Some experienced traders dogmatically assert that nobody makes money day trading. That is probably because they have tried, failed, and found some other trading style that suits them better. There is no doubt that day trading is a tough, competitive business, but the good news is that if it is your dream, it can be made to work for you.

Successful traders specialize in a trading niche which suits their temperament. In the process of doing this they may try different vehicles and strategies which are unsuccessful (for them). This is usually because the strategy is unsuited to the trader, not because it is “bad”.

After following a few blind alleys, I found my niche day trading grain futures contracts. I enjoy getting almost instant feedback on my trades, and having my money safely parked on the sidelines most of the time. It turns out that day trading suits my temperament, whereas longer term trading does not.

Day trading critics often trade relatively stodgy Forex markets. However, trading costs can sink a day trader, and, despite “commission free” trading offered by brokers, Forex trading costs are too high due to spread and slippage charges.

I prefer markets with greater volatility and enough volume to ensure a tight spread, but not such a huge volume that the market becomes hard to read. The grains (soybeans, wheat and corn) do the trick for me.

Do NOT decide on a market before you decide on your trading style. Find the style that suits you, then find the markets that respond best to that trading style.

Successful day traders should:

• Learn the concept of support and resistance in a market.
• Develop a trading system based on tactics at support and resistance levels.
• Test the system on independent data to make sure it has a positive Expectancy.
• Learn money management techniques to prevent taking on to too much risk.

Day trading often involves regular repetition of a simple trading plan to place high probability trades. If you learn the principles outlined above, stick strictly to your plan, and learn to avoid mistakes made in the heat of the moment, you are well on the way to day trading success.

Most day trading is done by professional traders who experience lower stress levels than you because they are using bank funds. You have to beat them at their own game despite the additional anxiety of having your own money at risk!

Two cardinal sins for a day trader are trading without a plan, and over-trading. You must have a plan which dictates your every move in the fast paced cut and thrust of a market session. Otherwise you will be a victim of bad decisions driven by emotions, the downfall of many a trader!

Over-trading often arises because you experience a loss and try to get it back by taking an unplanned trade. Very often, you end up making a bad day into a disastrous day. Sometimes people over-trade because they feel the more trades they take, the more money they make. In fact, all they are doing is building up huge trading costs which make it very difficult to make a profit.

Even though I am a day trader, I take less than one trade per day on average. If the trades you take are good quality, you can still make good returns. (For example, I placed 15 trades in February 2010 and recorded a return of 39% on trading capital invested. You can see the trades here).

Author: D Bennett
Article Source: EzineArticles.com
Provided by: Programmable pressure cooker

I was reading an article recently which maintained it is not possible to make money day trading. Naturally this piqued my interest because I day trade for a living and last time I looked I was doing OK.

The article began by making the very valid point that the vast majority of day trading articles are not written by traders at all, but rather they are written by people marketing systems with hypothetical track records created with the benefit of hindsight.

That is absolutely true.

It is equally true of articles about every other trading style in commodity futures, stocks, forex and options. Whether it is covered calls, trend following with our extra special absolutely never seen before new indicator, swing trading, pairs trading, spread trading, or selling naked options, or any other style, it will often have a hypothetical track record. The time period of the method being promoted is absolutely irrelevant.

The article quotes CFTC rule 4.41 which every futures trader has seen many times. It says:

“Hypothetical or simulated performance results have certain limitations. Unlike an actual performance record, simulated results do not represent actual trading. Also, since the trades have not been executed, the results may have under-or-over compensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve profit or losses similar to those shown.”

This pertinent warning is not confined to day trading systems. It is applicable to ANY trading system in ANY time frame where hypothetical or simulated track records are provided.

You see, most system developers research historical data to find high probability setup patterns. They develop indicators and trading rules to exploit these patterns. There is nothing wrong with that, so long as it is realized that the resulting system is optimized over this data set. The only valid way to test the system is on a completely different, independent set of data. Often a system that looks spectacular on the data the developer was originally working with will fail miserably when applied over a different period or in a different market.

The article went on to say that all day trading systems lose because “volatility in short term time frames is random and prices can and do go anywhere, meaning that if you try and use support and resistance levels they wont help you with your trading signal or help you get profitable market timing. You therefore cannot get the odds in your favour and will lose over time. This is fairly obvious when you consider that the price in any financial market is made by a vast diverse group of traders”.

Well, that is quite a statement. The fact is “volatility” exists in any time frame and, by definition, it is random in the time frame considered. Indeed, prices can and do go anywhere, whatever time frame you are looking at.

Support and resistance levels are identified from trading charts. If no time scale is displayed it is impossible for any trader to differentiate between a 1 minute chart, a 1 hour chart, a 1 day chart, a weekly chart or a monthly chart if they are not told which market they are looking at. The fact is all charts, in all time frames, exhibit similar characteristics. You will find trends, ranges and most importantly support and resistance levels. It follows that whatever edge you think you can get from identifying support and resistance levels in one time frame is equally applicable in the other time frames too.

Most successful traders use strategies which either (a) sell resistance and buy support, or (b) buy breakouts through resistance and sell breakouts through support. These core strategies are available to any trader working in any time frame.

The distinguishing feature of the day trader is that (s)he always exits trades before the end of the trading session. No positions are held overnight or over weekends. By adopting this approach the trader minimizes “event risk” which is the chance that some dramatic event will so disrupt the markets that you suffer a major loss. (Stop losses are ineffective in this scenario because the market “gaps” through your stop loss level.)

The REAL drawback to day trading is trading costs.

Say that in some hypothetical market, the typical trading costs are commissions (2 points) and slippage on entry and exit (1 point each). So for each trade, trading costs average about 4 points. Now, if a long term trader typically targets 100 points, trading costs would be 4%. For a medium term trader targeting, say, 40 points trading costs are 10%. But for a day trader, targeting 8-10 points, trading costs are 40-50%! Obviously, if a trader is determined to trade this market, then medium to longer term trading is the only sensible option. It would not be surprising for a trader focussed exclusively on this market to form the opinion that day trading does not work.

Clearly, then, not all markets are good for day trading. If the average market movement is just a few points, the trader will be unable to find short term trades which cover the trading costs. Even where the trading costs can be covered, they often turn what looks like a good system into a poor one. This is because, as a rule of thumb, trading costs are nearly always deducted from theoretical profit in successful trades, and added to the theoretical loss in losing trades. This significantly changes the average win to average loss ratio for the system.

To prosper, the day trader seeks out volatile markets where the the projected trading costs are a small percentage of targeted gains. The Expectancy of the system used, allowing for the impact of trading costs on the average win to average loss ratio, must be positive.

Fortunately, many such markets exist. The rather stodgy forex market, with its high trading costs, is NOT a good example. However, there are commodity markets and many individual stocks which exhibit the required volatility.

Author: D Bennett
Article Source: EzineArticles.com
Provided by: Digital Camera Times