set in. So how do you deal with this and all the other head games that the market plays on you?
Rule number one, risk. Yes risk you never ever risk more money on any one trade than makes sense. Of course we all have different levels of risk tolerance that goes without saying. But if every time you open a trade you have your whole bankroll riding on the trade how many times do you think you can be wrong before your trading days are over and you're looking through the want ads again?
I suggest you never risk more than 2% of your account on any one trade. That means whatever you are trading you set a hard stop loss that if hit would not eat any more than 2% of your capital. I know some people are even more strict and wouldn't suggest more than (1 or 1.5% but 2% is fine in my eyes.
Day Trading Info If you're serious about day trading, then you will need to find out how much money you need to get started. Different brokers will have different requirements for funding an account.
I know of a couple of traders that don't think twice about putting 40 or 50% of their account on the line every time they open a position. Well all it takes is two or three bad trades in a row and poof they are finished, account busted.
I know that might sound like a lot, but trust me on this it's more than possible to have four or five bad trades in a row.
Then what? Well then you dig out those want ads again.
Which brings us to most asked question number two, losses. Yes everybody has losses, I do, you will even the most experienced trader on the planet will have losses. The sooner you accept that and move on the better off you will be. You can't beat yourself up over having a couple of losses.
Try not to look at them as losses, look at them as business expenses. They are just a part of doing business, nothing more nothing less. You could see a market that looks setup perfectly to make a move all the planets have aligned and sure enough you jump in and get your fill. Only to have the market turn the other way and take off like a Jack Rabbit, it happens far more often to us than most traders would like to admit. You can't take losses personally you can't try to trade your way out of them and you can't control
Day Trading Info Most people who deal with day trading spend all of their time in front of the computer, watching the slightest change in the stock price. As the prices go up and down, the day trader must be alert as to when to sell his stock or wait for the moment to hold on it.
when they are going to happen. So just don't beat yourself up, take your loss chalk up to a learning experience and move on.
Sometimes there isn't even anything to learn. You made the right move everything looked good, the market just turned. It will do that more than you care to think about.
Most asked question number 3,
what's the best system for trading?
Well the best system for you is your system.
Let that one sink in for a bit. There are as many systems out there as there are traders. They aren't all perfect and what works for you might not work for me or anything else.
The one thing I can tell you, there is no holy grail of systems. They all can be used by just about anyone; they just all need the personal touch of the user. A system working for a week or two or eight does not making it a winning system. All systems have their good and bad points; none of them seem to work in all markets.
There is so much to choose from between systems and how to use them I think I'm going to make that a topic for an entire newsletter all by itself. The bottom line about systems is to do what works for you, learn what you like. Do you like swing trading, scalping, intra day…whatever you like there will be a system you can buy to get you started down the right path while you figure out all the nuts and bolts.
NOW GET EVERYTHING IN YOUR HANDS
I end this up with a saying of Randy McKay:"Virtually every successful trader I know ultimately ended up with a trading style suited to his personality."
So you can trade on your way
But.........
TAKE CARE & BE GOOD :-)
SEE YOU SOON
--MAHINDEESH
