Keep Your Eye On The Ball - Part II:
D - Define Your Risk & Money Management Method
Adequate Capitalization
Diversification
Margin/Bet Size
Stop Losses
Averaging Down
Holding Winners Overnight
Trade Liquid Markets Only
Know When Not To Trade
E - Evaluate Your Execution System
Broker
Data
Software
Real Time News Sources
Remote Execution System Failure - Contingency Plan
More On Execution Systems
F - Further Help On Setting Up A Trading Plan
_____________________________________________________________
D - Define Your Risk & Money Management Method
Adequate Capitalization:
For the experienced trader an adequate level of starting capital is in the 75,000 - 150,000 dollar range. The inexperienced trader will most likely start with less which will limit his available opportunities within the market.
Diversification:
My belief is that if you are Momentum Day Trading you should not hold more than one or two positions at the same time. Trading more than or 1 or 2 positions will make it difficult to spot the small nuances in the tape that signal exit points. Although this increases theoretical risk I feel that using other ways to reduce risk are more effective for the Day Trader. In addition trading concentrated positions can result in MUCH higher rates of returns.
Technical Trading offers you the ability to diversify because of it's rigid entry and exit signals.
Margin/Bet Size:
Be careful not to overextend yourself by betting too much on one trade, or using margin to increase your leverage more than you usually would. A good strategy is to determine the bet size you are comfortable with and NEVER increase it. If you feel less confident about a trade REDUCE the bet size until you feel more confident about your trades. The less margin you use the better. Trading on margin is a double edge sword which can cut deeply if a trade runs away from you.
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.
When Technical Trading Keep stop targets to a maximum of 5% of the trade capital. Some prefer tighter stops of 1% or 2%.
When Momentum Day Trading I will kick out any stock when it fails to do what I think it should( in other words - because the momentum has stopped) The trick is to limit losses to 1/8 or at the most 1/2. Larger losses mean that you are not kicking your losers out soon enough or your executions skills need work.
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 Day Traders hold overnight if the trade is closing strongly in their favor. What 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? Are you willing to assume the risk of a gap down on a concentrated position?
Trade Liquid Markets Only:
Consider trading only markets such as the NASDAQ or NYSE where you can find stocks that have volume of 100,000 to 25 million shares trading daily. Liquidity means you can get in and out easily. The more liquidity also means the less likely the security is being manipulated by insiders,brokers, or promoters.
Know When Not To Trade:
Often times the market is flat, or you do not have the proper state of mind to trade. If this is the case take the day off and relax! The market will be there tomorrow.
Days to Trade, Beware and Avoid:
adtrading.com
---------------------------------------------------------------------
E - Evaluate Your Execution System (software/news/research/quotes/broker)
Ultimately there is no perfect execution system for everyone. Because each person has a different approach and trading method what is perfect for me, may be terrible for you. Generally speaking, here are some guidelines:
Broker:
Make sure know what you want from your broker. Fast executions, immediate confirmations, reliable data and software, great client service, competitive fees, good website, excellent reporting. Make sure the broker is reputable and has a good capital base behind it.
Software:
Make sure you know your needs before looking at software. Currently Real Tick III dominates the landscape and is very flexible. Also CyberTrader and Tradecast are as flexible yet not as widely used. A step down from this is a browser based systems offered by Castle Online(a.k.a Market Link). A step below this are the other browser based systems such as those offered by Datek, Etrade, Dreyfus, Discover, etc. Ask around the online trading rooms for opinions on what systems are good, bad and why.
Data:
Will most likely come packaged with the software. If not consider S&P Comstock or PC Quote or DBC.
Real Time News Sources:
Reuters, Dow Jones, Bridge, and Bloomberg set the standard for news sources. All are excellent.
Remote Execution System System Failure - Contingency Plan:
1)Know how to contact your broker in case of problems. Have several backup numbers in case the lines are busy.
2)Know what your broker's procedures are concerning phone in orders/questions.
3)Discuss your broker's liability with regards to missed trades/opportunites. What will he take responsibilty for and under what conditions.
4)Be sure to follow through on orders regardless of execution problems. Hesitation to follow through on trades could cause many headaches including missed opportunities and larger losses. You may not take a loss at the time but a change in your strategy may lead to larger losses down the road if you hold the trade longer because of execution problems.
5) Be sure you now how to reboot your system as quickly as possible. Always find out what the problem is before you waste valuable time trying to reboot. Sometimes the system may be down for lengthy periods of time.
More On Execution Systems:
From The Trading Desk
Subject 15612
---------------------------------------------------------------------
F - Further Help On Setting Up A Trading Plan
For background information on "Keep Your Eye On The Ball" including books, magazines, articles, software vendors, brokers, quote vendors, news sites, research sites, and various educational sources of information useful to Day Traders check out:
The Final Frontier Links
exchange2000.com
Highly Recommended Reading:
Applied Derivative Trading
adtrading.com
ADT Beginners Guide
adtrading.com
ADT - Trading Techniques
Message 2988701 |
