It Is Not For The Faint-Hearted
Do you remember the dotcom boom in the early years of this century? It seemed that everyone was day-trading dotcom stocks around the world as the NASDAQ was zooming north at a rate of knots. It was in the news all the time. There were countless message boards on a multitude of websites that anyone could post any nonsense whatsoever (there still are today). But do you know anyone that made consistent profits from it? I certainly don’t.
‘Business (trading) opportunities are like buses, there’s always another one coming’ – Richard Branson
Because day-trading action can be fast and furious, most traders’ emotions get caught up in their judgment and they make the wrong decisions at the wrong times. We humans are geared, when threatened or excited, to subconsciously kick the rational part of our brains out and resort to the primitive (reptilian) responses of ‘fight or flight’. Because this happens subconsciously, most people are ill-equipped to recognise the changes in their behaviour.
While this behaviour keeps us out of trouble in ‘normal’ life situations, it can be very counter-productive in trading!
So to be a successful trader, we must somehow train our brains to ‘override’ this tendency to be ‘manic-depressive’ when markets move with us and then against us. So we need a solid trading strategy that we employ regardless of how we are feeling, especially in day-trading!
Here is an example of one such strategy at work:
Notice that the MACD Indicator was moving up with the market, but then, as the market moved down towards previous support, the MACD was turning over (from a high reading) – a warning signal!
We would therefore conclude the rally was perhaps running out of steam and to anticipate this, we place a short-selling stop just below the support line, with a protective buy-stop just above the line (placed after the sell-stop was filled). Of course, this requires constant sitting in front of your monitor, or could be done with an OCO order.
Then the market confirms our analysis and falls along with the MACD. Before long, we can draw an authentic downtrend line joining the ‘tops’.
As the market falls, we are on the alert for moving our protective stop down, as we do not want to give back too much of our gain. Then, the market stops falling and moves above our downtrend line, and we decide to exit the market. We can do this manually, or by moving our stop.
You Do Not Need To Trade Every Day!
One of the other factors that made so many day-traders in dotcom stocks lose money was their desire for action, action, and even more action! They fed off constant involvement in the action – they had to be in the market at all times. This is a sure-fire approach to losing money.
In the Crude Oil example above, it was a nice clear-cut opportunity with a terrific profit potential. These do not come along every day.
We are using similar strategies to those we use on longer time-frames. The big difference is that we use tighter stops and keep moving them throughout the day.
In this example, the market behaved in an orderly way. Sometimes, and especially around the release of major reports, the market will go berserk and be highly volatile. It is best to stay out of the market during these times for most traders – you can always get back in when the patterns become clear again.
The Commitment You Need To Make
You have seen that waiting for a great set-up in a market is a bit like fishing – sometimes you wait, and wait. But you need to keep monitoring your markets every 15-30 minutes at least in order to be there just when a trade is indicated.
Then, when you sense an opportunity, you check the daily charts to assess where the market is – is it in an uptrend, downtrend, or in a congestion zone?
- Can you easily apply the Fibonacci levels to a previous wave for possible retracement?
- Can you spot an Elliott Wave pattern?
- Can you draw a reliable trend line (or horizontal support/resistance line) up to the present bar?
- Is your indicator (Momentum or MACD) moving off an extreme reading?
- Is there a sensible entry level to place your entry stop order and a sensible place to put a protective stop in case you are wrong?
- If the market moves in your favour, how should you move your protect-profit stops?
- Do you have a strategy for taking profits? We used the upward break of the downtrend line in our example.
As for the time you need to devote to day-trading; ideally, you would be available during the whole trading day. For most financial markets that we trade, the markets are open 24/5 (we can take the weekend off, but I use them for thinking about my strategy for the week ahead).
I know some day-traders who have other commitments and can only check the markets 3 or 4 times a day. They tend to miss many trades, but are happy nonetheless. They tend to be more conservative traders.
Then I know other traders who trade several times a day in the same market. They are looking for pretty small moves over minutes or perhaps an hour or so. If using a spread betting firm that offers spreads of 1 tick (say in the Dow Jones Rolling), that can work out. But for relative beginners, I suggest you be patient and only trade when all the ducks have lined up (as in the Crude Oil example). The goal should be to make profits, not to get a constant adrenaline rush all day Monday to Friday. (But if that is your thing, then enjoy!).
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