I'm still very early in my own learning, less than two months of really serious effort. I've lost several thousand dollars, part of tuition, but I've also gotten steadily better. I know exactly why I lost money today. I was only wrong a couple of times, mostly I got sloppy. You can expect to be wrong a percentage of the time, its built into life, and you can never expect not to be wrong. That isn't the goal. You can, however, learn to make the right decisions and respond correctly to the situation. The correct response in a particular situation may be to take a loss. I'm actually feeling more confident about trading futures -- the e-minis -- these days.
There are four things you need to day trade.
- Discipline
- Experience
- Strategy
- Knowledge
Knowledge
You acquire a lot of knowledge early on, and its about basic things like what the mechanics of trading are -- the role of ECN's, how to work your software, what a P&L is. In terms of the stock market itself you need to have heard of a lot of different companies and understand sectors and the companies in them. You don't need to know who the CEO of XYZ is or anything, but knowing that Akamai (AKAM) is an Internet company and that Proctor and Gamble (PG) is a food company or that Goldman Sachs (GS) is an investment bank is important so that you understand who the real solid companies are. There are a lot of ticker symbols out there that you can trade, but only a tiny percent are really suitable. Fortunately this universe is fixed in size, and although companies come and go you will find yourself in a world of familiar names after a period of time. You won't learn this unless you read real business papers like the Wall Street Journal and watch CNBC for many hours on end. This has to be interesting to you on its own or you'll never learn it. I like reading about business, to me its like sports. Its the human condition in a certain wrapper.
Experience
The experience of day trading is, like most of life, unlike anything else. Its its own world, ultimately part of our world, but its little corner. There is only one way to get experience, and that is by doing it. You can paper trade some, and should so that you can get a sense of the scope of how things move, but when there is real money on the line that's when you find out how emotional you will be. Hopefully you will have learned how to avoid risking too much -- part of knowledge -- and you will have enough time in the trenches to turn the corner. I'm in a trading room with an expert who is a teacher and mentor, and he says that it can take from 3 months to 18 months to develop the necessary skills and knowledge. I've logged hundreds of hours watching stocks intraday now and its becoming less intimidating, and I'm starting to see some patterns recur; certain kinds of action and movement and what a good decision is for those. I'm still a newbie, in diapers really, even though I've traded stocks for over 20 years. Day trading is its own world and very little of the knowledge I learned from other parts of the stock market applies.
Strategy
It would seem that its ultimately about strategy, and yet this part turns out not to be the most mysterious. Here is a simple strategy based on momentum. Find stocks that are making new highs or new lows and jump on board with them. Of course that's a broad stroke. How do you find these stocks? The software should have a screen that displays them. How do you pick good ones? Select names that have good volume and that may be part of a theme for the day. How do you know if the action is good for this strategy? Watch it to see if its in motion -- if the price is changing quickly on heavy volume. When do you get out? Watch for how it behaves at a round number, a pivot line, a fib line or if its approaching a round number of dollars like $5 or $10 in price change.
Now of course that's a lot of information and it would be impossible to start new and understand that -- what's a 'fib line'? Nonetheless, its a strategy, and its a pretty basic one. Day trading uses a playbook, certain kinds of responses to certain setups. There are not an infinite number of them, there may not be more than, what, a dozen or so? After all, a price can only go up or down. How many variations on that can there be?
Discipline
This is where the rubber meets the road. You can have everything else lined up and not show good discipline and get wiped out. Discipline gets you in and makes you stay in or get out. There is some board game out there with a simple set of rules and it states that 'takes a few minutes to learn and a lifetime to master'. That's the role of discipline in day trading, and its all about you and your mind. In that respect its like golf, its just you and the club and the ball.
When you are enter a trade you have to have rules, the first and foremost of is, when do I get out. Its said that "you have to look down before you look up" in trading, and that means that every trade you get into you need to know when you will bail if it goes against you.
If you don't decide that ahead of time when you will get out you will have no discipline about staying in the trade if the winds turn, which they do most of the time. Most of the time after I enter a trade it ticks down for a bit, because things move. You have to decide before you get in when you are going to pull the ripcord. This is much harder than it sounds, because things happen fast. Discipline also gets you out when you have a profit instead of staying when the party is over. Some trades only last a few minutes and then they are done and you don't want to stay too long or you will give back all you got. Trades move at different speeds, of course. Some boil and move $1 in 30 seconds, others take an hour to move 25 cents. The former are like a set of spinning blades and can result in large wins and losses and the latter are less scary but require more patience.
Learning discipline is to train the mind. To train the mind is to mold the self.
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