New and experienced stock day traders alike grapple with an all important question: Which method is the best approach to stock day trading, a system approach or a discretionary approach? While each approach has its advantages and disadvantages, the correct answer may, in fact, be a combination of the two approaches. System trading means creating a strict set of objective and mechanical rules for identifying if a trade opportunity exists, when should you enter the trade, and how do you exit the trade. The operative words are "objective" and "mechanical". If a set of trading rules can be programmatically reduced to a series of computer instructions, then the rules are objective and mechanical. One of the main advantages of system trading is that it enables you to produce consistent trading results. In other words, your actual trading results should be identical to the results generated by the system. This type of trading requires very little thinking or analysis on your part, and all you have to do is follow the trading system rules without deviation.
The first is that the day trader is less exposed to event risk than a long term trader. I get in and out of the market as quickly as possible. I am in the market during primary trading sessions, so my stops are normally filled at or near the specified price. A long term trader may find that an unforeseen event triggers big moves when primary markets are shut, forcing price to gap way beyond protective stops when markets re-open. Minimizing exposure to event risk while trading leveraged instruments is a key benefit of day trading, and why I think it is one of the least risky forms of trading when done properly. Another reason I prefer day trading is that I can work through losing spells more quickly. All trading methods encounter drawdowns when traders have a losing spell. If a typical drawdown for your system spans a period of 10 trades, and the average duration of each trade is 2 weeks, you face drawdown periods averaging twenty weeks. But if you are a day trader completing one trade each day, your average drawdown period is just 10 trading days. If you complete more than one trade per day, the drawdown period is even shorter. It is never pleasant being in drawdown and it is easier to stick to your system if drawdowns are short. Twenty weeks, or more, in a loss situation tests the resolve of any trader.
Day trading is a broad term, encompassing many trading styles. The one thing all day traders have in common is that they are out of their positions at the end of the primary trading session. No open positions are held overnight, at weekends, or even during lightly traded electronic sessions outside primary trading hours. The typical image of a day trader is of a person glued to a screen during long market hours, possibly entering several trades during the course of a day. That is true of many traders, but there are other styes. For example, my own approach is quite different. The biggest problem in day trading is trading costs. A day trader takes many more trades than a long term trader, so obviously costs are higher. Typically trading costs are a combination of brokerage fees and trade slippage. In my experience, trading costs can get out of control if you take too many trades, so I limit myself to one trade per day.
As told earlier, there are a variety of products available for day trading. The most popular ones are the stock and the forex currencies. Others include options like stock options and futures options, and futures like currency futures, stock futures, stock index futures and commodity futures.
An early entry is especially good if the exit strategy can be automated. I can set up an OCO (one cancels other) group to implement my exit strategy without having to monitor the market after the trade is entered. Thus, after watching the market for up to 30 minutes to find an appropriate trade entry, I can set up the OCO group and just leave the trade to work. As I live in Australia and trade at night, this means I can go back to bed! Finding the right entry is the great challenge, especially in the fast moving period as a market opens. The trader hasn't got a lot of information to go on at this stage. I've generally found technical indicators to be worse than useless at this time, because they react to price changes too slowly. Most professional traders try to determine support and resistance levels, based on significant turning points in prior sessions, or the extremes of an opening range established in the current session. Traders then apply one of two broad strategies - either they sell resistance and buy support, or they buy breaks through resistance and sell breaks through support. They can devise an almost limitless range of tactics to implement either strategy. Whichever approach is chosen, it is important to manage trades in such a way that the average winning trade (including trading costs) is bigger than the average losing trade (including costs). I aim for a ratio of 2:1, that is, the average win is twice the size of the average loss. I also try to keep my winning percentage of trades greater than 50%.
There is a third approach to stock day trading which combines both approaches described above. The hybrid trading approach merges together system trading and discretionary trading. Under a hybrid trading approach, you would employ objective system trading rules for those parts of the decision process that will enable you to achieve consistent results, but discretionary decisions would only be allowed for situations that don't materially affect the outcome of the trade. For instance, identifying when a trade opportunity exists and when to enter the trade would be performed under objective system trading rules. However, discretionary decisions regarding how and when to exit the trade would only be allowed after your first profit objective has been satisfied because the essence of the trade opportunity has been met. A hybrid trading approach can often produce more effective results than either a system trading approach or a discretionary approach by relying on the rudimentary idea that sometimes the sum is greater than the parts.
The first is that the day trader is less exposed to event risk than a long term trader. I get in and out of the market as quickly as possible. I am in the market during primary trading sessions, so my stops are normally filled at or near the specified price. A long term trader may find that an unforeseen event triggers big moves when primary markets are shut, forcing price to gap way beyond protective stops when markets re-open. Minimizing exposure to event risk while trading leveraged instruments is a key benefit of day trading, and why I think it is one of the least risky forms of trading when done properly. Another reason I prefer day trading is that I can work through losing spells more quickly. All trading methods encounter drawdowns when traders have a losing spell. If a typical drawdown for your system spans a period of 10 trades, and the average duration of each trade is 2 weeks, you face drawdown periods averaging twenty weeks. But if you are a day trader completing one trade each day, your average drawdown period is just 10 trading days. If you complete more than one trade per day, the drawdown period is even shorter. It is never pleasant being in drawdown and it is easier to stick to your system if drawdowns are short. Twenty weeks, or more, in a loss situation tests the resolve of any trader.
Day trading is a broad term, encompassing many trading styles. The one thing all day traders have in common is that they are out of their positions at the end of the primary trading session. No open positions are held overnight, at weekends, or even during lightly traded electronic sessions outside primary trading hours. The typical image of a day trader is of a person glued to a screen during long market hours, possibly entering several trades during the course of a day. That is true of many traders, but there are other styes. For example, my own approach is quite different. The biggest problem in day trading is trading costs. A day trader takes many more trades than a long term trader, so obviously costs are higher. Typically trading costs are a combination of brokerage fees and trade slippage. In my experience, trading costs can get out of control if you take too many trades, so I limit myself to one trade per day.
As told earlier, there are a variety of products available for day trading. The most popular ones are the stock and the forex currencies. Others include options like stock options and futures options, and futures like currency futures, stock futures, stock index futures and commodity futures.
An early entry is especially good if the exit strategy can be automated. I can set up an OCO (one cancels other) group to implement my exit strategy without having to monitor the market after the trade is entered. Thus, after watching the market for up to 30 minutes to find an appropriate trade entry, I can set up the OCO group and just leave the trade to work. As I live in Australia and trade at night, this means I can go back to bed! Finding the right entry is the great challenge, especially in the fast moving period as a market opens. The trader hasn't got a lot of information to go on at this stage. I've generally found technical indicators to be worse than useless at this time, because they react to price changes too slowly. Most professional traders try to determine support and resistance levels, based on significant turning points in prior sessions, or the extremes of an opening range established in the current session. Traders then apply one of two broad strategies - either they sell resistance and buy support, or they buy breaks through resistance and sell breaks through support. They can devise an almost limitless range of tactics to implement either strategy. Whichever approach is chosen, it is important to manage trades in such a way that the average winning trade (including trading costs) is bigger than the average losing trade (including costs). I aim for a ratio of 2:1, that is, the average win is twice the size of the average loss. I also try to keep my winning percentage of trades greater than 50%.
There is a third approach to stock day trading which combines both approaches described above. The hybrid trading approach merges together system trading and discretionary trading. Under a hybrid trading approach, you would employ objective system trading rules for those parts of the decision process that will enable you to achieve consistent results, but discretionary decisions would only be allowed for situations that don't materially affect the outcome of the trade. For instance, identifying when a trade opportunity exists and when to enter the trade would be performed under objective system trading rules. However, discretionary decisions regarding how and when to exit the trade would only be allowed after your first profit objective has been satisfied because the essence of the trade opportunity has been met. A hybrid trading approach can often produce more effective results than either a system trading approach or a discretionary approach by relying on the rudimentary idea that sometimes the sum is greater than the parts.
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Frank Miller has a Debt Consolidation Blog & Finance, these are some of the articles: Frugal Tips For Back To School Shopping You have full permission to reprint this article provided this box is kept unchanged.
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