If you are a new trader, I want you to sit back, take a deep breath and read these words objectively. Think about where you have come from, where you are going, and how you plan to get there? Please take a moment before starting in here, and give these questions some thought.
Now, with that said, lets get started:
You have read the magazines, you have followed the big online traders, and you have just opened your first online brokerage account. After all, you have been quite successful over the past three weeks in your paper trading account. You are ready to enter the fast paced markets as a day trader. But not so fast. You must walk before you run. Just as every successful business starts with a plan, so too must your day trading.
Let us first start with the definition of a day trader. In the truest sense of the word, a day trader is one that seeks to capitalize on short term price fluctuations within the financial markets by executing multiple intraday trades, all of which must be closed by the end of the trading day.
Most online traders that you come across will be "position" traders, or those who still wish to capitalize on short term price fluctuations, but over periods of time ranging from a few seconds to a few days, to many weeks. The price action of the issue will determine whether the position is "cut", or allowed to run.
With that brief, and simplistic, definition out of the way, let us turn our attention to paper trading. Paper trading is the method by which many would-be traders hone their trading skills in preparation for the real thing. But let me make one thing perfectly clear, although paper trading is great for learning the price fluctuations of stock, it will, in no way, prepare you for the emotions that you will feel when "real" paper is on the line. The psychological and emotional stability of you, as a trader, will largely determine your ultimate success or failure, even before your first trade.
Next, let’s talk about a script for success. There isn’t one! No one skill, tactic, strategy, discipline, or method, will guarantee success or failure as a trader. However, a dynamic approach to trading will certainly increase your odds of being successful. The stock markets are an unfeeling entity, always changing, always evolving. And although you may feel like the markets react to, solely, your trading activity, I can assure you that they do not. The best strategy for becoming a successful trader, is to become very good at what works for you. There are numerous, different, variables that affect the way we all trade. These variables make no two traders exactly alike. Just some of these variables are: motivation, cash flow, cash reserve, emotional strength (i.e. iron stomach), tolerance for risk, age, time, work ethic, personality, intelligence, and goals. These are just a few of the endless list of variables. What mix are you?
Let me give you another tip: No amount of money or technology will guarantee success as a trader. Obviously, as you are reading this, you have an internet connection, a PC and, most likely, an online brokerage account. But do you have a high bandwidth connection to the Internet, two monitors for simultaneous graphing and quoting, and a Level II provider for in depth stacking of orders for your favorite issue? Do you need it? No! Will it help you? Only you can determine that. I know many good traders that use only their market knowledge, good work ethic, and a decent connection that do very well in today’s markets. I have also run across many that have every tool imaginable that have yet to make a dime in trading. I strongly suggest that you learn the ropes first before making any significant investment in any of the advanced tools or utilities. I also will go on record by saying that Level II quoting, which allows you to see who is on the bid/ask, and the resistance/support levels of individual issues, is over rated for position trading. If you plan on scalp trading, taking advantage of "teenies" (1/16), or 1/8ths, you will get no argument from me that Level II quoting is a significant advantage.
I could quote one hundred different disciplines that will help to make you a better trader. For the sake of time and to save my fingers, let me focus on a few that are absolute musts if you are to be successful. Before going any further, answer this question – What are three most important disciplines of day trading? How many of you said "Capital Appreciation" or "Making Money" as at least one of the three? If you did, I contend that you are completely wrong.
1) Capital Preservation is more important than Capital Appreciation – Basically stated: Live to trade another day. Speak to any trader that makes a living through his/her trading, and they will tell you that successful trading is more about hitting many singles rather than home runs. Any gain is taken quickly and not allowed to turn into a "wash" or a loss. Losses are taken quickly and without fail. Any trader that cannot sell a losing position, for whatever reason, is doomed to fail. This is the reason why a reported nine of ten traders lose money. You can make no money on a majority of your trades and still be a very successful trader.
2) Keep greed in check – We all like to make the "big kill". But chasing the three bagger, ten bagger, or more, will only empty your account in a hurry. To illustrate this point, I turn to a quote from the movie "Wall Street" where the young and aggressive Budd Fox asks Gordon Gekko, "How much is enough, Gordon?" Ask yourself this question often and keep yourself in the black. Don’t be afraid to take a gain, regardless of how small it may be. Don’t be afraid to use what I call ascending stops. This is a tactic where, if a stock runs beyond my goal, I step up my stop to lock in a gain while still allowing the issue some space to continue its run. As the issue continues higher, I continue to raise my stop. If I get stopped out, so be it. Either move on, or watch for a reentry point.
3) Goal based trading – Every trader must have a goal to guide them in their daily or weekly activities. Without a goal, you are free to break discipline and are subjecting yourself to emotional failure. Realistic and achievable goals are an absolute must if you are to be successful, you must be able to measure your results.
Let me add two "bonus" disciplines:
4) Have fun – And I am very serious when it comes to this discipline – You know better than anyone else what is fun for you, and what is not. If it is not fun, the motivation to continue doing it will not be there. I have a saying that I live by: "You will do best at what you enjoy most". Allow trading to be fun. Trade within your means, and not beyond. You know what your financial situation is. Trade responsibly, allow yourself to do well, and reward yourself for a job well done.
5) Work to become a better trader: Do not allow others to dictate whether you will be successful or not. Be ultimately responsible for your trades and surround yourself with those traders that most closely represent your ideals and disciplines, there is great power in a close-knit group of traders. If you work to become a better trader, you will, this I will promise you. If you set aside one hour a day to research, learn, or exchange ideas, you WILL increase your results. Trading is like so many other endeavors, you will get out of it exactly what you put into it.
I hope this helps a few of you become better traders or gives you the confidence to start trading. I firmly believe that anyone can trade, if they are willing to learn the art behind the science.
Many more disciplines exist, more than I can elaborate on here.