Before everything else, what exactly is day trading? As per Wikipedias definition, Daytrading represents the practice of selling and buying financial instruments (such as stocks, futures, options, etc.) as a way to generate a return within the same trading day. Traders that practice day trading are called active traders or day traders.
Day trading, like any other business professions, needs serious education, quality planning, and plenty of practice. Numerous beginners enter the daytrading business each day in hope of making quick cash. But just a few of those who get properly educated, possess a good trading plan and self-control can survive and thrive in the business. Many of them make lots of money every day trading only for a couple of hours, and spend the remainder of their days freely with their family and friends, doing whatever they love to do.
But how to become a good day trader and make real money in the market? Lets take a look at the idea:
Step 1. We need to give ourselves a thorough education on the financial market. We should find out what financial instruments can be found in the market, and what instruments go well with our day traders best. Next we need to familiarize ourselves with the various day trading strategies and try to find one that fits us the best. Search engines including Google and Yahoo are great places to find day trading courses and strategies. We’ll need to carry out our in depth analysis and utilize our own judgment to find the right one that fits us most. We should also equip ourselves with the trading tools such as market research tools, realtime trading software, and find and sign-up with a trustful discount broker.
Step 2. Once we have determined our trading strategy, the next task is to write up a trading plan. Yes, we should put our trading plan in paper. Within this trading plan, we will outline our mission statement-what we wish to achieve in day trading? What are our short term and long-term objectives? Do we want to get a little extra income aside from our regular job, or will we wish to turn into financially independent by doing day trading? We will also want to prepare an in depth plan on our daily trading activities that include pre-market research, our entry and exit strategy, and our after-market groundwork.
Step 3. Set up an account for paper trading. Once we have written up our trading plan, we are set out to test the water by paper trading or carrying out trading simulation. This is very essential as we do not wish to risk our real money before we’re comfortable with the game. There are lots of trading simulation software readily available for free on the market and we may also check out with our broker to see if they provide a real-time trading simulation platform. When doing simulation, attempt to consider ourselves as trading with our real money and act according to our trading plans.
Step 4. Set a daily limit, both for profit and for loss. After we have built up self-confidence in day trading, we try to trade once or twice a week with real money. It is very important set a daily limit for both profit and loss. For example, we can set a daily profit target at $200, and a loss limit of $100. Once we have reached either limit, we should stop trading. Turn off your computer, go out and take a walk or have a cup of tea. Never over-trade.
Step 5. Have a good money management system in place. Before we enter each trade, we ought to evaluate our worst case scenario. How much money we can afford to lose in each trade we enter if we happen to lose in every single trade we made for the day? Knowing our maximum affordable loss for each trade is important as we will deliberately limit our size of entry and set up our stop loss even before our trade. This can prevent us from losing big and keep us in the game.
Step 6. Fix our emotion issues through writing trade logs. For day traders, keeping our emotions in check is a big challenge and need much disciple and exercise. Every day, we may be distracted by numerous emotions such as fear, pride, ego, etc. These emotions may prevent us from following our trading plans and eventually deteriorate our confidence. An effective way to fix this issue is to write trade logs regularly on a daily basis. When writing logs, we will analyze each trading action and record the actual logic or emotion behind trade. When we see ourselves fall in the trap of emotions, we will remind ourselves not to make the same mistake the next time. By practicing this plenty of time, we will train our mind to follow the logic and keep our emotions in check.
Step 7. Reward ourselves when we abide by our rules. Whenever we follow our strategy or trading plan to the letter, regardless of a winning or a losing trade, we need to give ourselves a big pat on the back, because we have conquered our emotions and made a big leap toward day trading success and financial freedom. When we have achieved our short term target, we should not forget to reward ourselves for the hard work and achievement. Be it a trip to Las Vegas or a cool iPad, put this in our trading plan as it will motivate us to achieve our goal. In the end, we deserve it anyway.