Day Trading and Swing Trading
12.1 What are Day and Swing Traders?
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 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.
12.2 What Do You Need to Get Started?
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:
- Skill and training
- Focus on one strategy, one market
- Risk management
- Sufficient capital
- 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 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.
- 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.
- 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 flat 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 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 stokes at once. It smooths out price fluctuations.
- 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 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
- 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.
- Practice: Once you’ve decided on your strategy, it’s time to refine it and develop your eye. You want 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 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.
- 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. Sergejs Kovalonoks, an iToroStocks Popular Investor, is very patient. If he doesn’t see a good trade he won’t budge.
- 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 losses happen. Take it in stride. Accept them with grace and move on. It’s all part of the process.
- 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 hope trading.
- Base trades on loss: Set your trades based on how much you are willing to lose if the trade fails.
- 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.47 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 flexibility. 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.
- Time: Day trading takes a lot of time. First, 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.
12.3 Follow a Sample Trade
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 iToroStocks platform, so you are using CFDs. You decide to enter the trade at $18.31 with a small portion of your $50,000 equity, $5,000, and use 2x leverage. This lets you trade 546 stokes of ETH. 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 ETH rises, the stop will follow it. You can lock in profits.
On 12 March 2017, Ethereum goes over the $1B market cap. By the 13th, it reaches $26 per share. You think a $7/share profit is a respectable amount. Can it run further? You decide to see where it goes, knowing you have a protective stop in place. It rises to $30.29 and then retrenches to $27.26. You are stopped out at $30.10 for an $11.39/share profit and a total increase of $1437.
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.
12.4 Ten Tips Every Frequent Trader Needs to Know
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.
- Don’t risk money you can’t afford to lose.
- Start small – with small amounts of capital risked and low amounts of leverage.
- Know your market. Know the news surrounding your market and keep up-to-date.
- Trend, support, and resistance lines are critical to good trading. Learn to discern them.
- Learn the fundamental and technical analysis of your strategy and your assets.
- Practice in virtual trading programmes for as long as necessary to get your strategy down.
- Know your exit strategy before you begin the trade.
- Base your trade size on the amount of money you are willing to lose.
- Don’t risk more than 1%-3% of your capital on any one trade.
- 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.
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