Last updated on April 19th, 2017
You’ve been seduced by the rags to riches stories from day trading and decided that day trading for a living is something you are going to do. Even though statistics show the odds are stacked against you and the success rate is extremely low, that is not going to deter you.
I’m not going to get into the basics such as broker selection or the trading software you are going to need. You should know though that you don’t have to spend an arm and a leg because there is a lot of free trading software available from charting packages to news feeds. Even your broker will offer freebies as part of your business relationship with them.
If you were to follow these 6 steps below, you will be well on your way to mastery of the 3 main areas necessary to succeed in trading: methodology, risk management and trade psychology.
Are all three of of those areas of equal importance? If you have ever read any trading books like The Market Wizards that feature famous day traders, swing and position players, you’d read that the method used to find trading setups is the least important variable of all. Risk management and psychology is their biggest asset.
Day Trading Mastery In 6 Steps
While you are reading this, it’s sure to spark some thinking on your part so keep a notepad handy to jot down any thoughts you may have. It’s been said that you should never walk away from the moment of decision without doing something towards the goal and there’s no time like the present to do just that.
Stage 1: Figure Out Your Reasons For Wanting To Day Trade
Establish your reason for trading. Hopefully you will have pruned your reason down to 3 simple words. “TO MAKE MONEY!”
Realize that in order to achieve your reason for trading you must accept the fact that you have to first learn to not only accept losing, but embrace it.
How do we do that?
By not losing the forest among the trees.
In other words, understand that we make money from the edge that our trading system gives us over a big basket of trades. One trade is meaningless as it’s a large number of trades that will set you up for failure or success. Your losses, if following your edge, will eventually lead to the winning trades.
In order to actually accept the fact that you will lose, you must first learn to take internal ownership of the trading methodology. If you skip this important step, you will be merely taking a “leap of faith” thinking that the method will work without actually trusting it.
It will then rear its ugly head once you are in a trade. You will not trust your edge and will intervene in a trade (based on emotions) and once you do that, you are no longer trading the system that have put your faith in through testing.
This is how you end up like many who have come before you. It will undoubtedly lead to your undoing.
Stage 2 – Accept How You Make Money Trading
Seek a beginner’s market where you can risk 2% or less per trade with a $5000 account. Many traders with a small account may appreciate markets like the YM, Nasdaq or even Forex when they start day trading.
Why? Because you can trade 1 contract and your average risk per trade will be less than 2% per a $5000 account.
You can use any number of day trading strategies but the key is you must have faith that you’ve seen an edge in the system you’ve chosen. How do you accomplish that?
Manually back test!
Make sure you back test correctly. You can do this by posting at least 100 trades (200 is better) in your spreadsheet. Witness the results of your back test and take note of the losses as they relate to the winners.
Notice key stats and results like the Most Consecutive Losses and Largest Draw Down Period. I refer to this as the “One Step Back” mode. After you complete this, then take the “Two Steps Forward” mode that follows.
Take note of how your internal self reacted to “uncomfortable” set-ups. Then notice the net profits that occurred through your 100+ trades, despite your discomfort and the losses that happened throughout.
You should be thinking, “Wow! This really does work.”
- You are beginning to accept.
- You are beginning to believe.
- You are beginning to take internal ownership of the system that will be your main tool for achieving your reason for trading.
Be serious and realistic!
Rome wasn’t built in a day. Don’t think you can take internal ownership by short-cutting this step Back testing is boring (I still prefer doing it by hand…bar by bar) but without it you will not fully trust in your trading system
There are only short cuts to draining your trading account… not to growing it. Realize that successful trading is not some place you magically arrive at overnight. It is a day to day, trade after trade business journey.
Do The Opposite Of Losing Traders
Stage 3 – Practice Makes Perfect For Beginners
Now you are ready to simulation trade this market and we will call this the forward testing phase Sim trading is NOT the same as real trading nor do we expect it to be. But it does serve a valuable purpose: it allows you to perfect your craft by learning how to execute your trades in real time, while still adding trades to your spreadsheet, building your data set even beyond your back test.
You are also reinforcing and perfecting your knowledge of your day trading rules and watching how they play out on the chart.
Sim trade for a few weeks to how every long it take to feel you have a firm understanding of how the trading system works (meaning that you can recognize all the trade set-ups and you can execute them) . This is the time you will feel you are ready to start trading with your live account.
You may have heard this before but I consider it one of those “secret tips” that most people don’t know:
Commit to taking 25 consecutive mistake-free trades, live, in your sim account before you top up your online trading account and start trading live.
A mistake can be anything including:
- execution errors
- 2nd guessing
- moving your stops and targets outside of your plan
- missing an entry
- not adjusting around a key level, etc.
If you make a mistake on the 24th trade for example, you must start over at 1 again. Consider this your “dress rehearsal.”
Make sure you are practicing with all rules in full effect including any “cut-off” times you’ve chosen. At Netpicks, we call this the “Power of Quitting” and it is something you should really consider.
The understated and often-forgotten ingredient to your long-term trading success is discipline. By practicing how you will ultimately trade in reality, you will be strengthening this critical aspect of your trade plan.
Don’t shortcut this process.
Stage 5 – It’s Time To Start Day Trading Live
Once you have achieved your 25 consecutive mistake-free trades while day trading your sim account and have meticulously tracked each and every one of them with your ever-growing spreadsheet, you will now have seen how your system works, over and over again.
You will have lived through the ever-repeating “two steps forward, one step back” routine enough times to adequately allow your inner-self to claim that profound and deep internal ownership of your trade plan. You are now ready to succeed… and you will!
- You have learned that we make money based on the edge of our system.
- You have learned that losing trades and money is part of getting back on the winning side because your edge will play out.
- You’ve seen, even in your sim account, that emotions play a huge part in trading and you are committing to lessen their hold on you.
Lean on your system and take your trades, because that IS the only way to continually make money trading.
Allow yourself to trade 1 contract only, until you can take 25 mistake-free trades, consecutively, live with real money. You know the drill. Start back at 1 again if you make a mistake. Remember, this is real money now.
Stage 6 – Monitor Trade Statistics and Tweak Your Trading Plan
Earn the rite of passage as a trader. At this point you may begin trading with a standard 2% risk per trade if it suits your trading account. Establish your prior day’s ending balance and use that to determine what a 2% risk would be and how many contracts you can take per the average trade risk of your chosen market and time frame.
As your account grows, so does the number of contracts you can trade. Again, keep it to the 2% risk per yesterday’s ending account balance. 2% risk, combined with your winning edge will keep you on the winning track (provided you trade accurately) and an every increasing trading account.
Back test other markets and time frames if/when you are ready to trade other markets following the plan laid out above.
We need to keep a higher perspective by not focusing on just one or two trade results so we will not lose sight of our end-game goal. With the two steps forward, one step back dynamic that will ensure our equity curves grow in a stair-step manner, we fully expect to lose.
We have accepted our way of making money day trading and we have learned that we MUST sacrifice 1/3 of all of our trades to get to the 2/3rds that satisfy our reason for trading.
If you do wind up losing your way, stop. Take a step back. Re-evaluate. Go back to Stage 1 and start over again.