Keep Your Eye On The Ball:(updated)
They key to being a successful trader is to focus on your TRADING PLAN - day in and day out. What follows are some ideas I have on components of a successful TRADING PLAN. It will be updated whenever I come up with any new ideas.
Contents:
A - Attain The Proper Psychology
B - Begin With Goals
C - Constructing A Trading System
D - Define Your Risk & Money Management System
E - Evaluate Your Execution System
F - Further Help On Setting Up A Trading Plan
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A - Attain The Proper Psychology (trader's state of mind)
Components Of Intuitive Day Trading:
1) Desire
2) Faith
3) Visualization
4) Specialized Knowledge
5) Organized Planning
6) Decision
7) Persistance
8) Network
9) Sixth Sense
Learning How To Win, Learning How To Lose:
How to win?.....DON'T GET EXCITED about a big win. Just take it as a normal part of trading. Always close a winning trade and move on.As a daytrader you can lose as quickly as you win.
How to lose?..DON'T GET DEPRESSED about a big lose. Just take it as a normal part of trading. Always use stop loss orders. Always close a losing trade and move on. As a daytrader you can win as quickly as you lose.
You must learn to take all your trades in stride and focus on you trading plan. Getting excited or depressed just clouds your judgement and prevents you from take the right action at the right time.
This is the biggest difference between successful traders and losers!
B - Begin With Goals (short/mid/long term)
What Motivates The Successful Day Trader:
1) Money
2) Freedom
3) The desire to maintain control of his/her own mind towards external events, and observe/react correctly to the short term emotional actions of others in the market.
Once you have deterimined what motives you can draw up a written goals to review and visualize daily. Visualization is they key to developing the proper mindset needed to react correctly throughout the trading day.
C - Constructing A Trading System
My thinking is very much in sync with Ken Wolff's on Trading Systems. Here is a summary of his Trading System:
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Intraday Indicators I Use To Time my Trades:
Live Trading Indicators - Previous Trades:
For me there is no better indicator for trading than previous trades. Trades literally define the leading edge of the trend.
By watching a scrolling summary of trades I am able to determine
whether demand is slowing down or picking up for the stock.
The volume of each trade helps me to determine if there are any serious buyers in the market and how badly they want to buy the stock.
You can get a real feel for the market of a stock by watching the velocity of the trades. As momentum gains the speed of trades intensifies. Whether or not the price can break through on this higher volume is a key in determining support or resistance points.
Knowing these support and resistance levels is a key to knowing when to enter or exit trades.
Often traders or marketmakers can fool you by jocking around on the bid/ask, but previous trades denote the true sentiment of the market.
Live Trading Indicators - Bid/Ask:
After Previous Trades watching the bid/ask is the next best thing.
There are several components of the bid/ask:
price - the price offered at the bid, and the price offered at the ask
spread - the difference in price between the bid and ask
size - the number of shares at the bid, and the number shares at the ask
For NASDAQ stocks it is possible to get a Level 2 screen of the bid and ask for indivdual stocks. This gives you additional information such as the size and price of bids and offers behind the current best
bid/ask.
For example if the best current bid for Intel was 1000 shares bid @ $100...Level 2 would show bids below this, such as 1000 shares bid @ 99 15/16.
Additionally Level 2 will give you what brokerage house is bidding/asking, how many shares each is bidding/asking for, at each price differential.
Bid/Ask is a good trading indicator of the strength of the demand/supply because you can see new orders for stock being added or deleted from the market. This information can help you to determine whether prices are likely to move. For example if the size of stock bid is much higher than the size of stock offerred it is likely that prices will trend higher. This is not always the case though and that is why previous trades tend to be a better indicator of trends.
The spread is a reasonable trading indicator as well, but it is much better in non-liquid stocks. In liquid markets stocks tend to maintain tight spreads. In non-liquid markets a wide spread can mean that a price movement is eminent. The tendancy of traders to not tighten the
spread means that the market must change the bid/ask up or down to attract more traders to the market.
Once again previous trades tend to be a better indicator than the spread because of opprtunity for traders to manipulate the spread, especially in non-liquid stocks. Unfortunately in non-liquid stocks there may not be enough previous trading to get a good feel for the trend...and that is one big reason why I rarely trade non-liquid stocks.
Live Trading Indicators - Day High/Day Low:
Keeping an eye on the daily price range of a stock gives me perspective of where the stock is trading with relation to it's longer term (such as hourly, daily of weekly) trends.
Knowing when a stock is approaching or breaking through a new day high/low is critical to helping me visualize that daily range.
Paying particular attention to trades as they happen as the stock is approaching a new daily high/low gives me a good insight as to the momentum of the market and it's willingness to establish new ground.
If a stock trades around new daily high/lows early in the day it helps me throughout the day in establishing Entry and Exit points for that stock.
Live Trading Indicators - Breaking News:
Be it company, industry,sector or market news, you must be aware of breaking news which will effect the stocks your watching.
Often times I am unable to receive news as quickly has the street, which is why I am always prepared to get in or out of stocks if the market moves for/against me.
My motto is ...pull the trigger first - ask what the news is later!
This does not apply IF you are playing Intraday News Plays. If so you MUST read and evaluate the news AND the company BEFORE you take a position. I rely heavily on #DAYTRADERS chatroom to provide me with Intraday News Plays. Here are some tips for using #DAYTRADERS Chatroom:
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Live Trading Indicators - Time:
The time between trades, as well as the time spent at a particular price level tends to indicate resistance/support levels.
For example - Often when I am watching a stock in an uptrend the pace of trading slows down at a particular level. If there is an increase in the size of trades during this time I will take this as an indicator that resistance has been met.
Often this will mean that a large order has been filled and is being
crossed to an institution before the market makers pullback off their bids.
I see the same thing happen on downtrends, but in this case the marketmakers are buying from the institution.
Live Trading Indicators -Trade Size:
As I referred to in my last post, the size of previous trades can indicate alot about what is happening with behavior of a stock.
for example - While watching a stock trade in a tight range a series of trades of large size will indicate a struggle that the marketmakers are having is about to be won by one side, and that the beginning of a breakout is near.
Trading Day Procedures:
Before the Open
1) Review your Trading Plan to get into the proper state of mind for trading.
2) Review overnight markets and news to get a feel for the overall market sentiment. Knowing the sentiment of the overal market will help you to determine how aggressive or defensive you will be with your trading.
During The Day:
Follow your Trading System
After The Close:
1) Review your trades.What did you do right or wrong? what can you you learn from each trade?
2) Scan/screen news/charts for potential candidates for tomorrow's watchlist.
D - Define Your Risk & Money Management System
Stop Losses:
You MUST keep your stops! There is no faster way to go broke than to hold on to a trade after it has violated your stop loss target.
Keep stop tragets to a maximum of 5% of the trade capital. Some prefer tighter stops of 1% or 2%
I will usually kick out any stock when it fails to do what I think it should( in other words - the reason I bought it)
Averaging Down:
You MUST NOT average down! This only increases the size of the loss you will take from not holding your stop target.
Holding Winners Overnight:
Often many daytraders tell me they do not hold overnight unless the trade is closing strongly in their favor.
What happens if the market or sector the stock is trading in, gaps dramatically in the opposite direction of your trade the next day at the opening?
Will the fact that the trade closed strongly prevent it from moving in sympathy with the market or sector?
Are you willing to assume that risk on a concentrated position?
E - Evaluate Your Execution System (software/news/research/quotes/broker)
For information on software, news providers,quote providers, brokers for Day Trading follow this link:
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F - Further Help On Setting Up A Trading Plan
For magazines, articles, and various helpful sources of information useful to Day Traders follow this link:
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