Regardless of whether one is trading long or short, the critical path to success in trading is to buy when others are selling and sell when others are buying. The timing of market entry and exit is of paramount importance. When using the day trading strategy, success or failure is often a matter of minutes or seconds. Daily stock traders attempt to yield a profit before the market closes; they do not normally hold overnight positions. The lower margin of error makes it imperative that traders should be more disciplined in adhering to good habits of successful daily stock traders.
♦ Study the market
Due to the lower margin for error when executing short-term trades, daily stock traders must study the stock market. They can conduct either technical analysis (referring to the graphical analysis of stock price movement) or fundamental analysis (analysis of the company, industry or economy) to choose the best stocks for day trading. A trading strategy should be linked to the results of whichever type of analysis is selected.
♦ Create a business plan and trade strategies
Before executing a trade, daily traders should have overall strategies and plans that are in sync with their trading personality. Apart from a plan for each trade, the daily stock trader should have a business plan that outlines aspects such as overall objectives, techniques used and expenses incurred.
The stock trader should have an entry and exit strategy and stick with it. Traders have a variety of short-term and long-term day trading styles from which to choose. These include what is known as “scalping,” where a trader holds a position for mere minutes and seconds, and long-term day trading, where a trader holds a position for the majority of the day.
A trading plan would also cover the nature of trades to be executed – such as trend trades, counter-trend trades and ranging trades. This determines whether a trade is conducted with the price movement (trend), against the price movement (counter-trend) or between prices (ranging, which is used when the market is “sideways”).
♦ Control emotions
Whether trading stocks or currencies, on a daily or long-term basis, traders must control their emotion. This would prevent them from departing from their trading strategy and plan too soon. A neutral approach can mean the difference between selling too soon and holding on to a plummeting stock. Control of emotion facilitates a rational approach – especially when the market turns against your trade.
♦ Become a technique specialist instead of a generalist
While it is seductive to try your hand at a number of trading techniques for a while, the best day traders normally have three or fewer trading techniques that they use regularly. This is because specialization allows faster and better development of expertise and experience in selected techniques.
♦ Manage risk responsibly
While successful day daily stock traders do not eschew risk, since trades are inherently risky and uncertain, they already decide how much of their risk capital they can afford to lose on a given trade. Once they begin to lose more than the amount, they cut their losses and move on to another trade. Trying to recoup on a day trade gone bad is succumbing to emotion as well. Successful traders never lose more than a significant portion of their account on any one trade. As part of risk management, traders trade with capital that they can afford to lose – risk capital.
To be a successful daily stock trader requires similar attributes to other forms of trading. Sound risk management, mastery of trading techniques, planning and neutrality are key aspects of successful trading. These are the basics to which experts adhere; beginners would be well advised to adopt and practice these until they become second nature.