Day Trading Tips for Spread Betters

As an investor looking to profit from moves in the market you will either be trading in the short, mid or long-term. Day trading as a trading style is about holding positions for a few hours, minutes or even seconds.

When it comes to online trading, there are many different strategies involved. One of these is day trading which you may have heard of before. Many people claim to make a lot of money with day trading but be warned it is not for everyone. Day trading is in fact a bit of a controversial stock trading strategy. But what is day trading and why is there so much controversy? Is it for you and if so, how can you learn more strategies to make it work?

What is Day Trading?

So what exactly is day trading anyway? Day trading basically refers to the buying and selling of a security within the same trading day. This can be done in any marketplace but it is most typically done in the foreign-exchange market and the stock market. It is an online stock market strategy executed by the experienced and typically the well-funded as you need to have money to be able to buy and sell so quickly in short periods of time. They use leverage and short term trading to capitalize on small price movements.

Why is it Controversial?

Why is day trading considered so controversial in the online stock trading community? Day trading is probably one of the most misunderstood and argued topics on Wall Street today. Many professionals and money managers do not believe the benefits outweigh the risks for this type of online stock trading strategy and most discourage it. However, there are many that do it and claim that there is a great profit to be made if you know what you are doing.

The media plays its part to promote day trading as some sort of get-rich-quick scheme that will make you a millionaire and this really isn’t the case either. Day trading is another online stock trading strategy that must be planned, studied and enacted with the same care as any other strategy and even with that, the unpredictable happens and there is risk involved.

How Does it Work?

So how does day trading work anyway? There are many day traders that play the market as a bit of a gamble. There are big wins but they come with big losses. However, there are some knowledgeable day traders that make a very decent living from it.

Day trading is not to be taken as a “gambling high” or a quick overnight money-maker. However, with the right knowledge and experience in the marketplace, sufficient capital and a proper strategy, you may be able to make a significant amount of money with this type of trading. A successful strategy in day trading is one that gives you a competitive edge over the other traders. With day traders, some successful strategies are swing trading and arbitrage. With discipline and the right knowledge, you may be successful at day trading.

A Word of Warning

Day trading can be lethal and these days I try to reel in my enthusiasm for day trading as I’m well aware of the risks that are involved. When the markets get real jittery, they will range up and down like lightening because they are being driven by day traders. These traders don’t care what direction it goes in as long as they can pyramid trades as far as possible in the same direction. They will place bets across all timeframes including daily so bounces can go on for days in what looks like a recovery before it crashes again. The computer program trades will go with them adding fuel to the fire.

Having said that it is hard trading shares when you see your share price fall by 5% in a day when you come home from work. Obviously when you’re spread betting as a day trader you have much better control over your positions. In any case, trying to day trade these markets can be very rewarding but requires a particular personality. And the thing is you’ve either got it or you haven’t and many fail to cope. If you happen to be one of the majority who can’t cope its probably because this trading methodology can be very emotionally depressing, time consuming and expensive. It’s much easier to hold cash for the good times which probably won’t come any time soon.

Some Trading Tips

You may have been attracted to spread betting by all the perceived advantages, but when you are day trading your account, you need to watch out for some important issues. Firstly, you know that spread betting does not require commissions, which is a good thing, but your broker makes his money from the spread between the buy and the ask price. You should shop around to find the broker offering the best spreads, which is the least difference between the two prices. As this can vary, depending the on market you’re trading, it can be a good idea to open two accounts, and compare before making your trade.

Anyway, trading shares is easier than day-trading if you find it easier and harder if you find it harder. You won’t know until you try. When you are day trading, you need to have action. Spread betting on a price which is meandering sideways is bound to hurt your account because of the spread, and some markets go sideways more than half the time. Look for the trend, either up or down, and trade with it.

Also, if you don’t feel confident with a trade you’re holding, just get out! Day trading is different to swing or trend following and it is a good idea to ask yourself ‘Do I feel confident about my trades today?’ If you are day trading, typically you would have already made a couple of trades in the first few hours of a trading session which should be sufficient to evaluate your performance for the day. If you feel good about your trades, continue, if not it is okay to stop trading for that day.

Don’t be afraid to sell, or go short in the market if your indicators suggest it. Many traders prefer to buy, or go long, looking for an increase in price, so short positions are taken less frequently. But prices can drop more rapidly than they rise, so it is a mistake to not include in your arsenal the possibility of profiting from selling.

Stick to your plan. If your system gives you a buy or sell signal, don’t try to second-guess it. You may have just seconds or minutes to make your trade, and if your system is researched and proven, following it will bring you success.

This does not mean that you should expect all trades to succeed. You may find that only half of your trades go in the right direction, and that’s okay as long as you have good money management. One of the keys to successful trading is not to sit on a losing position, but to cut your losses. This can be hard to do, as some people feel it is admitting they were wrong in entering a trade, when in fact the wrong thing would be staying in the trade.

The second part of money management is sizing your positions. Never make a trade where you will lose more than 2% of your account if it goes against you. You can easily see how much to risk from determining at what price you will cut your losses if the trade goes bad. If you risk more than this, a run of losses can cripple your account.

Don’t pyramid unless you are trading in the zone (google it if you don’t know but it’s a bit like riding a bike without having to think about it). If day trading is high risk – pyramid day trading is super high risk, and for that reason your pyramid trades are best left for the end of the month when your account is healthily in the black. Don’t mistake me – I don’t want to put anyone off as the rewards can be fantastic or encourage anyone as the flipside is very bad news. If you eventually pyramid trade you must take partial profits if using a trailing stop or all profits if you have a target. Taking all profits on a target and walking away without looking back is very hard to do if you are used to using a trailing stop such as a moving average.

And should you feel that you’ve panic sold, never pile back in again too quick – leave it for very clear signal as your judgement will be clouded. In fact, if you feel you’ve panic traded I’d pack up for the day – that requires a lot of discipline. If you end up losing, ending the day down after perhaps trying to get ‘even with the market’, you WILL feel terrible!

The third mistake in money management is to cash out a winning position too quickly. The corollary of cutting your losses is to let your winners run, and this is the way you make money even with the same number of winners and losers. If you are concerned about a retracement, consider exiting half your position and leaving the rest to gain future profits.

Finally keep in mind that day trading is an intense occupation, and demands full attention at all times. While this may be what attracted you to day trading in the first place, you should be aware that you need to be on the top of your game at all times. Day trading isn’t easy and requires lots of screen time, discipline and the patience of a saint. If you are feeling under the weather for any reason, you should seriously consider skipping trading that day. It is a hard fact that 80% of all day traders lose. There is no automated system that consistently makes money, which is why hedge funds go bust and lose lots of money. The only people I know who make, or, more accurately, claim to make money at it are those who I perceive use a high degree of subjectively along with their rules. One of the problems is that when it comes to discretionary decision making rather than following a strict criteria that tells you when to enter, when to close and where to put your stops in place you need to have years of experience.

I would suggest anyone who aspires to become a day trader to follow those who are successful; any information you can accumulate on their trading strategies, philosophies and mechanics should prove useful in developing your own mindset and trading system. Don’t copy others but find what is comfortable for you and stick to it – that also requires discipline. Finally, remember that day trading is a professional in itself and requires long term commitment. I do believe it takes a number of years for anyone to become truly good at short-term trading.

Day trading is a completely different kettle of fish, but as I often hear some experienced traders say, “We don’t buy at resistance and we don’t sell at support”. Very simple statement that if thought about before taking every trade will save you a lot of money.

The statement above is true about support and resistance although both get broken eventually. I suppose you only place your trade once the line has been passed decisively and volume backs it up either way.

Day Trading Experience

In the past I used to day trade. My strategy was lots of small P&Ls. I would often take a profit over several days or even weeks having held a loss in the interim. I’d almost expect the market to move against me as soon as I’d opened a position. I can see how quickly you’d rack up losses chasing the market all over the place.

I don’t like to encourage day trading but for those doing it I’d remind you that it is practically 100% technical analysis. In other words nothing works all the time and losses are inevitable so stops are essential. You must have a strategy and stick to it otherwise you are simply coin flipping. Also after writing your strategy decide what information you don’t need. For example, if you are following a trend with macd or moving average remove all pivots, fibonacci’s and support/resistance lines. They will play with your emotions and cause you to anticipate an entry or exit before your true strategy signal. If you’re trading price action support and resistance clear all indicators from your screen or they will also distract you from your strategy. Strategy discipline is the essential ingredient to being one of the 10 % ers.

I used to work on a bond option desk where we lost £15m over about 6 months (nice work if you can get it ) on large directional trades, I remember being very impressed though with a guy on another desk who traded FX, he spent all year taking lots of little bites out of the market rather than making big ‘macro’ bets. Ironically he was made redundant. The loss making senior traders… they went off to start a hedge fund.

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