Posted by forex at 5:32 AM
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1. Demonstrate to yourself and others that you have adequate experience to be a successful day trader. You should have substantial experience managing a substantial account for a number of years. Data should be collected showing the volatility of the account, the number of trades, the percentage of profitable trades, the greatest number of consecutive wins and losses, the greatest win and the greatest draw-down and how long it took to recoup the draw-down. From this information, a business plan should be constructed showing how the business will operate going forward. You cannot be a novice trader and expect to make money immediately. The learning curve in trading is exceptionally steep.
2. Arrange online trading accounts with at least two brokerage firms. Pay attention to the fee structure as brokerage fees and slippage ( the difference between the bid and offered side of a stock sale) represents the biggest variable cost to day trading. Realize that you must have a high winning percentage in order to be a day trader and trade accordingly. Have a backup plan and access to an individual if you cannot enter trades online for any reason. Also, backup all software and market data on a nightly basis.
3. Understand that day trading profits do not recognize the cash flow needs of the day trader. Compute your personal needs and the needs of the business. Suppose you need $50,000 a year for all living expenses. A good rate of return for a day trader is a 25 percent. This implies that your starting investment portfolio needs $200,000 minimum to begin trading. Assume that you will have three negative months a year. Consult your draw-down statistics from Step 1 and input the actual number. This is money you will need for living expenses beyond the monthly draw. In this case, the investor will need $212,000 to trade. This is a minimum amount for an experienced trader.
4. Trade with strict stops and a robust trading strategy. The object of day trading is to make many small and profitable trades in a day. Do not carry overnight positions. Close every trade at the end of the day. The worst trading mistake for any trader is to let small losses become large losses. Day trading does not allow for large, diversified portfolios. Trade a few positions in good industries while following the market trends. Never trade mean reversion ( trading overbought or oversold stock positions and wait for them to return to a mean or average range) as these are low probability trades and will not return to mean within a day.
5. Trade commodities through ETFs ( exchange traded funds) rather than through futures. Futures tie up much capital and slippage costs can easily take more than 25 percent of short-term trading gains. Use discount brokers and trade stocks instead. Develop a trading philosophy that you will follow and stick with it. Remember that bull markets trade much differently than bear markets. Be adept at trading both as otherwise you will increase the rate of capital draw-down.
6. Use technical trading techniques to trade. Use a combination of moving averages, stochastics or Elliot Wave techniques. Do not use fundamental analysis as it provides broad trend information but no specific entry and exit points for stocks.