Tips for Successful Day Trading: A Personal Experience
This article is about an interesting event I’ve discovered with day trading. Most of my trades always had gone against me at first. Here’s my solution to the problem to avoid losing money.
I have over 35 years of stock market experience, buying and selling stocks long-term as well as day trading online.
I don’t day trade anymore. I have not found it to be a very successful endeavor. I prefer longer-term trades, but here is my discovery of how to improve results in case you really want to give it a chance.
When I first started day trading, over 90% of my trades always went against me at the beginning. I was diligent about taking profits, so when they turned around and became profitable, I got out.
The thing that helped conserve my resources was that I took small profits when it came in my direction. If I was greedy and waited, I usually lost money. Greed is a terrible thing in trading and it needs to be controlled.
I realized that this is not a good strategy, though. The time will come that a trade just keeps going in the wrong direction. I knew that day would come.
I needed to figure out why most of my trades started in the wrong direction. You would think that there would be a 50-50 chance. Stocks, futures, even options, can go up, or they can go down.
Moreover, they can go up or down at any time, Even if a stock went sky-high and you think it will give some of that back, it still has a 50% chance of going higher. That’s the statistics. Keep reminding yourself of that, because it might just save you from making a terrible mistake in the future.
Things never go the way you expect. If they did, we all would be multi-billionaires. I thought I knew what I was doing when I started to day trade. When the trend was up, I went long. When the trend was down, I went short.
It was strange how my trades were always going in the opposite direction.
For a while I was thinking that all I needed to do was put on my trades in the opposite direction from what I intended to do.
I figured I’d be successful almost 100% of the time then. I knew that was ridiculous and I was just entertaining myself with the thought. No, I was not serious with that. Nevertheless, I really needed to figure out why my trades were consistently going in the wrong direction.
The Right Way to Use Limit Orders
I was placing all my trades with a limit order. When I saw an upward trend I would go long with a limit order slightly lower than the present price. I was thinking that I was giving myself the chance of a better price because everything fluctuates anyway.
I also did the same thing in reverse. When I saw a downward trend I entered a limit order going short at a slightly higher entry than the present price. Again, I was thinking that I was getting a better price.
What I was really doing was forcing my trades into waiting for a reversal. By placing limit orders as I described above, the trades didn't execute until the trend reversed.
Most of the time that reversal continued, which is in the opposite direction from what I wanted.
The solution would have been to get in right away so that I would have gotten on the ride in the direction that the market was still trending. This is tricky, however. You don’t want to use a market order because the market makers will always give you the worst price.
You still need to use a limit order, but place those limit orders for the asking price on a long trade or for the bid price on a short trade. Those trades will execute immediately and without any surprises.
Once I started placing trades at the bid and ask, my trades moved in the right direction right from the start more frequently. It’s not a 100% certainty, but anything better than 50% is putting the odds in our favor.
<–– Spread ––>
The price buyers are willing to pay.
The difference between the bid and the asking prices.
The price sellers are willing to sell at.
Two Important Conditions to Understand
Now, it's important to understand two conditions about this method.
- The trade still has only a 50% chance of going one way or the other. However, the trend helps a little. Only as long as the trend doesn’t turn on you before you get out.
- It's important to do this only in a market, and with an instrument, where the spread between bid and ask is extremely small. Otherwise, you may not get a chance to close the trade at a profit. Day trading is usually done with small moves. You’re in and out quick, taking small profits. I am sure you can see how a wide spread is no good in this case.
Day Trading Futures
I actually like trading the Mini S&P 500 Futures. It’s heavily traded and therefore has a small spread. That is, the difference between the bid price and the asking price is very small, so if you need to get out soon, you don't get punished by a huge speed.
There are also other advantages that are agreeable to day trading:
- IRS section 1256 allows applying 60% of the gains as long-term for tax purposes, even if held for less than a day.
- There are no day trading limits with futures. The IRS may consider you a day trader if you trade stocks more than three times a day, and that has tax consequences, but not with futures.
Vigilance with Your Money
Day trading requires an awful lot of vigilance with the ability to manage risk and accept failure without letting emotions guide you.
Failure to admit when you are wrong will lead to hoping that the market will turn in your favor. The market doesn't care. It's all up to you to be successful. If you can't be vigilant with your thought process then stay away from day trading.
On the other hand, if you can be strict with yourself and create a mechanical method of entering and exiting trades, then this could be a worthwhile experience where you might be able to make money.
What’s your experience with day trading?
More By This Author
Mr. Stok also writes about strategies he perfected over the years of investing and trading stocks and futures, including defining risk, trading without emotion, and trading mechanically.
Disclaimer: This article is for educational purposes only and was presented to share my discovery of how to increase the odds of entering trades in the right direction. You are solely responsible for your own investment decisions.
Questions & Answers
What is the preferable amount of money to trade long term?
I’m sure any professional trader will agree that the only money you should be using in your trading portfolio is the amount that you can afford to lose.
© 2016 Glenn Stok