Day Trade Your Way to a Lifestyle.
This Fantastic article was originally posted by “Traph” who has contributed many articles which can be found on www.topstocks.com.au . I highly recommend Topstocks to you as Topstocks as the first place to go when you are researching forex or shares. You can join for free by clicking here.
This post may not suit everyone, however I feel that everyone may benefit in one way or another.
This post should not be taken as advice, but I am sure many will extract some valuable information, while others may learn something new.
Have you the right frame of mind for what it takes to be:
1. Under constant pressure?
2. Making snap decisions?
3. Willing to take ownership of a loss?
4. Willing to try again after a failure?
5. Dedicating all your efforts to succeed?
6. Are You Willing To Not Give UP?
If you answered “NO” to any of the questions above, then you could continue to read on and extract what ever value you may find in this post, but daytrading is not for you.
However if the above fits your needs, then read on, take plenty of notes as I explain the shear volatility and excitement you are about to experience.
In order to day trade you will need a “LIVE” platform. I will not get into specific details as many day traders have their own specific setup as I have mine.
If you use a delayed quote system and no full market depth, then please do not attempt to day trade, for failures are easier to accomplish using the delayed setup.
1. You will need the live platform with a charting capability. The chart needs to be an intraday chart as you attempt to execute each trade on the same day. This means your buy and sell orders need to be finalised on the same day (Hence my term “No Prisoners”).
2. De pendant upon your needs, obviously funds must be available to execute a trade and that will depend on what spare cash you may have available. I use Commsec which does not require cash funds as they accept a portfolio as collateral. The larger the portfolio the more is available for trading (I do not recommend this option for new day traders!).
What do you aim to achieve on a daily basis? You must decide this yourself, as no-one else would know your requirements. An easy way to gauge this is by looking at your budget and your earning capacity and requirements.
The more dollars you aim to realise daily the more difficult it will become. Attempting to make $200 per day is a lot more achievable that attempting $2000 per day, although both can at times take up the same amount of dedication regardless.
I speak of dedication because day trading becomes your job. It is very different from working for a company or any other job for that matter, because you are the Boss! The Manager, The Accountant and The Secretary. So as you can see you will play many roles to achieve your goal, and you must keep that in the back of your mind as you are the only responsible party in this, no-one else but you!
The best way to start is to simply watch your platform with your stocks. Add some other stocks that seem to be volatile and watch what happens. You will be surprised as to what you are able to pick in the Intraday chart once it’s setup (I’ll go into that a little later). You will be able to pick up on patterns, cycles, momentum and volatility.
Daytrading requires that you choose your stocks wisely. The stock needs to be:
2. In demand.
3. Affordable to you.
By watching the trading platform for about 1 to 2 weeks, you would pickup on the patterns described above and you will be able to filter which stocks to daytrade and which are not suitable.
Do’s and Dont’s
When day trading, you need to make each and every trade execution count. So having a run of bad executions soon evaporates your capital. There are certain Rules that need to be followed pre and post trading the market volatility. There is a lot of stress involved, but there is a lot of satisfaction after a successful trade execution.
These Rules are very important to follow and should be used as guidelines in order to be successful at least 80% of the time. Why 80% of the time?
Because everyone makes mistakes, however these mistakes should not count towards failures but more towards learning why the mistake occured and how to avoid it next time around.
The basic Rules are:
1. No matter how tempting things appear, never buy on OPEN.
2. No matter how good the news is, never buy straight after pre-open.
3. Never place a bid to buy and be last in the queue! someone has to be last, I prefer it is not me!
4. 70% of the time, the best buying opportunities are between 15 minutes after market opens for a period of approximately 45 minutes.
5. 70% of the time the best selling opportunities are after the first hour of market opening.
6. Never hesitate to trigger your trade! you induce fear and indecision.
7. Have both buy and sell order windows open at the same time, ready for both to be executed within seconds.
8. Never discard VWAP! (Volume Weighted Average Price). This is your ultimate guide on the day, amongst other indicators.
9. Look at the closing price and volumes of the stock in the past 5 trading days, can be a great guide of what to expect.
10. Never execute anymore than 1 trade at a time! that becomes very dangerous. After executing the first trade take a break and unwind, listen to music, have a drink or go for a walk.
Daytrading does not require knowledge of fundamentals. The purpose of daytrading is to realise quick profits. Only investors and swing traders (holding a stock for 1 to 2 weeks) are concerned with fundamentals. The whole aim is to enter a trade and exit as quickly as possible, even if the stock is still rising. You set the profits required and according to your execution plan, you execute. You do not alter direction from that plan.
Many daytraders fall in a trap of wanting more and end up losing more as a result of a plan gone wrong, why? because the stock was trending further upwards only to spike down very quickly in a rush of panic.
Keep in mind that you are not alone daytrading! there are hundreds if not thousand other daytraders attempting the same with a different outlook however, and many will clash with your plan, so you had better be first and disciplined enough to carry through with your initial plan of attack.
Daytraders will differ in their chart setup. The basics of the chart setup is to use a candle chart, MACD Histogram, RSI, Parabolic SAR, Bollinger Bands, VWAP, 2xSMA with differing time periods being short and long and volume. This is as simple as it gets for me.
Many other daytraders will add other indicators but I found the above to do the job quite well with less clutter.
Understanding the relationship of these indicators as trigger patterns is the key to execution and timing. I always prefer to keep all indicators in use at their default settings.
1. Candles: The candles display in different colours, being red and green. A red candle indicates a declining price while a green candle indicates a rising price. The timeframe on the chart is 5 minutes broken into 1 minute slots. It is important to keep the time slot as close as possible as this is used for gauging momentum.
2. MACD Histogram: The MACD Histogram is used to gauge the change of a trend. Above the zero line is a bullish trend while below the zero line is a bearish trend. Staying flat indicates no change in the share price and is more accurate for daytrading than simply using the MACD.
3. RSI: Is an oscillator used to guage an overbought or oversold signal. It’s ranging scale is a good intraday indicator. Needs to be watched if below 30 the stock is oversold and above 70 it is overbought or overheating.
4. Parabolic SAR: This is an interesting indicator. It is very useful in identifying a continued trend rather than a changing trend. One thing I found with it is that you need to look closely at it’s signal being plotted and it’s direction and attitude. In a down trend when the signal is being plotted in a straight line it is weak and may change, however when plotted in a curved shaped line it is strong. The same occurs when the signal line is uptrending.
5. Bollinger Bands: I have discussed this on it’s own in the newbie forum.
6. VWAP: I was unable to plot a VWAP on the chart previously however the charting package after an upgrade has this feature included now as an indicator. Plottong the VWAP is a great insight into the stock longer term trend almost the full trading day. Trending upwards is a good sign that the stock may finish on a high, and vice versa when trending lower.
7. 2 x SMA: I use 2 differeing SMA’s with a 6 and 12 period. Some use differing period being longer however as we need to guage the volatility I use the shorter one.
8. Volume: This is one of the most crucial indicators used during the day. The volume is used to guage demand. Rising volume per time slot is a good indicator of demand, lower volume is a good indicator of over supply.
This post is a brief insight into the basics of daytrading. It is not the full story! Unfortunately I would not be able to complete this story as this post will turn into a book with full details.
However if some of you are interested, simply reading this and understanding the basic needs and steps, maybe then you would be encouraged to do your own research into how you too can daytrade and hopefully become independant.