daytradingskills

Traders Wisdom

Investing (trading) is like poker. You should only play the good hands, and drop out of the poor hands, forfeiting the ante. - Gary Biefeldt

I tend to cut bad trades as soon as possible, forget them, and then move on to new opportunities. The elements of good trading are: (1) cutting losses, (2) cutting losses, and (3) cutting losses. If you follow these three rules, you may have a chance. - Ed Seykota

My Marine training helps in investing. They teach you never to freeze when you are under attack. - Marty Schwartz

I learned that an opinion isn't worth that much. It is more important to listen to the market. - Brian Gelber

Most people who dare to take the jump in the trading ring, soon find themselves struggling to decipher dynamics of market waves. The waves are never rhythmic, but mostly erratic and unpredictable. The closer you get, the more unruly they seem. That is the regime where day traders operate. They are the first to get hurt by sudden market tsunamis. The survival rate of traders is quite small.  Those who survived, for whatever reasons, seem to have gathered the following wisdom.

Time goal

Approach the markets with a reasonable time goal. When you enter the trading business, decide on the length of time you would want to trade, and not just the amount of money. This approach not only helps you conserve your trading capital, but also to avoid the Las Vegas approach of "I will trade till I go broke."

Trend

The trend is your friend except at the end when it bends. – Ed Seykota

Always trade with the trend, rather than try picking tops and bottoms. To most people it is the hardest advice to follow – because some are special kind of persons and not "one of the crowd" and some others are so extraordinary that they can “see” the future trend in their gifted brains and “know for sure” that the market would follow their thoughts soon. Well, even if you are a proven genious, trade only along the actual trend if you want to make money as a trader in the long run.

Over smartness

Be extra careful if you are a bit extra smart. Quite frequently smart people start seeing things which actually don’t exist. For example, they enter a position a little too early trying to catch a trend prematurely before it has become “actual”. Thus, they are often "trapped" in the opposite trend and get worn out. As a result they aren't around when a big move finally shows up. They were too busy riding the imaginary trend waves to make money from the real ones!

Patience

If you're just getting into the markets as a trader, make a slow entry. Patience is the most desirable virtue of every trader. It can be developed with practice. Trade in the smallest possible lots for some time (at least 4 – 6 months) and perfect you trading system and risk management procedures. Analyze your trade records, particularly the bad ones. You can really uncover several flaws in your thinking and plug them.

In trading life, patience is the ability to stay cool, unbiased, and focused over a long period of time waiting for the right trading opportunity to show up. Windfall profits (profits that have no sound rationale for occurring) come only to cool and patient traders; others are too fragile to handle that.

Over-trading

Do not over-trade. Take a position only when your system tells you to do so. Remember, trading is an opportunity; don’t make it a compulsive activity. It is not something to be kept busy with. So, develop prudence too along with patience.

Standing aside is also a position; and a good one too, particularly when the market is not showing any trend. Program your mind to "sit still" and wait for the right opportunity to trade. Further, do not cling to a winning trade. If you do, you are bound to glue to a bad one too.

Technical tools

Use technical signals and charts for entries and exits. Most traders are not emotionally equipped to stay disciplined without help from some technical tools. These tools help you eliminate impulse trading and maintain discipline. Candle stick patterns, Elliot wave patterns, MACD, RSI, slow stochastic, Bollinger bands, etc., are some of the most commonly used tools.

Trade Plan

Trade with a systematic plan – and not with hope, greed, or fear. Have an elaborate plan which tells you when to get in the market, when to exit from a bad trade, how much you will risk on any trade, and when and how you will take your profits. An ideal plan should not leave any thing to “gut feelings” and should help you trade without emotional involvement.

Cutting Losses

• Trading my way, I always have defined amount of money that I am willing to lose. I let the market decide how much money I’m going to make. - Casey (In "“The Logical Trader” by Mark B. Fisher)

• Good traders manage the downside; they don’t worry the upside. - Mark Minnervini

Always use stop orders to keep your losses small. However, the moment you feel you are in a bad trade, get out immediately even before your stop is hit. Program your mind to accept several small losses. Keeping your losses small helps you survive longer so that you have better chance of making money.

Rumors

Don't trade on rumors. The very fact that you are listening to rumors shows that you have little confidence in your trading system, assuming that you have one. Only a systematic approach to trading can bring consistent profits over a long run.

Averaging a losing position

Resist the temptation to average down a loss making trade. Your first loss is always your smallest loss. Rationally speaking, a trade turned bad can only get worse. So, get out with the smaller hit unless you are a sadist who enjoys bigger pain. Averaging down doesn't work in the shorter duration of day trading.

Capital

You might have started trading with surplus cash, losing which wouldn't affect your life. However, suppose that your personal financial situation undergo some change and the capital in the trading account no longer remains “surplus” – it becomes required. In such a situation, quit trading right away without waiting for "just one more day". Else, fear of losing money will color your trading actions and then you'll surely lose. So, periodically access your financial situation and trade only with that part of funds that can actually be labeled “surplus”.

Recording your trades

“Even the best system is bound to have some holes, but good records will allow you to find them and plug them up.”
“Show me a trader with good records, and I’ll show you a good trader.”
-- Dr Alexander Elder, Come Into My Trading Room

Just as a scientist keeps careful records of his detailed observations of every experiment so that he can analyze and fine-tune his research, a trader should maintain a detailed log of his observations. A trader should approach his activities in the most scientific way, uncluttered by emotions. Besides the utility of written record, the very act of writing forces the trader to think and act rationally.