Investors ask the age old question: can you time
the market? Day traders and swing traders say yes!
They try to time the market in a short term: daily
or even minute by minute. They are the opposite
of the buy-and-hold investors. But even value
investors try to buy low and sell high.
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Day traders buy and sell a number of securities
all within the same day. They prefer not to hold
positions overnight. They are looking for short
movements in highly liquid and volatile assets.
Swing traders are similar to day traders except that
their time horizon is longer. They may hold trades
for two to six days, and perhaps even for a few
weeks.
Both day and swing trading involves a deep
study and knowledge of markets, news, technical
analysis, and the development of a trading
strategy. They need to master their emotions and
have the discipline to stick with their strategy. They
understand that losses are a part of the system,
but work to ensure the winners outpace losing
trades.
Some people say you can’t make money day trading.
In truth, many novices lose all their money day
trading. Scams in the past have given day trading a
bad name. And get rich schemes that promise great
wealth in a matter of weeks or months are reckless
and unlikely to pan out. Yet there are successful
day traders, both within financial institutions and
trade-from-home individuals.
What Do They Trade? Day traders look for
securities with high volume. This means there is a
lot of buying and selling of the asset. Volume gives
you the advantage of quickly entering and exiting
the trade. Liquidity means there are buyers and
sellers lined up to make the trade.
Day traders look for volatility. They choose assets
with price fluctuations that are above average.
Currencies, commodities, CFDs, and stocks in the
financial and tech sectors are areas that see a
lot of price movement. This is due in part to their
sensitivity to news and the uncertainty inherent in
these kinds of assets. Some indices can move 100
12.1 What are Day and Swing Traders?
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points or more in a day.
But it doesn’t take such a large movement for day
traders to be profitable. Scalpers are day traders
that look to make a profit on very small movements
in the price. They just trade more frequently and
with higher leverage to increase those profits. Of
course, that leverage also raises the risks of loss,
some of which can be deep and painful.
Risks and Advantages of Day Trading: Why do
people day trade? It can be very profitable. If you
make just 1% on five short-term trades in a day,
at the end of a week, you’ve made 20% profit. If
you leverage that with a 5x leverage, you have the
potential to see 100% gains.
It’s numbers like this that have novices eager to try
it. And it is possible to occasionally see this run of
profitable trades… but it’s not likely. Day traders
need to accept losses as well as profitable trades.
A 60% winning trade record may make a trader
overall profitable. That would mean that 40% of
the trades he or she places lose money. A misstep
in entry or exit can wipe out all trade profits for a
week or wipe out the entire trading account.
You increase your risk of losses when you let
emotions get in the way, have an imperfect system,
or don’t stick to your strategy.
There are a number of things you can do to set
yourself up for a better chance of successful
trading. It helps if you have the right:
1. Equipment
2. Skill and training
3. Strategy
12.2 What Do You Need to
Get Started?
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4. Focus on one strategy, one market
5. Practice
6. Patience
7. Discipline
8. Risk management
9. Sufficient capital
10. Time
1. Equipment: You don’t need the most expensive
computer, but it does need to be fast. The key to
day trading is getting your trades executed exactly
when you want them to be. Lagging computers
can’t get that done. Make sure you have enough
memory to run your programmes.
While you can get by with one monitor, two will
help you see more charts and keep up with
leading indicators that will help with your strategy.
Professionals may have a bank of monitors
they scan. You also want a fast, reliable internet
connection. You don’t want to get stuck in a trade
because your internet goes down.
Find an accurate news service. Some trading
platforms will give you a calendar of news events.
However, you also need a reliable service that
announces breaking financial news.
Look for a trading platform that has all the things
you need to execute your strategy. Do you need
trend lines, MACD, and charts you can expand and
contract, with daily, hourly, or minute by minute
charts? Make sure your trading platform has all the
tools you need to determine your ideal entry and
exit points. You may want to try out several and
see which one works best with your style.
You’ll need a trustworthy and reliable broker or
trading platform. Day traders look for low-fee
brokers. But don’t make that the most important
thing. You want a platform that will give you
support. You want one that’s honest and doesn’t
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make trades against you. And you may find
platforms that offer social trading and people you
can copy. This lets you begin trading even before
you’ve gained the needed experience to trade on
your own.
2. Skill and Training: To make successful trades
on your own, you must have training. There are
many books, courses, trading strategies, and ‘fail-
proof’ methods for sale and for free. Read as many
as you can. Learn how to read charts and what
the indicators mean. Master the technical analysis.
Learn valuation and fundamentals. Book learning
is a foundation… but it’s just the foundation.
The next step is to find your strategy, and practice,
practice, practice. Plan on your training taking
several months. Expect to be learning and refining
your strategy for up to a year to gain the skills and
confidence to trade well. Excellent traders never
stop learning.
3. Strategy: There may be as many strategies as
there are traders. Out of all the possible ways to
trade, you need to find the one that resonates with
you. It’s a blend of your personality, your training,
and the way you synthesise the news, markets,
charts, and other indicators. This is what makes
it hard to learn trading. What your mentor does
may not work as perfectly for you. Another trader’s
sure-fire approach may fall at for you.
Here are some common day trading strategies.
They tell the theory, but putting it to work for you
takes practice.
Buy the Dips This strategy focuses on entry
points. It uses pullbacks as a place to enter
the trade in the hopes the equity will rebound
higher.
Fading Here, traders watch for sharp moves up.
They check indicators that suggest the move is
topping out and starting to fade. These traders
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short the security believing that resistance has
been met, there will be fewer buyers, and the
security will drop in price.
Momentum Traders look for indicators that
show a reversal of the trend. A news event
or trend change signals the asset may surge.
Traders buy at the beginning of the uptrend.
They hold until their price is met or they see
bearish signs that the rally is over.
Options Options traders use time decay and
premium volatility as part of their strategies.
They may use spreads - buying and selling both
puts and calls - to reduce risk while capturing
the upside potential. They may earn on the
anticipation and sell before the news release.
Buy and Hold This is the classic Warren Buffett
approach. You buy top quality assets with the
anticipation that you will hold on to them forever.
Pivot Points Traders watch the moving indicators
to determine when to enter and exit a trade.
They look for specific up turns with the goal to
buy low and sell high.
Price Averaging Sometimes this is called stepping
into a trade. The strategy buys a percentage of
the total amount of the security you want to
trade. Then, in timed increments, you add to the
trade. You may end up paying more or less for
each individual trade, but the price average may
be lower than if you’d bought all the shares at
once. It smooths out price uctuations.
Scalping Traders using this strategy take many
trades in a day looking for short, profitable
moves. They don’t ride the wave to the end. They
want to take quick profits and move on to the
next trade.
Each of these strategies likely involves stop losses
and may also have set targets for profit taking. They
may also use leverage. Different strategies may call
for a mastery of different fundamental indicators
such as understanding candlestick charts, moving
average convergence (MACD), relative strength
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indicators (RSI) and often proprietary trading tools
that analyse, refine, and present the data in an
easy-to-use layout.
Be wary of gimmicky software or get rich
techniques. You may initially find success with
them, but typically they only work in certain kinds
of markets. If you depend on them alone, and the
market changes, you may experience epic failure.
On the other hand, if you’ve invested in your own
knowledge and practised virtual trading, you are
more likely to know how to make adjustments to
your strategy as the markets shift.
Your strategy will not be generic. You want to refine
it to be very detailed and specific. Your trading
strategy should tell you:
Best time of day to trade
Best assets to trade
Where to set stop loss
Where to take profits
Amount of risk you can tolerate
4. Focus On One Strategy, One Market: When
you first start out, you want to focus on one strategy
and one market. Choose forex, commodities, CFDs,
or equities. Each has unique traits. You may want to
limit yourself to only a few stocks or only a couple
of trading pairs. It’s so much easier to master one
strategy in one market. This lets you eliminate all
the strategies, information, and news used to trade
other assets.
Different asset classes move in different directions.
They respond to different kinds of news. Focusing
on one area reduces the pool of knowledge
required to master that strategy. You can practice
over and over and get a feel for when and where
your strategy works and when to cut losses.
5. Practice: Once you’ve decided on your strategy,
it’s time to refine it and develop your eye. You want
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to be able to consistently find the chart changes
that trigger the greatest probability for a successful
trade. It helps to go back in time and look at chart
patterns. Find the places on the chart that meets
your criteria. Look at what happened after your
trade entry point. Did it support your strategy?
Does your strategy need more refinement?
Then move on to virtual trading. Practice your
strategy in real time. Each day is different. What
worked one day may have a different outcome
the next. Don’t abandon a strategy when it doesn’t
work. Try refining it. After all, it works for some
people, make it work for you. If you jump ship and
move to a new one, you’ll have to start the learning
curve all over again. Plan on it taking time to learn
and refine. Give yourself a good three months, six
months, even a year.
Skilful trading is like gaining a college education. It
costs time and money. Some traders run losses for
several years and lose over $100k in the learning
curve. It’s not a get rich quick scheme. Schedule
time to practice and educate yourself.
Your goal with your practice is to consistently
find repeat patterns. Over time, you’ll learn the
variations on the pattern that work as well. You
want to be able to correctly determine:
Entry point
Stop loss set-up
Time to take profits
Before each trade, you should have an exit plan
regardless of the movement of the market.
Check your practice and virtual trading. When
you have at least a 60% success ratio, you may
be ready for live trading. You also need to ensure
that your wins have outpaced your losses, both in
numbers and in percentages. Ideally, your strategy
will give you larger wins and smaller losses so even
if you have a 50/50 win loss ratio, you will still make
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money. And remember, even the best traders
expect to lose 20% of the time.
Again, give yourself the proper amount of time for
practice. Don’t rush it. Your future wealth depends
on this.
6. Patience: Part of your patience is being willing
to invest in practice. But even after you start live
trading, you’ll need patience. You will be tempted
to take a trade that is not exactly aligned with your
strategy. Don’t do it.
Stick to your trading plan. Be willing to sit in front of
the computer for your allotted time and not make
any trades at all if no chart meets your strategy
requirements. You may end up going several days
without making a trade. This is better than making
a poor trade and losing money. Dawid Kowalski, an
eToro Popular Investor, is very patient. If he doesn’t
see a good trade he won’t budge.
7. Discipline: Emotions are a part of life. They may
also be an enemy or an ally in your trading. You
may feel bored as you sit in front of the computer
and no good trades come along. They are the
enemy when anxiety creeps in as a trade starts
to go south, and you close a position too early.
You will struggle with greed and fear. At times your
confidence may push you into an iffy trade. On the
other hand, once you get to know your emotions,
they may be your greatest ally. Emotions can warn
you when it may be time to abandon a trade or
when to fear and back out of a trade you would
usually make.
Be aware of the power of your emotions. Be
disciplined enough to stick to your trading strategy.
Through consistent practice you gain self-mastery.
As you progress, your trading experience may help
you weather the emotional times. You need to be
realistic about profits and losses. Recognise that
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losses happen. Take it in stride. Accept them with
grace and move on. It’s all part of the process.
8. Risk Management: Risk management is such a
vital part of trading we’ve discussed it several times
before. With day and swing trading, it’s useful to
touch on specific factors that can minimise risk.
Create mental stops: In addition to your hard
stop losses, if at any time in the trade your
strategy is violated, exit the trade.
Establish trade criteria: You might agree to risk
only 1% or 2% per trade and trade a max of 5
trades/day.
Stop trading after losses: If you have a string
of 3-4 losses in a day. Stop trading for that day.
Your emotions are hard to keep in check at that
point.
Use scaling: When you reach the first profit
target, sell half your position and move up stop
losses.
Evaluate losses: Did you follow your strategy
exactly? Was it the right set-up, entry, and exit?
Does your strategy need refinement? Would you
have avoided this loss if you had followed your
plan? If all was done correctly, then accept the
loss and move on.
Reduce leverage: The less leverage you use, the
lower your risk of loss. Begin with zero leverage,
then work slowly up to the leverage comfortable
for you.
Budget: Allot a certain amount of disposable
money to day trading. Do not exceed that
amount. Make sure essential bills are paid
before using money to trade.
Start small: Use small positions. Trade only a
few assets. And keep to one trading strategy.
Risk small amounts of capital: Don’t place all
your capital on one trade. Set up trades that
only risk 1% of your capital.
Follow your trading plan: Don’t keep on a run
hoping it will go higher or keep in the trade
hoping it will recover. Stick to your strategy, not
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hope trading.
Base trades on loss: Set your trades based on
how much you are willing to lose if the trade
fails.
9. Sufficient Capital: Businesses promoting day
trading tell novices how little it takes to get into
day trading. Sometimes you can start with as little
as $250 and a lot of leverage. Don’t do it. Studies
show smaller accounts are more likely to have
losing trades and get wiped out.
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The more capital
you have, the easier it is to ride out losses.
Of course you are welcome to start small. Begin
with what you have and commit to adding to your
account on a regular basis. Invest in no leverage,
low-risk trades as you build up your account. You
may want to copy trade with your beginning funds,
but remember, all trading carries risk. You may lose
the nest egg you are building.
When you have $50,000 in your account that is
disposable, you will have a good trading cushion.
It allows you to set a 1% or 2% loss of $500-$1,000
per trade. Even with five trades in a day, you risk
only $5,000 per or 10% of your account. Your
account could survive five losing trades, where an
account of only a few hundred probably could not.
Some brokers will require you to have $250,000
or more in your account to trade forex or futures.
That’s the minimum. You need investment capital
above that amount. Stock brokerage accounts can
set their own minimums and their own leverage
amounts. When you trade CFDs you have a lot
more exibility. They do not require your account
to hold a minimum, however they may still limit
leverage on small accounts. In their own way,
each platform seeks to control your risks while still
allowing you to trade in your preferred style.
10. Time: Day trading takes a lot of time. First,
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DailyFX.com, ‘Leverage’
162
it takes time to read, practice, and learn the
strategies. Then it takes commitment to sit in
front of computer screens and watch for trade
set-ups. Nevertheless, you don’t need to be in
front of your computer all day. Many traders
just trade for two to three hours a day or trade
primarily from their mobile device.
Part of your trading strategy will be to determine
which times those will be. The highest volatility
typically occurs in the first few hours after
opening and an hour or so before the closing of
most stock exchanges. Many short term traders
will just trade the morning, exit those trades, and
come back and trade again in the evening. Novice
traders may be better off waiting 15 minutes
after the opening bell for trade to stabilise. It may
allow them to see trends better.
The currency exchanges open at midnight UK
time on Sunday and run to 10pm on Friday.
Some traders think the best time to trade is when
the market is least active. The active times shift
by currencies traded. Quieter times include the
late US-Asian times or the early European times.
Currency traders are night owls, often working
from 7pm to 11am UK time. Range trading
strategies look for support and resistance. These
are more likely to be broken in active trading
sessions and may be better predictors in slower
trading sessions.
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Let’s walk through a sample trade. To make it easier,
we’ll take an example from the past. Remember,
this is just an example. It is not an indication of
what might happen as you trade.
Assume your strategy is to focus on the news and
how news events affect your asset. You’ve chosen
to trade in cryptocurrencies and do momentum
trading to take advantage of uptrends.
You’ve been hearing about the Winklevoss brothers
trying to get their Bitcoin ETF approved by the US
securities exchange and played Bitcoin’s (BTC)
move higher on speculation. You’ve also been
following Ethereum’s (ETH) growing presence that
it was nearing the $1B market cap. On 10 March
2017, the Winklevoss ETF is rejected by the SEC.
BTC falls as speculation drains away.
You think ETH is where the smart money will move.
Your rule is to wait for three upticks on an hourly
chart before entering a trade. ETH has moved from
$17.42 to $18.31 in 24 hours.
You are trading on the eToro platform, so you are
using CFDs. You decide to enter the trade at $16.12
with a small portion of your $50,000 equity, $5,000,
and use 2x leverage. This lets you trade 620 shares
of Silver. You set a tight stop of $100, so you are
only risking 2% of your invested equity. So if the
price drops $100 you will exit the trade. You decide
to make it a trailing stop. This way, as Silver rises,
the stop will follow it. You can lock in profits.
12.3 Follow a Sample Trade
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You watch the charts and see another set-up in the
next few days and get back into a new trade.
Of course, not every trade goes according to plan.
You might have been stopped out earlier if the
trade went in the other direction or had a minor
pullback. Still, you took advantage of a strong
upside movement with only a small downside risk.
In this particular case, you have the chance to re-
enter the trade to continue the trend. And, with
the advantage of looking at a now historic chart,
you can see where your tight stop loss will exit the
trade before the next steep drop.
Everyone trades differently. Even as traders copy
other traders, no two do it exactly the same way.
There are a million different ways to make money
trading. Finding trades is like finding the repeating
melody in classical music. The motif returns, but in
various forms. Successful traders learn to discern
the pattern of the music of the trade in its different
variations.
As you develop your trading style, you’ll refine your
eye or ear for the recurring patterns in the asset
you choose to trade. But there are overarching
words of advice for all traders. Here is a simple
recap of the advice given in this chapter. These tips
will save you money, frustration, and allow you to
continue trading.
1. Don’t risk money you can’t afford to lose.
2. Start small - with small amounts of capital risked
and low amounts of leverage.
3. Know your market. Know the news surrounding
12.4 Ten Tips Every Frequent
Trader Needs to Know
165
your market and keep up-to-date.
4. Trend, support, and resistance lines are critical
to good trading. Learn to discern them.
5. Learn the fundamental and technical analysis of
your strategy and your assets.
6. Practice in virtual trading programmes for as
long as necessary to get your strategy down.
7. Know your exit strategy before you begin the
trade.
8. Base your trade size on the amount of money
you are willing to lose.
9. Don’t risk more than 1%-3% of your capital on
any one trade.
10. Constantly improve and refine. Even the best
experts are continually refining their technique.
Is it possible to time the markets? Successful
traders say, yes. With practice, experience, and a
little bit of luck, they find high probability trades
that allow them to make excellent money in day
trading. If you put in time and money necessary to
build experience, you may become one of them.
Your capital is at risk. Cryptocurrencies can uctuate widely in prices and are therefore not appropriate for all investors. Trading cryptocurrencies is
not supervised by any EU regulatory framework. Past performance does not guarantee future results. This information is for educational purposes
and not investment advice.
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