How to Day Trade Successfully

Go Long for Strength and Short for Weakness

Day-trading requires discipline and determination. Day-trading also requires a high success rate, because the brokerage expense and slippage cost---the spread between the bid and asked prices that you pay---is so high relative to potential gains. Profitable day-trading is more about a workable plan and less about the drama of gains and losses. Emotional traders who work on hunches are uniformly bad day-traders.

Instructions

1. Have a plan to trade, and stick to it. A trading plan includes money management, and rules for your stock entries and stock exits. Work out all the details in advance. Never trade on emotion or on the fly. Aim for consistent profits over strong hunches. Develop discipline in the use of protective stops---the maximum loss you will absorb on any one trade. Do not let small losses become large losses.

2. Back test ---that is, test your trading plan on historical data---on futures, bonds and stocks. Find out what works best and what products or securities you are most comfortable trading. Know the margin requirements and how much you can afford to lose on any one trade. Day-trading does not allow for much diversification. You can only expect to trade a few securities intensively every day. You must close all positions by the end of the day to avoid overnight-trading risk.

3. Prepare your stock selections after downloading closing stock data. All trading changes and plans should be determined before the market opens. Do not do anything during trading hours other than buying and selling. If you cannot stick to a plan, don't trade. Write down all your trades, and execute from the written plan to eliminate careless mistakes. You, not the broker, are responsible for trading errors. Keep a diary to explain why you made the trades you did and whether they were successful.

4. Be cost-effective. Use the cheapest possible trading platform you can find. Brokerage costs will be your largest expense. Remember that day-trading requires active monitoring of stocks, so you must have an alternative to your primary Internet connection in case that connection is lost.

5. Determine how many consecutive losses you can afford. This is called draw-down. Draw-down will occur, as a random event, quite often. Determine, through testing, whether your draw-down is a result of your system failing or a random event. If it is not from a random event, stop trading until you find a system more attuned to the current market cycle. Bull-market techniques do not work very well, if at all, in a bear market.

Tips & Warnings

• Day-trading is an intense process. Be mentally prepared. Make certain that you have backups for all data and trading activities.

• Close all positions, at a loss if necessary, at the end of the day. Otherwise, you are not day-trading, and you are taking unnecessary overnight risk.

Resources

• Bloomberg Business News Information
• E*TRADE
• Scottrade