Five Things You Absolutely Need To Know To Become A Successful Day Trader

Five Things You Absolutely Need To Know To Become A Successful Day Trader

Published by lrushing
12-18-2007

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lrushing

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Join Date: Oct 2006

Posts: 35

Five Things You Absolutely Need To Know To Become A Successful Day Trader

Most people feel the lure of day trading: seeing the frenzy on the floor of the New York Stock Exchange, grabbing onto the tail of a skyrocketing stock, and earning your millions. They want to start day trading and find the answer to that famous quote from the movie Wall Street: "How many yachts can you water-ski behind?"

Unfortunately, the vast majority of these beginner traders want to see results faster than it takes to watch the movie. In fact, about 90% of beginner day traders are knocked out of the game within the first few months.

The good news is that this fact can easily be addressed. Just about all of those who crashed and burned did so because they didn't have a plan. If you take the time to develop a plan and learn how to trade, you stand a much better chance of making that top 10% of day traders who go on to successful day trading careers.

Here are five things you need to know before you start day trading:

1. Is Day Trading Right For You? - This seems like a basic question, but you should seriously evaluate your trading personality. Will risking that much money make you nervous? Can you afford to lose money in the stock market? Are you financially - and emotionally - prepared to leave your job and co-workers behind you? These and other questions must be answered before you go any further in planning your day trading career.

2. How to Control Your Emotions - What most beginner day traders don't realize is that trading psychology has a huge impact on your success - and the market likes to play with your mind! There are many different emotions that come into play, but it boils down to two main dangers: fear and greed. It is vitally important you learn how to control your emotions before you try to tackle the market.

3. How to Develop a Solid Trading Plan - If you fail to plan, you plan to fail. And yes, it really is that simple. A solid trading plan will include details like determining what type of trader you are, your trading strategies (see below), what products (stocks, e-minis, etc.) you will trade, what software you will use, even your entry points, exit points, and stop loss points. The more detailed your plan, the more likely you are to have day trading success.

4. What Kind of Trading Strategies You Will Use - There are many trading strategies that will help you succeed at day trading. As a beginner trader you will probably be best served learning one or two to start with. For example, the Bull Trap is an easy type of momentum play for beginners to learn that allows you to predict a trend reversal, and cash in by following the momentum. But there are many different trading strategies; the key is finding the right set of strategies for you.

5. How to Develop a Business Plan - You should approach day trading as a business, not a hobby. Even if you plan to trade just part time, make sure you develop a full business plan that covers all the financial basics like how much trading capital you have, what your short-term and long-term financial goals are, developing cash flow statements, etc. You should also decide how you will work: where your office will be, what time you will be in your office in the morning, what daily preparation you will need, etc.

Learning these five things won't guarantee that you will become a successful day trader. But if you start day trading before you find out these answers, you most certainly won't get too far.

__________________
Trading EveryDay
With the RIGHT Focus...
Phone: 877-861-8486
Email: leroyrushing@tradingevery day.com
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#1 (permalink)

By Chartsky on 05-18-2008, 11:10 AM

Re: Five Things You Absolutely Need To Know To Become A Successful Day Trader

Your list provides some good information for thought, but I have maybe a little different perspective.

I think most traders should NOT even attempt day trading until they can consistently make money on short-term position trading (swing trading).

Sure, the lure of all that "easy" money from day trading is very hard to deny, but day trading is the fastest form of trading. I find it counter-intuitive that traders who have not mastered (or even tried) trading daily bars want to start trying 15-minute, 5-minute, 3-minute or 1-minute bars . . . or worse, tick bars.

The principles of trading are pretty much the same regardless of time frame, but day trading requires much faster responses to quickly changing conditions, and the added difficulty of going up against the best professionals in the world who ARE experienced. They will gladly welcome newbies . . . more volume and more money for them. 90%+ of all new day traders wipe-out their accounts and that money is going somewhere.

The Following User Says Thank You to Chartsky For This Useful Post:
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#2 (permalink)

By smwinc on 05-18-2008, 06:05 PM

Re: Five Things You Absolutely Need To Know To Become A Successful Day Trader

With respect, going to have to politely disagree with basically everything you said my friend.

	Quote:	Chartsky
	Your list provides some good information for thought, but I have maybe a little different perspective. I think most traders should NOT even attempt day trading until they can consistently make money on short-term position trading (swing trading). Sure, the lure of all that "easy" money from day trading is very hard to deny, but day trading is the fastest form of trading. I find it counter-intuitive that traders who have not mastered (or even tried) trading daily bars want to start trying 15-minute, 5-minute, 3-minute or 1-minute bars . . . or worse, tick bars.

A common assumption, but I believe 100% false.

Every skill in life requires X number of attempts (opportunities to learn) before someone achieves some type of skill.

Day-trading provides the fastest 'feedback'.

If I trade 10 times a day, every day for a year, I've had more opportunities to learn than someone who trades EOD would have in 10 years.

Yes, you need capital preservation & risk management to avoid sending yourself broke in a week of day-trading. But the same rule applies to ANY form of trading / investment / financial activity in life.

	Quote:	Chartsky
	The principles of trading are pretty much the same regardless of time frame, but day trading requires much faster responses to quickly changing conditions, and the added difficulty of going up against the best professionals in the world who ARE experienced. They will gladly welcome newbies . . . more volume and more money for them. 90%+ of all new day traders wipe-out their accounts and that money is going somewhere.

Not really. The type of decisions you make intraday are completely different to trading a daily or weekly timeframe. They require different types of personalities, skill-sets.

It is also MUCH easier to teach a successfully day-trader to swing trade. It is not that easy to take a successful weekly trader and turn them into a high-frequency trader.

If someone can make decisions under pressured, time-constraint situations (intra day trading), they are likely to be able to make decisions under relaxed, time generous situations (daily / weekly trading). Clearly, this assumption does not work as well in reverse.

Let's look at 2 extremes here - two traders who know nothing about trading, never traded before. Two traders who do the same prep, and same analysis of their trades, same effort to learn, same "brain" for this example:

Trader A traded once in 2007, Long EURO. Made a stack of money. Analyses his trade. Writes in his journal. Etc.

Trader B traded Euro 100,000 times in 2007. Lost a little / Broke even. Has analysed every trading day. Has entires in journal to account for at least half of those 100,000 trades.

Who is going to do better in 2008? I'd be backing Trader B - Trader A made a guess, and probably thinks he's the next George Soros.

#3 (permalink)

By forsearch on 05-18-2008, 09:49 PM

Re: Five Things You Absolutely Need To Know To Become A Successful Day Trader

	Quote:	smwinc
	With respect, going to have to politely disagree with basically everything you said my friend. If I trade 10 times a day, every day for a year, I've had more opportunities to learn than someone who trades EOD would have in 10 years.

There are 250 or so trading days in a year. (Source: cbot.com).

10 times a day, for one year, would yield 2500 opportunities.

1 trade a day, for 10 years would yield 2500 opportunities.

Unless my assumption about your "opportunities to learn" is mistaken, that is...

-fs

#4 (permalink)

By MC on 05-18-2008, 10:22 PM

Re: Five Things You Absolutely Need To Know To Become A Successful Day Trader

	Quote:	smwinc
	With respect, going to have to politely disagree with basically everything you said my friend. A common assumption, but I believe 100% false. Every skill in life requires X number of attempts (opportunities to learn) before someone achieves some type of skill. Day-trading provides the fastest 'feedback'. If I trade 10 times a day, every day for a year, I've had more opportunities to learn than someone who trades EOD would have in 10 years. Yes, you need capital preservation & risk management to avoid sending yourself broke in a week of day-trading. But the same rule applies to ANY form of trading / investment / financial activity in life.

I feel the same, it wasn't until I started watching the eminis that it all started to sink in. This is in part because of the liquidity and fluid motion. Then also I think the rapid fire speed makes you focus more. I do think a new trader would be a total fool to trade live on futures without significant paper trading and developing their edge of course.

Great point though.

#5 (permalink)

By torero on 05-19-2008, 10:21 AM

Re: Five Things You Absolutely Need To Know To Become A Successful Day Trader

I agree, the leverage is higher (larger positions) for a short term gain requires nerves of steel because you have to decide before hand where you want to get it or out but lots lose their concentration or focus and just lose their plan where to exit and enter. Too much money is at stake in a short amount of time. I've done both and it's a whole world of difference. The pace of the moves intraday will make you sweat and sense of time is incredibly sped up. What is a few minutes seems like eternity. Try it, you'll see.

#6 (permalink)

By Chartsky on 05-20-2008, 08:35 AM

Re: Five Things You Absolutely Need To Know To Become A Successful Day Trader

	Quote:	smwinc
	With respect, going to have to politely disagree with basically everything you said my friend. A common assumption, but I believe 100% false. Every skill in life requires X number of attempts (opportunities to learn) before someone achieves some type of skill. Day-trading provides the fastest 'feedback'. If I trade 10 times a day, every day for a year, I've had more opportunities to learn than someone who trades EOD would have in 10 years.

And I'm going to politely disagree with a lot of what you said too.

There is no X number of trades that equates to becoming a successful trader. Trading is more about what's going on between the trader's ears . . . his or her psychology . . . than anything. If they can learn more slowly, on daily bars, they CAN transfer most of that experience to faster intra-day bars.

According to your analogy, the best way to teach someone to drive would be to put them in a NASCAR race rather than on a wide-open country road. I think most would crash and burn much faster in a NASCAR race than on the country road.

	Quote:	smwinc
	The type of decisions you make intraday are completely different to trading a daily or weekly timeframe. They require different types of personalities, skill-sets. It is also MUCH easier to teach a successfully day-trader to swing trade. It is not that easy to take a successful weekly trader and turn them into a high-frequency trader. If someone can make decisions under pressured, time-constraint situations (intra day trading), they are likely to be able to make decisions under relaxed, time generous situations (daily / weekly trading). Clearly, this assumption does not work as well in reverse.

I agree, but find the reality is that most newbies cannot successfully day trade. No one would argue that if you can day trade you can probably swing trade. No one would question whether NASCAR drivers can drive on country roads. The difference is in getting to where that person can day trade. Some will NEVER be able to day trade and some seem to be naturals. I'm talking about the others in between.

	Quote:	smwinc
	Let's look at 2 extremes here - two traders who know nothing about trading, never traded before. Two traders who do the same prep, and same analysis of their trades, same effort to learn, same "brain" for this example: Trader A traded once in 2007, Long EURO. Made a stack of money. Analyses his trade. Writes in his journal. Etc. Trader B traded Euro 100,000 times in 2007. Lost a little / Broke even. Has analysed every trading day. Has entires in journal to account for at least half of those 100,000 trades. Who is going to do better in 2008? I'd be backing Trader B - Trader A made a guess, and probably thinks he's the next George Soros.

Again, you're starting with someone who is a successful day trader. If you can trade for a year and basically break-even, you will probably succeed. Who wouldn't bet on a successful day trader over a 1-trade newbie? I do not think most could be thrown-in to day trading and break-even though and history showing that 90%+ blow-out their accounts seems to support this. I do think it's easier to take someone who has learned how to trade daily bars in a slower, more relaxed environment and translate their ability to shorter time frames. You think otherwise so we'll just have different opinions.

#7 (permalink)

By smwinc on 05-20-2008, 09:44 AM

Re: Five Things You Absolutely Need To Know To Become A Successful Day Trader

	Quote:	Chartsky
	And I'm going to politely disagree with a lot of what you said too.

Yes - I was just making it clear it was only my opinion, I'm not saying I'm right here. I didn't want to come across like an *******. ;-)

	Quote:	Chartsky
	There is no X number of trades that equates to becoming a successful trader. Trading is more about what's going on between the trader's ears . . . his or her psychology . . . than anything. If they can learn more slowly, on daily bars, they CAN transfer most of that experience to faster intra-day bars. According to your analogy, the best way to teach someone to drive would be to put them in a NASCAR race rather than on a wide-open country road. I think most would crash and burn much faster in a NASCAR race than on the country road.

Apologies for a slightly long post.

Let me explain the same thing differently. If you have read either of Brett Steenbarger's books, he explains it in a much more elaborate, accurate and detailed way than I did.

With what I said about: "..X number of trades that equates to becoming a successful trader."

Lets make a few really broad assumptions here to keep it simple:
1. the majority of your ability to trade comes from actual trading - not looking at charts, reading about trading, thinking about trading, etc. Real trading. You learn to swim by swimming, learn to ride a bike by bike riding, you learn to trade by trading.

2. That the core concepts of trading on a 1 minute, 5 minute, daily weekly are the same for this example.

Taking those assumptions, no matter how much "trading smarts" you have, it will take you a certain number of 'attempts' before you something clicks and you start becoming profitable. This is the "X number of attempts" I'm referring to.

I work in a prop. trading firm and we bring in intakes at least twice a year. If you sit someone down on a simulated trading environment for a week, and just tell them to "trade"; no rules, with no prior knowledge, it's amazing how much people learn. It is feedback mechanism.

Tried strategy A, didn't work. Tried strategy B, didn't work. Tried strategy C, didnt work. etc.

By the end of a week, these guys have tried THOUSANDS of different things. We just want them to trade as much as possible, trying ideas: Following size. Fading size. Fading momentum. Going with momentum. Trend lines, fibs, elliot wave, square root of the moon's radius / 342.1. etc. They are doing what people do as kids when they try and learn to ride a bike. Or learn to swim.

The main PROBLEM with starting this same trader out in trading on a weekly timeframe, is he is lacking the feedback. He is only allowed to ride the bike once a week. Or try to swim once a week.

	Quote:	Chartsky
	If they can learn more slowly, on daily bars, they CAN transfer most of that experience to faster intra-day bars.

Transfer what experience though? After 2 years you might have what, 100 trades? 200 trades? Across completely unrelated market environments? Maybe you even made money, your sample is struggling to be statistically significant?

There is a lot of variables here - does the trader want to trade for a living, or are they managing their savings instead, or is this just a hobby they would like to make a little money out of.

	Quote:	Chartsky
	According to your analogy, the best way to teach someone to drive would be to put them in a NASCAR race rather than on a wide-open country road. I think most would crash and burn much faster in a NASCAR race than on the country road.

No, I'm saying to drive NASCAR in a simulated environment. Of course i wouldn't suggest jumping into live day-trading right off the bat. No one would suggest that. That is what simulated trading is for.

Actually, I'd prefer you to drive cars FASTER than NASCAR, so that when you eventually master that, NASCAR feels like a piece of cake, but that's another story.. :-)

The blunt reality is that with trading, there is NO "little league", or C grade basketball to practice in. ALL trading is the NASCAR. There is no "warm up markets" unfortunately.

To add to the fact most people don't want to do the work involved, they come in under capitalised.

The majority of you reasons (and others) against day-trading is to do with risk-management, and losing capital too quickly.

Honestly - that has nothing to do with the market. We all have to trade differently based on our account size and current P&L, despite the whole concept of "don't trade your P&L", I don't think the real world works like that. However, there comes a point when you can't blame the market, and need to accept the reality that your enforcing too many restrictions on your trading.

Trading is not a game, or a hobby. We are trading assets that control hundreds of thousands, if not millions of dollars, worth of equity. It is far from being on the "country road". In the same way that casino's change your cash into chips to remove the reality of "money" away, markets remove the reality of how much money is really moving around.

I'm assuming from your view that you trade longer-term? Do you day trade?

I'm interested as I can only speak from my own experiences here. I've seen plenty of people who only trade longer-term. Every time I go out to dinner, I'll meet someone who thinks they're a trader, or that it's easy. I wonder how many thousands of people thought they were traders in the tech boom, before finding out the harsh reality they really had no idea what they were doing.

When you trade longer term, "reality" will take longer to realise. You can get lucky for YEARS depending on your trading style. This creates false assumptions, i.e. like your future performance. If someone is trading 50+ a day, it's going to be VERY hard to "fluke" a year's performance.

I'm focusing my views on the assumption here that someone wants to trade for a living, or for a decent income. This is not about making pocket money, or playing with your savings randomly picking stocks Cramer shouts out on CNBC.

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#8 (permalink)

By Chartsky on 05-20-2008, 04:24 PM

Re: Five Things You Absolutely Need To Know To Become A Successful Day Trader