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Tips for Day Trading Stock

by Carmelo J. Montalbano

Overview

Day-trading is not the dramatic, helter-skelter activity described on television. Day-trading success begins well before the first trade is made by implementing a money management plan, an entry and exit strategy, and a risk aversion plan. Few day-traders are consistently profitable. To be successful takes determination and discipline.

Trade the Trend Until It Bends
Planning for the Trade

Day-trading begins by having money to trade and having some experience in the markets. Traders should know rudimentary terms and be familiar with options, stocks, futures markets and currency markets and how they affect one another. Traders should know how day-trading requires quick turnarounds to buying and selling. Thus, traders must use technical trading techniques rather than fundamental analysis. Traders must have enough money for day-trading. Risking enough to make a living still requires the trader to accept the fact that profits are not smooth and consistent. Profits come in spurts with extended periods of losses in between.

Define Your Strategy and Needs

Every strategy the day-trader employs should be tested under bull, bear and neutral markets with a variety of stocks. There are excellent trading platforms available for doing so (see Resources). Day-traders must know how much to risk per trade so that a series of losses does not end their trading career. This is the biggest mistake of most traders. Traders must have discipline to cut their losses when stop limits have been reached. Traders must have two online brokers to minimize commissions and to use one broker if the other is having communication problems. Always use brokers that allow telephone trading in case your computer goes down. Trade with a pattern that minimizes risk by buying in different market sectors. Be certain to close all trades with "market on close" orders that must be entered 10 minutes before the end of trading.
Trade With a Plan

Know that the cost of commissions and the transaction spread between the bid and asked prices necessarily requires day-traders to be right a high percentage of the time. Compare your historical trading to your expected return by measuring profit per trade, profit per winning trade, loss per losing trade, consecutive winning and losing trades, and the average win-to-average-loss-per-trade ratio. Use these statistics to judge how to improve your trading. Review the difference between the greatest gain per trade to the actual gain per trade. This is useful as a measure of the effectiveness of your exit strategy. Review your use of limit losses or stop losses to control the total amount of loss you will absorb per trade. Have the discipline to honor those losses so small losses do not become large losses. No loss per trade should exceed 8 percent of the amount invested in a trade. Avoid rumors, websites with hot stock tips, bogus information and weak trading strategies.