My Most Popular Day Trading Strategies
What are Day Trading Strategies?
A day trader is two things, a hunter of volatility and a manager of risk. The act of day trading is simply buying shares of a stock with the intention of selling those shares for a profit within minutes or hours. In order to profit in such a short window of time day traders will typically look for volatile stocks. This often means trading shares of companies that have just released news, reported earnings, or have another fundamental catalyst that is resulting in above average retail interest. The type of stocks a day trader will focus on are typically much different from what a long term investor would look for. Day traders acknowledge the high levels of risk associated with trading volatile markets and they mitigate those risks by holding positions for very short periods of time.
Profitable Day Trading Strategies
In order to profit from small moves in price in over a short period of time, most day traders will take larger positions. Some will even engage in the high risk practice of trading on margin (money borrowed from your broker). For example, a day trader with a $25k trading account may use margin (buying power is 4x the cash balance) and trade as if he had $100k. This is considered leveraging your account. By aggressively trading on margin if he can produce 5% daily profits on the 100k buying power he will grow their 25k cash at the rate of 20% per day. The risk of course is that he will make a mistake that will cost him everything. Unfortunately, this the fate of 9 out of 10 traders. The cause of these career ending mistakes is a failure to manage risk.
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All Day Trading Strategies Requires Risk Management
Imagine a trader who has just taken 9 successful traders. In each trade there was a $50 risk and $100 profit potential. This means each trade had the potential to double the risk which is a great 2:1 profit loss ratio. The first 9 successful trades produce $900 in profit. On the 10th trade, when the position is down $50, instead of except the loss the untrained trader purchases more shares at a lower price to reduce his cost basis. Once he is down $100, he continues to hold and is unsure of whether to hold or sell. The trader finally takes the loss when he is down $1,000. This is a trader who has a 90% success rate but is still a losing trader because he failed to manage his risk. I can’t tell you how many times I’ve seen this happen. It’s more common than I bet you’d think. So many beginners fall into this habit of having many small winners then letting one huge loss wipe out all their progress. It’s a demoralizing experience, and it’s one that I’m very familiar with! We will discuss in detail how to identify stocks and find good trade opportunities, but first we will focus on developing your understanding of risk management.
Warrior Trading Case Study
Every Day Trade Needs a Max Loss (Cap your Losses)
Over my years as a trader and as a trading coach I have worked with thousands of students. The majority of those students experienced a devastating loss at some point due to an avoidable mistake. It’s easy to understand how a trader can fall into the position of a margin call (a debt to your broker). The money to trade on margin is easily available and the allure of quick profits can lead both new and seasoned traders to ignore commonly accepted rules of risk management. The 10% of traders who consistently profit from the market share one common skill. They cap their losses. They accept that each trade has a pre-determined level of risk and the adhere to the rules they set for that trade. This is part of a well defined trading strategy. It’s common for an untrained trader to adjust their risk parameters mid-trader to accommodate a losing position. If for instance they said the stop is $50, when they are down $60 they said they’ll hold just a few more minutes. Before you know it, they are looking at an $80-100 loss and they are wondering how it happened.
Strategies for Maintaining Composure
I admit that it’s extremely difficult to achieve the level of composure to sell when you hit your max loss on a trade. Nobody wants to lose, but the best traders are great losers. They accept their losses with grace and move on to the next trade. They never allow one trade the ability to destroy their account or their career. I personally focus on accepting small losses, and not letting them get me frustrated. Learning this characteristic will keep them in business as a day trader for a long time.
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The 8 Steps to making $200/day –
Learning How to Day Trade
1. Join the Day Trading Chat Room
Join the chat room and begin studying the Intro to Trading Course that comes free with all signups. This is the beginning of your education. You need to study the markets, analyze charts, and learn the strategies professional traders are using every day.
2. Learn the Momentum and Reversal Day Trading Strategies.
The Momentum and Reversal trading strategies are being used by thousands of our students in the Trading Courses. These strategies can be the basis for your $200/day trading plan. We teach all the details of these strategies in our day trading course, but we also cover them in summary in several blog posts and in chat room Q&A sessions.
3. Adopt a Trading Strategy and Write your Trading Plan
Adopt one of these trading strategies. Choose the one that is a good match for your skill level, your risk management tolerance, and the time of day you plan to trade. Students in our Day Trading Course can download our written trading plan documents.
4.Trade the Strategy for 1 month in a simulator
Make a plan to trade this strategy in a Simulated Trading account for 1 month to test your skills. Your objects will be to achieve a percentage of success (or accuracy) of at least 60%. You also must maintain a profit loss ratio of at least 1:1 (winners are equal size on average as losers). If you can achieve these statistics, then you are positioned well to trade live. During the 1 month of practice, try to take 6 trades per day.
Your most important objective will be to follow your Max Loss rules so you never have a loss that exceeds a predetermined amount. The most important skill you need to learn is to cap your losses.
5. Scaling Out of Winners
When I have winning trades, I scale out of the positions to take profits and adjust stops to break even as quickly as possible. I never hold a position that has achieved my profit target and hope for a bigger winner. The reason is because all too often the price can drop and you will end up giving up that profit. Instead, as soon as I’ve reached my first profit target (if I’m risking $100, then as soon as I’m up $100), I’ll sell 1/2 my position and set my stop at breakeven. This method of scaling out ensures small profits on all trades that move in your favor, giving you a better percentage of success.
6. Hitting the Daily Goal & Profit Loss Ratios
Lets say you take 6 trades/day with a $100 max loss and $100 profit targets. If lose on 2 and you win on 4 (about 65% success rate), and down $200 on losers, and up $400 on winners, giving you a net profit of $200/day. Ideally we want students to be risking $100, to make $200. That would give you a 2:1 profit loss ratio. Again, with 6 trades and a 2:1 profit loss ratio, your 2 losers would still be down $200, but your 4 winners would be $800 in profits, giving you a $600 net profit. With the same percentage of success, if you can increase your profit loss ratio you will make a lot more money!
Once you’ve hit your daily goal, decrease your position sizing so you don’t lose the goal. Finish the day green, and do it again tomorrow.
7. Maintain You Accuracy By Being Disciplined
As long as you can maintain accuracy of at least 60%, and maintain profit loss ratios of at least 1:1, you can be a profitable trader. Over time accuracy will improve and you will find yourself hitting winners right out of the gates. Some days you may even trade at 100% success with winners on all 6 trades you take.
If you plan to succeed, you must follow your trading plan. That means ONLY taking trades that fall into your strategy. Sometimes beginner traders start to gain confidence and then venture outside the strategy that works the best. This causes their accuracy to drop and profit loss ratios to go negative.
Focus on short term goals! You goal today is to take 6 trades, with 60%+ accuracy and 1:1 profit loss ratios. Rinse and repeat. That’s the ticket to success. Before you know it you will have 3-4 months of consistent trading under your belt.
8. Increasing position sizes
For most students, once his or her accuracy has improved the next step is increasing positions sizes to maximize profits. If you’ve been trading at 65% success with 1:1 or 2:1 profit loss ratios for at least a couple of months you should be starting to feel pretty confident. Now it’s time to increase your position sizes. Since you’ve been working with a $100 max loss, you’ve probably rarely exceeded 2000 shares.
Now if we increase your max loss to $150, you can start to venture into larger size positions, and bigger daily goals. Remember that your daily goal is 2x your max loss per trade. So if your max loss is $100, your goal daily is $200. Max loss is $150, daily goal is $300. Personally, my max loss is $500 and my daily goal is $1000. I know some students who have a max loss as high as $5k/day. Even though it’s hard to imagine right now, that’s the potential of a strategy that is scalable! All the strategies we teach are scalable