Strategising is a necessary skill in day trading


When markets are trading sideways and down it becomes more attractive to abandon buy and hold strategies which are not generating returns and instead look at directionally agnostic strategies like active trading. The first thing you must understand is that the fundamentalist approach that you have come to use to analyze investments are no longer any use in fact they may actually be detrimental to your trading. If you have a certain bias about what you believe will be the direction of a particular asset, be it stocks, bonds, commodities, forex or cryptocurrency based on what you believe to be the long term outlook. You may fail to properly interpret the technical data that underpins trading.

You may have been attracted to day trading by something like an broker advertisement that made making money using active trading strategies look so easy. The actual mechanics of making it work however requires a whole new set of disciplines that though not difficult to learn are often more difficult to put into practice. It can also be quite demanding on your time and place constraints on what you can do. Buying a stock using long term buy and hold techniques and you can forget about it. As a day trader you will want to be able to constantly monitor your positions and will never want to be away from them for very long while you have a trade on.

Most traders will set aside a block of time that they intend to use to trade. Usually this will be a period of six to twelve hours when they intend to have the positions open. They will never want to leave a position open overnight. You need to be able to react to in real time to changes in the market. To be successful as a trader you really only need to right about the directing of the asset you are trading about sixty per cent of the time. You make your money by limiting the losses when you are wrong by quickly closing out your positions when the market starts to go against you and by letting it run as far as it can when you get it right. Many people who do day trade enjoy it because they can put in intensive blocks of time and then take long periods off from trading completely.  You could set aside twelve hours blocks over three days in a row and then take four days off as a long weekend that lets you enjoy travelling.

So as you can see not only can day trading going to have a huge impact on how you use your time but it is going to require that you learn a whole different methodology for judging investments. While fundamental analysis of stocks may require that you learn how to read and interpret financial statements, trading requires that you learn technical analysis and how to read and interpret charts. Once you have mastered how to read charts they will provide you with all the information you need to make your trading decisions. There are lots of online resources that can help you learn technical analysis and even resources that will let you put what you are learning into practice by doing simulated trading on real markets. It is much better to take losses when you are still learning in a simulated environment and then once you start to feel confident in your abilities make the switch over real trading.

The other discipline that you need to cultivate to become an effective trader is how to remain calm and unemotional even in the face of losses. Most people get more affected emotionally by losing than they do about winning. This is a good thing. It prevents people from becoming addicted to gambling. People who develop gambling problems often have the opposite emotional responses. But for the trader you will want to make your trades with as little emotion as possible as emotions will often lead to you making poor trading decisions either by being overly cautious when you should be more aggressive or more aggressive when the charts are telling you to lay off risk.

Day trading is not for everyone, it is very much a lifestyle choice and you may be too time constrained or emotionally incompatible with it to be a success at it. Or you may just be unwilling to devote the time necessary to learn how to do technical analysis. But if you think that it is something that you might be good at and might enjoy then there are ways that you can try it out in a sandboxed environment and see if it is really for you. It also does not have to be a choice between long term investing and day trading. Many people are able to compartmentalise the two and day trade while having a seperate long term investment portfolio.

Leave a Reply

Your email address will not be published. Required fields are marked *