So, You Want to Be a Day Trader…?
What is Trading?
Trading in this specific context refers to buying and selling securities based on specific strategies. These strategies are developed by using technical analysis. Which we, as traders, use to identify low risk, high reward, high probability trade setups. Traders will often utilize advanced software and indicators to perform accurate analysis or trade setups and management. There are many different types of trading including: day-trading, intra-swing trading, or long term position trading. It is different than investing in that it allows for extraction of income and does not hinge on a percentage growth of capital. Think of it like investing for people with ADHD.
Pros & Cons of Trading:
As with anything in life, there are good and bad things to consider when beginning the life of a trader.
PROS:
- You’re able to make money in both bullish and bearish markets.
- Risk can be actively qualified and quantified for each trade.
- High liquidity of personal assets.
- Able to utilize multiple strategies and setups to profit from opportunities.
- You can make your own financial decisions.
- Focus on extracting income from trading, not % returns over time.
CONS:
- Taxation is a liability if your corporate structure is not set up properly and you are trading full time for an income.
- More decision making required due to being more active in the markets.
- It can be risky in many different ways, further outlined below.
Types of Risk in Trading:
Outlined below are just a few of the types of risks you may encounter when trading. By knowing them and preparing yourself, you stand a great chance of becoming a successful trader.
- Price risk (price fluctuations) – Increase and decrease in price movement can cause significant losses, especially if you don’t know what you’re doing before you enter into a trade.
- Liquidity risk (volume) – Different market factors can make it hard to unload the security you’re holding if demand is low. This can leave you tied up in a trade that may not be desirable.
- Credit/capital risk (insufficient capital) – Trading the wrong markets or not having enough capital to trade successfully can be a big challenge. If you don’t have enough money to trade successfully, this is probably not for you.
- Capital markets risk (global risk) – Global catalysts (war, political, natural disaster) are often unpredictable, but can still directly affect your trades.
- Volatility risk (news risk) – Announcements from the Federal Reserve, economic data, and business information are among some of the common causes of market volatility.
Ok, Let’s Do This!
Now that you’ve looked over that list and you know you can handle it… What’s next? Building a strategy that works for you will help ensure your eventual success. We at NeuroStreet like to break it down into two categories: Trader Type & Trader Style. A traders type relates to their time horizon, goals, commitment level and availability to trade. A traders style relates to their trading strategy. Many traders (including NeuroStreet traders) use a combination of styles to allow their strategy to remain effective in changing and dynamic markets. We will explore trader types and styles in more detail in our next blog post.
3 Steps To Take In Order To Become A Successful Trader
Use this 3-step plan to stay focused on your own success.
#1. Get Educated!
Learning an effective trading strategy can seem like a huge hurdle, but it doesn’t have to be. As you approach trading, it’s crucial to not skip steps in the learning process. Make sure you understand all of it’s components before you trade live markets. Using software can also help to enhance decision making. Treat trading like a business, not a hobby. Also, make sure you are mentally prepared for trading. Doing practice exercises, marking up your charts, doing bar-by-bar analysis in simulation and market replay will drastically improve your chance of success. If you treat this seriously and want a positive outcome it is important to follow this process while being patient to learn and develop your skill. Those who do the work will be rewarded by their skill and application.
#2. Develop Your Skills (LUCK = Preparation + Opportunity)
This is an important step that people often skip. I’m sure you’ve heard it before, that a successful trader is “lucky” somehow. Trading is not about luck it’s about preparing and knowing when to capitalize on opportunity. Those who practice their skill and trading education reap the rewards. It is important to know what level you are in the trading learning process. We like to break it down between these 4 different stages, to give you a better idea of levels of growth.
Stage 1: Unconscious Incompetence (we don’t know what we don’t know) – “You are unaware of the skill and you lack the proficiency”
Stage 2: Conscious Incompetence (we know we don’t know) – “You are aware of the skill but you are not yet proficient”
Stage 3: Conscious Competence (we know we know) – “You can perform the skill but only with effort”
Stage 4: Unconscious Competence (we don’t know that we know) – “Performance becomes automatic”
Being open and honest about where you are in the process will help you decide what to work on next. Don’t be embarrassed if you’re not at stage 4. Even professional traders had to start somewhere and, by admitting you aren’t the best at something, you are now on your way to changing your future.
#3. SIM to LIVE Trading process
In order to get to the “Unconscious Competence” level, we need to treat trading like a business not a hobby! Start first with simulated trading before going to live trading. We can plan for success by only taking the best setups and practicing patience before action. Evaluate risk when planning your trade setups. What works for you might be different than what works for someone else. The most important part of this equation is Practice, Practice, Practice!
Embrace the process and don’t be afraid to make some mistakes along the way. Start with healthy expectations and work towards improvement, but don’t expect perfection or certainty EVER! Even pros have losing days, although I’m sure many of them would not admit it.
Start a trading journal. When you take a trade, log it in your journal and review it. After you have an extended time of trades in your journal, go back and evaluate your decision making to look for +/- patterns and areas that need improvement.
Get your head in the right space by reading about trader psychology. We recommend “Trading in The Zone” by Mark Douglas, but there are many other resources online and at your local library.
As you’re starting out, you should be trading on simulation for at least 4 to 6 weeks or until you have mastered confidence, consistency, patience, rules, trade selection, profitability, and positive belief. Trading live markets prematurely causes traders to set themselves up for failure.
So, there you go! A comprehensive plan to get you from where you are now onto the path of where you want to be. Only you can put in the work to make yourself a better trader by educating yourself and practicing your technique. Remember: Preparation is key and it’s better to be prepared than lucky.