Day trading guide

In some ways, day trading is like a 'made-to-order' profession. To a large extent, you can work when and where you want. You can dictate exactly how and when you want to trade, working from your office or home, or even when travelling, thanks to the advances in mobile technology and the increasing popularity of mobile trading.

Private day trading allows you to be your own boss, putting you in control of your own time and money. So what's the downside? The very fact that you have total control is sometimes a frightening prospect for many, especially those who find it difficult to create and manage their own timetables.

How is day trading different to longer-term trading?

Technically speaking, the only difference between day trading and other forms of trading is the timeframe used. Instead of taking positions for weeks or years, day traders typically hold positions over one day, often exiting positions before the market closes. Active day trading requires much more focus than other types of trading due to the shorter timeframe, and because the market moves quickly over the shorter term.

Things to remember when day trading

Know your state of mind

Take stock of the thoughts and motivations that are running through your mind while you're trading and if your thoughts are a little 'off', don't hesitate to take a break. Day trading is hard work and it requires constant attention. You need to be focused and in the right frame of mind when you're trading.

Follow your own rules

Discipline is by far one of the most important attributes that successful traders have in common. Keep a watchful eye on your bad habits. Know what they are and look to resolve them as soon as possible. One way to check to see if you are trading in a disciplined way is to define a set of rules to govern your trading decisions and then check to see if you are following them. Your rules should be carefully considered and they should be designed to help you trade successfully.

As a day trader, it's a good idea to re-evaluate your rules at the end of each month, due to the shorter time frame of this style of trading. Keep in mind that you will break your rules occasionally - it's inevitable, but it's not a good habit to get into. Find ways to stop yourself from breaking your rules and look to address it if it is becoming a problem.

Manage your money

Money management is essential if you want to become a successful day trader. In fact, money management is one of the essential elements of successful trading over any time frame. Certainly, if you are planning to trade for many years to come, you are going to need to apply successful money management strategies. There are whole books dedicated to money management, containing many approaches, and you need to take the time to find a method that you're comfortable with.

Some traders look to enter trades that have the potential to gain twice what they are risking on the trade. This is known as a risk-to-reward ratio. If a risk-to-reward ratio in excess of 1-to-2 is maintained, the chances of remaining profitable are better. Remember, it doesn't matter if you win 90% of the time if your losses are much larger than your wins. What's important is that your wins are larger than your losses.

Always use risk management

Never forget to use stop losses to manage your risk when you are placing your orders to enter the market. This is your insurance. You need to be aware of exactly where your stops should be prior to entering the trade. This is a good habit to have and it will ensure you are constantly thinking of how to protect yourself from trades that go against you.

The psychology of day trading

Once you have developed an informed opinion – try to act quickly and decisively. When your price levels have been reached and the prerequisites for your trade have been met, you should consider acting quickly, otherwise the trading opportunity may be missed and all of your planning and research may have been for nothing.

You should always try to remain calm. This is especially true when you are faced with a loss. Maintain a calm disposition and react in accordance with your rules. Mentally rehearse your worst-case scenarios so, if they do occur, you are prepared and can keep a level head.

Don't let other traders' opinions influence your trading. Sometimes other traders will offer their views on the market and give advice without considering your trading methodology. Remember, no one has put as much effort into your trading system and style as you have. You know your timeframes and your stops, so you need to stick to them. Other traders will have a bias. If you want advice you should consult a professional who will be able to appreciate your style of trading and give their thoughts accordingly, without throwing you off course.

Maintain your independence. If you find yourself reaching for the phone or looking to send an email to someone in order to back up your view, then don't place the trade. You should be able to trust your own instincts. Once you have conducted your analysis and calculations and you've reached your conclusions, then don't doubt yourself. There is a reason why you have come up with your entry and exit signals at your key points, so believe in those numbers and don't second-guess yourself and rely on others to confirm your ideas.

Emphasis needs to be placed on the importance of patience when trading. If you can't find any viable trading opportunities, don't force yourself to trade. As you get to know a market you may find that knowing when to trade becomes easier. Your intuition is something that sharpens as you become more experienced as a trader.

Be aware of your stress levels. Day trading can be stressful as it requires constant attention and motivation. You can counter this by taking time to think about your priorities. Get some perspective on trading and its place in your life. Increased stress levels can have a negative impact on your trading decisions so, if you feel like your stress levels are rising, it's probably a good time to step away. You can come back to trading later when you are in the right frame of mind.

When you're trading it's also necessary to be flexible with your positions. Market conditions can change rapidly and so you need to be flexible in your approach. You need to be ready to adapt to changing market conditions all the time if you want to stay ahead.

Stick to your chosen market and a particular timeframe. These are two parameters you can control in an environment that can change very quickly.

Never be afraid of taking profits. If you find that you have exited a trade at a profit but the trend continues, don't regret your decision. Let the other traders out there fight over the last part of the move. You have made a profit, which is a lot better for your account balance than making a loss, and you can start looking for the next opportunity. If you worry that you are continually exiting too early and are missing out on profits, you could design and test a re-entry technique. If, as a short- term trader, you find yourself making more profits than losses, you shouldn't worry too much about taking profits a little bit early sometimes.

Keep detailed trading records

When you are running a particular trade you should look to write down your reasons for entering it. This will help you later when you wish to evaluate your past trades in order to learn from them. By keeping good records and writing down precisely why you entered the trade you can increase your learning curve and success. Taking the extra time to do this can help you improve your trading.

You also need to have a clear picture of whether you are in front or behind for the day, week or month. Keep these numbers handy as you need to take responsibility for them. We all know that there is a lot to be learned from hindsight so, after you have been day trading for a month, take some time to evaluate what you have done. Look at your trades and ask yourself whether, if you could do the trade again, what would you do differently? This can help you to become a more consistent and successful trader in the long term.

​CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

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