The Key to Day Trading Success
The key to day trading is to permit yourself only one of four possible outcomes for every trade you take.
4 allowable Trading Outcomes.
1. Small Loss
2. Breakeven
3. Small Gain
4. Large Gain
NEVER ALLOW A BIG LOSS
First and Second outcomes are already covered in earlier posts. Let us discuss about third and fourth outcomes.
Small Gain
A small gain on a trade may be a quick scalp of ½ percent or more when a stock makes a sudden move in your favor or may be the result of taking profits on a trade that just isn’t going anywhere and you are closing it out before the end of the session.
Large Gain
When you take a precision entry and end up catching a substantial intra-day price move you can experience a large gain on a trade. Stocks make long range moves about 1out of every 5 days and if you get on the right side of these they can be profitable.
The precision day trader should always strive to achieve more winning trades than losing trades. While this seems like an obvious concept, there are many trading books out there that try to convince you that you can make big money even if you win only 20-30% of the time as long as you win big. While this may be true in investing and even in Swing Trading it is not so true in day trading. The problem is our time horizon of seven hours to achieve profits while the market is open. Our gains on trades intra-day can only be so big. Therefore we must attempt to win more than we lose and this is accomplished by the accuracy of our entries and the timeliness of our profit taking.
If we use strict ½percent stop loss rules on all of our trading then we want the bulk of our winning trades to be 1% or greater. Remember the average stock moves 2.5% to 3.0% per day and if you catch a long range day it can be double or even triple that. If we get stopped out with a 0.5% loss twice,
stopped out at B/E with no loss twice and catch a 3% run on a stock experiencing a long range move, then our net profit for the day after 5 trades is positive. This is a win.
Many Day Traders are not sure when then should take profits on a trade that moves in their favor. We have probably all experienced the trade where we take profits on a trade much too early and the stock goes on tomove 3 times the distance from our entry. We feel cheated and short-changed. Lets say you went long 100 shares on a stock and quickly experienced a 1% gain on the trade in the big run up bar. You should take profits on half the position and keep the other half protected at B/E. A bit later in the trade when you notice the stock consolidating and respecting an upward sloping trendline you can slide your stop under that level. As the stock climbs the trend line, you can move your stop. You take your 2ndprofit on a trend line break with an extra 1% gain.
With only a 0.4% daily profit on your initial trading balance you will double your account within one year. Multiplying 0.4% against your available trading capital helps you determine your Daily Profit target in terms rupees. This will give you weekly and monthly targets as well.
The Daily profit target is important as it gives you a defined objective to work towards each day. At the end of the day you will have either met this objective or not and this framework will help you stay focused. Having a realistic target to aim towards each day will also give you a sense of achievement each time that you attain your trading goal and will also help you to become a more careful trader. How? You will quickly learn that getting sloppy, swinging for the fences and taking a big loss on atrade is just going to be a gamble that can set you back on your plan.
