DAY TRADER · (day trad·er), noun - A person who's goal
is to make his or her profits from a security in the shortest
amount of time [preferably during a single day].
Following are a number of "Trading Strategies" which we keep in mind, and suggest you keep in mind
while day trading. We refer to these as strategies, because much like war, you are pitting your wits
against every other person in the market. Every dollar you make is on the back of someone else's
losses. Never forget that and you'll be a much better trader in the long run.
Before you read this page, take about $10,000 in crisp, brand new one hundred dollars bills out into
the back yard and pour lighter fluid all over them and then strike a match. Don't burn your money just
yet, but stand there and always remember that at any given time, when you are day trading for a living,
you are risking probably that much money or more and it may be in as much risk. Our analogy is fairly
accurate and if that bothers you, then perhaps you might consider another line of work, because I
don't know any GOOD day traders that haven't seen at least $10,000 go up in a puff of smoke during
market hours and their learning process (and you thought college was expensive!).
So put away the match and let us help you save a few thousand dollars on your day trader education.
In the following text we will try to impart some of the knowledge we have acquired while day trading for
a living:
· TRADING STRATEGIES ·
PATIENCE - If there is one thing you must learn, it's patience. Good things come to those who wait,
be it low buy prices or high sell prices. Sometimes if you had only waited, you could have sold higher
or bought lower. Have patience, it's without a doubt one of the golden keys to making money in the
stock market.
REVERSE PSYCHOLOGY - If patience if the golden key to trading, then the silver key is doing
things opposite from the rest of the market. You want to buy when the average investor is selling and
driving the price down. And when wonderful news is driving a stocks price higher, you want to sell
your shares at the over inflated price. Buying when stocks are falling and selling when they are
moving into higher ground is one of the hardest things to learn [and do] when you first start trading.
We don't have the luxury of holding our stocks for years to help iron out the little highs and lows. We
live off the little highs and lows. Buy when there is blood in the streets!
EMOTIONS - The stock market is very good at playing on your emotions. In order to be a good
trader, you must look at the market in a cold, hard way. When the masses are selling in a panic, you
must stand fast or step up and buy. Remember that the market is made up of emotional sheep buying
and selling in waves - you must be the cold, cunning and calculating wolf looking over the heard for
your kill. Don't panic sell and don't buy on hysteria.
BID/ASK - If you aren't aware that stocks are sold to you at one price and bought back at a slightly
lower price, the difference being the spread, then you may be in for a very big surprise when you go to
make your first trade! Trade on stocks with small relative spreads, and spreads that are well
controlled (such as on the NYSE board).
MARKET ORDERS - Don't use them unless you have to, and DON'T EVER place a market order for
a stock at the opening of the market, or when a stock is making new ground fast (such as during a
positive mention on CNBC). Putting in a market order in the first 10 minutes of the market is a sure
way of paying the highest possible price for your stock, because as all the built up orders from the
previous day go through, it lifts the stock prices for a few minutes. You can be pretty sure that
you order will go off at the high of the day this way (but keep in mind it's sometimes handy to sell
during this time).
STOP LOSSES - These are almost as bad as market orders. Stop losses are a sure way of selling at
a loss. We only recommend using them when you are "in the money" and would normally sell your
stock, but want to retain a slight possibility that it might continue to go higher. Stops can also be used
to sell your stock a little quicker in volatile markets, as stops seem to taken a little more seriously than
market and limit orders when bid prices are being changed rapidly.
BUYING LOW - Sometimes the best way to buy low is to put in a limit order for a stock at "a price
you'd love to own the stock at". Let's assume for a moment that the stock you want is trading at 20
dollars, try putting in an order at 18 1/2 and wait it out, what do you have to loose? You never know
when you might hit the low for the day that way. It's far better than putting your limit order at 19 7/8,
only to find it crashed past that, filled your order and continued down to 18 3/8. You'd be surprised
what an effective way this can be to both buy and sell. When you get your "dream" price, it's a great
feeling.
SELLING - Selling is actually harder than buying in many ways. If you are trading a stock, then decide
what price you want to sell your stock at as soon as you buy it, so when that price does come along,
you'll be ready to move. Using a GTC order (good till cancel) is also a good way to sell stocks once
you own them, since many times a stock will move up for just seconds - not even enough time to get
to the phone, let alone place your order. But if it's "on the books" when the stock makes a quick
run up, you'll be right there selling it. A good way to calculate your sale price is based on how much
you'd like to make for the day. $500, $1000, $5000, etc. Then calculate back the price you need to
sell at and stick to it.
FREE LUNCH - If there is a free lunch in day trading, it's picking stocks that are making new
[medium trend] highs to trade with. That way if you do get in at the wrong point, there's a much better
chance that your high buy will turn into the next low buy as the stock moves higher in its overall trend.
This is one of the only safety nets you have in day trading, when combined with patience and some
extra cash reserves.
IF YOU ARE WRONG - then you are wrong. Don't try to justify a bad trade by convincing yourself it
will turn into a good trade. If you buy on the high side, then sell at break even and buy back in on the
low side. Talking yourself into believing that your mistakes are actually wise moves in disguise is very
costly. Be professional enough to spot your mistakes and move on - think of it as day trader
insurance.
PROFITS AREN'T AS IMPORTANT - as your capital. If you miss out on some profits, that's okay,
you can always find another stock to buy. However, if you lose a big chunk of your trading money then
the game is over. Protecting your trading capital is your number one mission, followed, of course by
increasing it.
DON'T GET GREEDY - Greed and fear drive the markets and for the most part drive the average
investor to making mistakes. Sell with good profits, but don't get too greedy. A savvy trader once said,
"Pigs get fat, hogs get slaughtered".
BIG SWINGS - Big moves up are sometimes followed by big moves down and visa versa. Sell on
abnormally large moves to the upside and buy on abnormally moves to the down side. They are
generally out of character of the stock and can many times be followed by a "snap back" on the stock.
Knowing your stock's trading habits can be very helpful.
HOT STOCKS - Stocks that are hot move great, but nothing lasts for ever. If you buy a stock for a
big, quick gain and find that the stock has "lost its heat", don't allow your money to be dead (unless
you are looking for an investment). Sell and move on, don't justify your mistakes - it tends to be a
costly justification process in the long run. Others in the stock for the hot ride will start to bail out
when as the stock cools off and looks like it's not capable of making "hot moves".
JUSTIFICATION IS COSTLY - Don't hold a losing stock to justify your original purchase. If you make
an incorrect buy or end up with a stock that is falling when you thought it would climb, handle those
mistakes quickly - do not be tolerant of stocks that are costing you time and money - get rid of them!
SUDDEN MOVES UP - Be very careful buying stocks that have just made sudden moves up. Many
times they are following very closely with sudden profit taking.
TIME TO BUY - One of the best times to buy is when a stock is going down on low volume (with no
news) as compared to recent increases on higher volume. This suggests that the selling is lighter and
that the holders of the stock that are going to sell have finished selling and the rest are holding. The
sellers of the stocks then may come back into the market when they see the price stabilize. It's also
not a bad idea to sell on high volume on the way up, as this usually creates abnormally high prices
that cannot be maintained very long.
SIDELINES - Remember, you can't take advantage of market dips if you are already in the market. It's
better to be out of the market more for day trading than in the market. This will allow you to get in and
out with profits fast and be on the sidelines should dips occur. Try to be out of the market more with
your trades and in the market more with you investments (as long as they are good ones).
DAILY VOLUME - Do not day trade in thinly traded markets, or on stocks that have very low volume.
You may find you can't get out of the market as timely as you think.
IPO - More IPO's trade down from their initial offering than go up. Buying IPO on their initial (or close
to their) offerings is very risky. Watch them and try to buy them when they trade below their original
slated offering prices (not the price they come to market at). When the IPO is good and gets hit with
heavy profit taking, it can be a great buy and return to normal levels quickly. |
