New and experienced stock day traders alike grapple with an all important question: Which method is the best approach to stock day trading, a system approach or a discretionary approach? While each approach has its advantages and disadvantages, the correct answer may, in fact, be a combination of the two approaches.

System trading means creating a strict set of objective and mechanical rules for identifying if a trade opportunity exists, when should you enter the trade, and how do you exit the trade. The operative words are “objective” and “mechanical”. If a set of trading rules can be programmatically reduced to a series of computer instructions, then the rules are objective and mechanical.

One of the main advantages of system trading is that it enables you to produce consistent trading results. In other words, your actual trading results should be identical to the results generated by the system. This type of trading requires very little thinking or analysis on your part, and all you have to do is follow the trading system rules without deviation.

However, system trading can be difficult to implement in practice because it typically requires you to take all of the valid signals produced by your system in order to allow the system’s edge to manifest itself. This is because it may take a considerable amount of trades in order to turn a profit with a mechanical method. As a result, your system will often produce entry signals that run contrary to what your common sense is telling you. For instance, the current trading day may be a very strong bullish trending day without any signs of selling; however, if your system produces a valid short signal, then you must take the signal without question in order to allow the edge to manifest under a system trading approach. Or, if you are in a trade and prices come very close to your profit target and suddenly reverses back toward your entry, you must stay in the trade if your system trading rules require you to do so, even if you believe strongly that the trade is failing. This type of trading is very hard on the emotions because it often requires you to make decisions that go against logic.

Discretionary trading, on the other hand, entails identifying when to enter and exit a trade based on whether you cognitively or intuitively perceive that a profitable trade opportunity exists. In essence. you are assimilating various mental processes of perception and judgment to determine whether you should either take a position or remain on the sidelines. Although discretionary traders also use rules for entering and exiting a trade, usually discretionary rules do not meet the objective and mechanical test. Typically, discretionary rules cannot be completely programmed for computerized instruction. An example of discretionary trading would be deciphering the sequence of trades occurring at the ask versus trades occurring at the bid on time and sales in order to determine whether a trade opportunity exists.

Discretionary trading is usually easier on the emotions than system trading because you tend to take trades that you agree with emotionally. For example, a discretionary trader that trades with the trend and looks for trade entries by reading the time and sales screen would probably avoid taking a short trade during a very bullish trend day in which there were no signs of selling on time and sales, because he would most likely be trading against the trend.

The main disadvantage of discretionary trading is the inconsistent results this style of trading can potentially produce. Markets are constantly changing, and the circumstances and factors which may have led to you placing a winning trade yesterday, may not be the same as they are today. A lot of the success of discretionary traders can be attributed to their ability to perceive trade opportunity. However, what may be perceived as the same setup that occurred in the past, may in fact be an entirely different setup upon a more thorough analysis. As humans, we are susceptible to biases that allow us to equally treat all market situations simply because they look similar to past situations. Looks can be deceiving when it comes to market analysis and one must perform careful due diligence to make sure that they are comparing apples to apples.

There is a third approach to stock day trading which combines both approaches described above. The hybrid trading approach merges together system trading and discretionary trading. Under a hybrid trading approach, you would employ objective system trading rules for those parts of the decision process that will enable you to achieve consistent results, but discretionary decisions would only be allowed for situations that don’t materially affect the outcome of the trade. For instance, identifying when a trade opportunity exists and when to enter the trade would be performed under objective system trading rules. However, discretionary decisions regarding how and when to exit the trade would only be allowed after your first profit objective has been satisfied because the essence of the trade opportunity has been met. A hybrid trading approach can often produce more effective results than either a system trading approach or a discretionary approach by relying on the rudimentary idea that sometimes the sum is greater than the parts.

Author: Monti Simmons
Article Source: EzineArticles.com
Provided by: Guest blogger

New and experienced stock day traders alike grapple with an all important question: Which method is the best approach to stock day trading, a system approach or a discretionary approach? While each approach has its advantages and disadvantages, the correct answer may, in fact, be a combination of the two approaches.

System trading means creating a strict set of objective and mechanical rules for identifying if a trade opportunity exists, when should you enter the trade, and how do you exit the trade. The operative words are “objective” and “mechanical”. If a set of trading rules can be programmatically reduced to a series of computer instructions, then the rules are objective and mechanical.

One of the main advantages of system trading is that it enables you to produce consistent trading results. In other words, your actual trading results should be identical to the results generated by the system. This type of trading requires very little thinking or analysis on your part, and all you have to do is follow the trading system rules without deviation.

However, system trading can be difficult to implement in practice because it typically requires you to take all of the valid signals produced by your system in order to allow the system’s edge to manifest itself. This is because it may take a considerable amount of trades in order to turn a profit with a mechanical method. As a result, your system will often produce entry signals that run contrary to what your common sense is telling you. For instance, the current trading day may be a very strong bullish trending day without any signs of selling; however, if your system produces a valid short signal, then you must take the signal without question in order to allow the edge to manifest under a system trading approach. Or, if you are in a trade and prices come very close to your profit target and suddenly reverses back toward your entry, you must stay in the trade if your system trading rules require you to do so, even if you believe strongly that the trade is failing. This type of trading is very hard on the emotions because it often requires you to make decisions that go against logic.

Discretionary trading, on the other hand, entails identifying when to enter and exit a trade based on whether you cognitively or intuitively perceive that a profitable trade opportunity exists. In essence. you are assimilating various mental processes of perception and judgment to determine whether you should either take a position or remain on the sidelines. Although discretionary traders also use rules for entering and exiting a trade, usually discretionary rules do not meet the objective and mechanical test. Typically, discretionary rules cannot be completely programmed for computerized instruction. An example of discretionary trading would be deciphering the sequence of trades occurring at the ask versus trades occurring at the bid on time and sales in order to determine whether a trade opportunity exists.

Discretionary trading is usually easier on the emotions than system trading because you tend to take trades that you agree with emotionally. For example, a discretionary trader that trades with the trend and looks for trade entries by reading the time and sales screen would probably avoid taking a short trade during a very bullish trend day in which there were no signs of selling on time and sales, because he would most likely be trading against the trend.

The main disadvantage of discretionary trading is the inconsistent results this style of trading can potentially produce. Markets are constantly changing, and the circumstances and factors which may have led to you placing a winning trade yesterday, may not be the same as they are today. A lot of the success of discretionary traders can be attributed to their ability to perceive trade opportunity. However, what may be perceived as the same setup that occurred in the past, may in fact be an entirely different setup upon a more thorough analysis. As humans, we are susceptible to biases that allow us to equally treat all market situations simply because they look similar to past situations. Looks can be deceiving when it comes to market analysis and one must perform careful due diligence to make sure that they are comparing apples to apples.

There is a third approach to stock day trading which combines both approaches described above. The hybrid trading approach merges together system trading and discretionary trading. Under a hybrid trading approach, you would employ objective system trading rules for those parts of the decision process that will enable you to achieve consistent results, but discretionary decisions would only be allowed for situations that don’t materially affect the outcome of the trade. For instance, identifying when a trade opportunity exists and when to enter the trade would be performed under objective system trading rules. However, discretionary decisions regarding how and when to exit the trade would only be allowed after your first profit objective has been satisfied because the essence of the trade opportunity has been met. A hybrid trading approach can often produce more effective results than either a system trading approach or a discretionary approach by relying on the rudimentary idea that sometimes the sum is greater than the parts.

Author: Monti Simmons
Article Source: EzineArticles.com
Provided by: Guest blogger

New and experienced stock day traders alike grapple with an all important question: Which method is the best approach to stock day trading, a system approach or a discretionary approach? While each approach has its advantages and disadvantages, the correct answer may, in fact, be a combination of the two approaches.

System trading means creating a strict set of objective and mechanical rules for identifying if a trade opportunity exists, when should you enter the trade, and how do you exit the trade. The operative words are “objective” and “mechanical”. If a set of trading rules can be programmatically reduced to a series of computer instructions, then the rules are objective and mechanical.

One of the main advantages of system trading is that it enables you to produce consistent trading results. In other words, your actual trading results should be identical to the results generated by the system. This type of trading requires very little thinking or analysis on your part, and all you have to do is follow the trading system rules without deviation.

However, system trading can be difficult to implement in practice because it typically requires you to take all of the valid signals produced by your system in order to allow the system’s edge to manifest itself. This is because it may take a considerable amount of trades in order to turn a profit with a mechanical method. As a result, your system will often produce entry signals that run contrary to what your common sense is telling you. For instance, the current trading day may be a very strong bullish trending day without any signs of selling; however, if your system produces a valid short signal, then you must take the signal without question in order to allow the edge to manifest under a system trading approach. Or, if you are in a trade and prices come very close to your profit target and suddenly reverses back toward your entry, you must stay in the trade if your system trading rules require you to do so, even if you believe strongly that the trade is failing. This type of trading is very hard on the emotions because it often requires you to make decisions that go against logic.

Discretionary trading, on the other hand, entails identifying when to enter and exit a trade based on whether you cognitively or intuitively perceive that a profitable trade opportunity exists. In essence. you are assimilating various mental processes of perception and judgment to determine whether you should either take a position or remain on the sidelines. Although discretionary traders also use rules for entering and exiting a trade, usually discretionary rules do not meet the objective and mechanical test. Typically, discretionary rules cannot be completely programmed for computerized instruction. An example of discretionary trading would be deciphering the sequence of trades occurring at the ask versus trades occurring at the bid on time and sales in order to determine whether a trade opportunity exists.

Discretionary trading is usually easier on the emotions than system trading because you tend to take trades that you agree with emotionally. For example, a discretionary trader that trades with the trend and looks for trade entries by reading the time and sales screen would probably avoid taking a short trade during a very bullish trend day in which there were no signs of selling on time and sales, because he would most likely be trading against the trend.

The main disadvantage of discretionary trading is the inconsistent results this style of trading can potentially produce. Markets are constantly changing, and the circumstances and factors which may have led to you placing a winning trade yesterday, may not be the same as they are today. A lot of the success of discretionary traders can be attributed to their ability to perceive trade opportunity. However, what may be perceived as the same setup that occurred in the past, may in fact be an entirely different setup upon a more thorough analysis. As humans, we are susceptible to biases that allow us to equally treat all market situations simply because they look similar to past situations. Looks can be deceiving when it comes to market analysis and one must perform careful due diligence to make sure that they are comparing apples to apples.

There is a third approach to stock day trading which combines both approaches described above. The hybrid trading approach merges together system trading and discretionary trading. Under a hybrid trading approach, you would employ objective system trading rules for those parts of the decision process that will enable you to achieve consistent results, but discretionary decisions would only be allowed for situations that don’t materially affect the outcome of the trade. For instance, identifying when a trade opportunity exists and when to enter the trade would be performed under objective system trading rules. However, discretionary decisions regarding how and when to exit the trade would only be allowed after your first profit objective has been satisfied because the essence of the trade opportunity has been met. A hybrid trading approach can often produce more effective results than either a system trading approach or a discretionary approach by relying on the rudimentary idea that sometimes the sum is greater than the parts.

Author: Monti Simmons
Article Source: EzineArticles.com
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Opinions about day trading vary widely. Some people swear it is the best way ever to make a profit in the stock market…others, including the SEC (Securities and Exchange Commission) advise strongly against day trading, insisting it is too risky. As with many things having to do with investing and the stock market you will hear all kinds of things about day trading. The trick is to sort the information out.

But what exactly is day trading and why do so many advise against it? Day traders literally trade everyday, all day, buying and selling sometimes very rapidly. They hope to see a stock going up, for instance, quickly buy a block of that stock and then sell it again as soon as it has risen enough to make a reasonable profit. If everything works right the trader makes a profit every day from the normal movement of stock prices up and down.

Day traders try to concentrate on certain stocks that are particularly suitable for day trading. The most important thing is that the stock must be one that is highly liquid, which means it is bought and sold often. This allows the day trader to buy and sell easily. Liquidity varies with market volume and the size and nature of the business. In general almost all stocks on the major exchanges are more than liquid enough for day trading purposes.

To be suitable for day trading a stock also needs to be sold in sufficient volume that the buying and selling activity of one trader won’t affect the market price of the stock. Day traders usually buy and sell big blocks of stock so a good day trading stock needs to have at least 500,000 shares traded a day. Day traders also look for stocks that have high volatility, which means that the price goes up and down rapidly. A stock with a rapidly changing price is perfect for day trading. The ideal is at movement of at least $2 a day.

A day trader also needs to be able to find sufficient real time information of the orders for a stock. This is sometimes called price transparency or market depth and lets the trader know how much stock they can probably move in a certain period of time. Traders need to have access to the NASDAQ level II quote screens in order to gather this information.

There is nothing illegal about day trading but it can be extremely risky. Almost all day traders are working with borrowed funds which they hope to increase through their buying and selling. If the NYSE and the NASDAQ classify someone as a “pattern day trader” then that trader must trade through a margin account with at least $25,000 as a deposit in it. The broker who handles the account will require that further deposits be made if the trader’s holdings drop too far in value.

Because day trading is so risky the Securities and Exchange Commission has devoted quite a bit of energy to spreading warnings about the practice. Their fear is that people will become involved without understanding how much money they can lose in a very short time.

Anyone who decides to try day trading can expect to suffer huge losses as they try to learn how to do it successfully. Very few will succeed and make money in day trading. No one should ever try day trading with money that they cannot afford to lose without any problems.

Day traders are not really investors. They buy and sell over the span of time as short as seconds or minutes. They never hold stock after the close of the trading day because the risk of overnight price changes is too great for them. Day trading is really speculating; some call it gambling.

Be sure to avoid websites which promote day trading by talking about the great profit potential and then offer you ‘expert information’ or ‘hot tips’ for money. The recommendations are usually actually paid for themselves and the advice is worthless.

It seems most of the articles I read in the article directories suggest day trading exchange listed stocks. This is a bit difficult for me to understand, as futures contracts offers some distinct advantages over trading stock issues. As a longtime trader, I have extensive experience trading both of these equity instruments and understand the way both function. Not that there’s anything wrong with trading stocks, as good money can easily be made trading stock issues. In my opinion, though, trading futures contracts, especially the e-mini contracts, have a multitude of individual advantages so as to make them a prohibitive favorite for day trading.

Needless to say, I can hear the stock day traders protesting loudly as many have been very successful in day trading their favorite stock. I can understand this, as a certain amount of money can certainly be earned in the stock business. However, the leverage to maximize your gains simply doesn’t exist in day trading stocks. Further, day trading stocks entails a significant capital outlay in order to get started. On the other hand, getting started in the futures trading business requires a far smaller outlay of cash and seems better suited for the smaller investor.

From the onset, though, any futures day trader realizes that the high level of leverage that futures trading involves will maximize your profit; but it’s also important to realize that high levels of leverage can also maximize your loss. For that reason alone it is important to practice and learn sound money management practices when trading futures. Contrary to popular belief, trading futures is not like going to the casino. There are very specific methodologies that must be learned and employed in order to be successful trading futures. To be sure, it is my belief that many beginning and poorly trained futures traders habitually over trade their accounts and take unnecessary risks in their trading activities. This approach is a sure way to deplete your futures trading account.

While some stocks can be fairly active, there activity pales in comparison to the financial index e-mini futures contracts. This healthy activity in the financial index e-mini contracts makes them a popular and profitable equity instrument to trade. And traders have flocked to the e-mini contract in droves. To be sure, the ES e-mini contract is the fastest growing financial instrument in the short history of futures contract trading. Currently the average volume on the ES contract has consistently exceeded 1.4 million contracts per day. That is to say, there are no liquidity problems in the e-mini marketplace.

In my trading activities, I trade the financial indexes in the futures market. I do this because all of my prior experience in trading has been centered in the financial arena. There are scads of other e mini contracts to trade, but I have found the financial indexes fit well in my trading plan. Further, I do not employ any fundamental analysis when trading the e-mini contracts. I am a scalper, and find scalping among the most effective methodologies for day trading the e-mini contract.

On the other hand, day trading stocks is a different proposition. While some technical analysis can be employed to trade stocks, there is a healthy amount of fundamental analysis that goes hand-in-hand with trading stocks. For intraday trading, fundamental analysis can be a difficult road to hoe. Many stock day traders may have to wait several days before their analysis results in their fundamental expectations.

As a scalper, I have no trades to hold overnight, and every night at bedtime all of my money is in cash. I can be an impatient person, and detest trying to de-cipher, or predict, which way the market may move. As a scalper I spend no time predicting market moves; I react to what the market is offering and exploit breakouts and breakdowns as they occur on the chart. I find that simply trading the chart in front of me greatly reduces my market risk as my investment horizon is usually between 10 and 15 minutes. I would contrast that to the stock day trader who may wait days before his plans come to fruition.

Of course, when trading futures contracts we run very tight stops to minimize downside risk and try to let our winning trades run. This is often easier said than done, but with practice you can become quite proficient in this technique. In short, scalping allows me to minimize downside risk and take advantage of significant market moves as they present themselves. I spend no time waiting for the market to move in my desired direction, I spend my time discerning potential movement in the market as the chart formation indicates. No, I am not much on predicting the market; I spend my time reacting to the market and hence reduce my potential risk exposure to a very narrow time band.

Especially for beginning traders, I highly recommend learning the scalping method as a way to profit in the market. It does take some time and practice, but the learning curve is not a prohibitively difficult one and I have had many traders find success in as short as 2 to 3 months. It is my opinion that scalping futures contracts is a superior method to trade. Most traders tend to graduate from scalping and move into swing trading or longer-term trading techniques. As for me, I have spent the last 25 years scalping and have no desire to graduate to swing trading. I suppose I am stuck with the simple elegance and efficiency of trading e-mini contracts. Additionally, I covet the peace of mind I receive by not holding trades overnight or committing myself to a certain direction of the market in order to profit

Author: David S. Adams
Article Source: EzineArticles.com
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