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The objective of day trading is very different from investing. Investing refers to a long-term investment in an asset class and should be determined by fundamental analysis and global economic climates. Day trading on the other had has nothing to do with a company’s financial standing, their long term growth prospects and even less to do with what the global economy is doing as a whole.
The only thing that matters in day trading is market timing. This being the entry and exit points of your trades and how you view the market to determine them. Other than actually calling the market right the two other factors that will determine if your spread betting can make you money day trading are diversification and risk management.
Market timing – follow the trend…
This simply means don’t fight the market. The key to picking winning trades when day trading is to go with the flow and piggy back on to momentum and get out when the moment is right.
It is very difficult to automate intra-day trading signals because there are so many variables that are not that relevant in longer-term position taking. So it’s best to eye ball the day one minute and tick charts of your preferred markets. Stick to the most liquid such as the major FX pairs, the main indices and to some extent the top traded main market stocks. Investors Intelligence and ChartsTA.com provide some good education material and daily analysis.
For example, a zig zaggy chart will be difficult to predict the next move, but, a chart with a clear intra-day downtrend may continue to go down. Unless you are a reversion expert (and there are very few) concentrating on finding a trend is a good rule to follow.
Diversification – a basic premise for trading
The best traders in the world only get it right about half the time, most traders admit to being right about 55% of the time. But what makes the right trades right is that there are enough of them to run the wins and cut the losses. Traders need to look at as many trends and momentum charts as possible. A good diversified set of open positions against asset classes such as commodities, fx, indices and stocks should provide a bit of protection against economic indicators and external factors influencing price.
Once the positions (say ten or so) are open you should be able to tell in your open profit and loss section what traders are winning and what trades are loosing. When you call a trend correct run it, when you have called it wrong cut it. The skill is in closing positions, not opening them. A profitable position can go on to generate far more profits than ten small losses.
Risk management – using stops and limits.
As above one of the greatest demises of any trader is not cutting a loss. Traders live in hope that they will eventually be proved right and it is essential that realism is exercised. Traders get it wrong and using stops to automatically cut a bad position takes the emotion out of the game. Set yourself an amount you are prepared to lose on each trade and stick to it.
You can read more on what brokers offer guaranteed stop losses here.
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Richard started the Good Broker Guide in 2015 and has been a broker for 20 years most recently at Investors Intelligence and previously acting as multi-asset derivatives broker at MF Global (Man Financial). Richard started his career working as a private client stockbroker at Walker Crips and Phillip Securities (now King and Shaxson) after interning on the NYMEX oil trading floor in New York and London IPE in 2001 & 2000.