The number of people making a living from active equities trading continues to grow. Whether it be professionals day trading for a broking firm (proprietary traders) or individuals trading for themselves at home, the rewards can be substantial. If you are new to day trading, here are a few tips on short-term trading strategies that work and will help you meet your trading aspirations.
The number of people making a living from active equities trading continues to grow. Whether it be professionals day trading for a broking firm (proprietary traders) or individuals trading for themselves at home, the rewards can be substantial. If you are new to day trading, here are a few tips on short term trading strategies that work and will help you meet your trading aspirations.
When to trade?
The key element of successful trading is getting into a regular trading regime at a time that suits you, and when the appropriate market is operating. If you think you can fit a round trading window into a square time availability, then you are most likely heading to disaster. For example, if you're proposing to regularly trade for extended periods after a hard day's work then you will probably be disappointed with the outcome.
To be a successful short-term trader, you need a period of at least 3 hours each trading day when you can totally apply yourself to the task, with no disruptions! For those trading at home, it's best if your trading period comfortably fits into your daily routine and that of your family. The best regime is to have 45-60 minutes pre-market open so that you are ready for the commencement of the day's trading. This means that you are fresh and can focus on the task at hand. If that's not possible then the next best alternative is the final 90-120 minutes up to the close.
Know & Stick by the Market Rules
Before you become an active day-trader it is important that you fully understand the rules of the market in which you are trading. You certainly do not want ASIC to be all over you for erratic trading, so ensure that each and every order you place, no matter how small, complies with the market rules. ASX and ASIC use market scanning software to monitor all orders and trades entering the market.
The most serious transgressions are the “touching up” of stock prices at market close, especially at the end of each month, quarter and year; multiple orders in close proximity to the current price, and erratic order entry and removal. Your broker should be able to assist you with any questions you might have on market rules.
Day trading can be expensive if you trade “too-big” when you are still a novice. Until you get a reasonable win-loss ratio, don't be embarrassed to start with just a few hundred dollars per trade.
Don't tie up all your available funds in day trading. At all times remember that short term trading is no more than an adjunct to your longer term investment strategies.
Know the Market Time
Getting shares in the opening match (or when shares are reinstated after announcements) can be a great contributor to your trading profits. If you are to time your order entry to the most benefit it is most important that you know the exact market time and when each share is coming out of a match.
Get and Quickly Digest the News Feed
A lot of the market run comes from news flow during the day. Always be aware of all the day's announcements. Try to extrapolate company news to other shares in the same field. When reviewing today's announcements, especially those late in the day, ask yourself, “How will this be read in tomorrow's paper?”
Know Your Positions
Successful day-traders will always know exactly which shares and how many they hold, the prices paid, and their remaining orders in the market.
Don't trade too many stocks
When you are starting out, taking positions in up to four or five stocks at a time will be more than enough to keep you busy. Later you might try to increase this, but more than 7-8 is, in my view, at all times risky.
Make the trend your friend
If you're a long only trader, you need to focus on shares that are going up. The aim is to buy a share early and stay onboard while it's running (i.e., not selling too soon), spreading your selling into three or four lots to capture some profit while also retaining some upside. If you buy stocks that have fallen sharply, chasing a bounce in the price, do so with utmost care. You will often find they have been weak for a reason.
Don't hold overnight
Although holding overnight can also be a most profitable strategy, profits can also be blown away by a bad night on Wall Street. As a general rule, a novice day-trader should avoid holding overnight unless the stock is backed by an especially strong chart or an announcement that the market has not yet factored in and which will attract good coverage
Careful with stop-losses
Most trading gurus advise you to always put stop-losses in place. I am wary about using them. If you are not careful they can lead to a steady string of moderate losses according to the level of stop loss you set. The hard part is to decide when to hold, when to cut, and when to increase your position. That's the challenge and the joy of day-trading.
A crucial consideration - Your state of mind
Many will tell you that your state of mind is a key determinant of your trading success or otherwise. The one of the best short term trading strategies is clearly that you need to be sufficiently focussed for extended periods without distraction.
The worst time to trade is when you are under emotional stress. Many turn to trading after they have had a significant life change, for example, when they have just received a large payout through retrenchment or divorce. From my experience, this can be the absolutely worst time to trade without close supervision.
A successful trader is neither too positive nor too negative. The need for a balanced perspective is as appropriate in modern day trading as in any market. If you're too prone to optimism then you'll find yourself paying too much for junk you simply shouldn't want. But of course, if you're too cautious then you'll miss the best opportunities
A good trader will not be too meek, but ably to feel the waxing, waning and shifting directional pressures in the market, pretty much the way a small boat sailor would do. Reading the waters ahead, he will see when a heavy gust is about to hit and be ready to capitalise on it. He learns to instinctively judge when to go hard, when to go really hard, and when to just stay away.
And finally, understand that it will take time
To become proficient as a short term trader, you need to give yourself an extended period for training. You should aim to spend six months on continual daily practice if you are to become anywhere near proficient. Appreciate that it may take 2-3 years to get to the stage that you really know what you are doing. By that time you should have developed skills which would stand you in good stead for life.
If you are mastering short term trading, you will be well on the way to success as an equities trader.