I’ve been day trading the markets for over a decade now. I’ve tried plenty of strategies and I’ve been forced to adapt to changing market conditions multiple times. When new traders enter the world of day trading, it can seem like there is an infinite amount of data to process. After all, there are tons of technical indicators, stock charts, trading styles, etc. While there is an overabundance of data available, most successful day traders tend to live by a smaller set of rules. This allows us to simplify decision-making and improve the efficiency of our trading strategies. Here are a few of the most important lessons I have learned over my day trading career. Hopefully, they can help you along your journey.
1. Less is More
When new traders begin day trading, they are very ambitious; they want to master everything! Let me tell you now that you don’t need to nail EVERY trade and you don’t need to watch EVERY stock. Day trading can be very active certain days and slower others. You don’t need to be in a trade every minute. More importantly, you never want to trade just for the sake of trading. Often times, less is more. Day trading is a classic example of the importance of “quality over quantity.”
If you focus on less setups but higher probability trades, you’ll notice that your trading risk is much more defined, focused and gains start to compound. This is far more valuable than trading a million names for small money. If you can make the same profits from trading one ticker that you could from trading ten, why wouldn’t you? Is your time better spent focusing on 10-12 names at $200 a pop or one to two names for the bigger score?
2. Entry is Everything
One of the more difficult aspects of day trading is choosing an entry. You go over a bunch of setups and finally find one that looks appealing, but how do you initiate your position? Entry controls emotions; it’s that simple. Many traders allow greed, anxiety, and fear to control their entries. This often spawns from a fear of missing out on a trade or getting in too late.
It’s important to learn that you MAY miss trades, but if your entry didn’t hit your entry didn’t hit. The goal is not to just enter a stock. Instead, you should be focused on finding an ideal entry that allows you to execute your trading plan with set risk/reward. If you WAIT for the entry you want, your risk is defined and becomes more structured. It’s no longer “Oh no, it dipped WHAT do I do!” “Had I waited for entry, I wouldn’t stop out here, but my average sucks so I may” The point is, if you wait for the trade to come to you, you eliminate all of the emotional questions and just stick to the plan, period.
3. Fear of Missing Out
As mentioned above, sometimes trading less is more. You do NOT need to trade every name. You do NOT need to fear that you will miss a trade. If you miss out, you miss out. There will be plenty of other opportunities in the future. If you create a habit of entering subpar trades, you risk your longevity as a day trader. I saw the following quote once, “I’d rather wish I was IN the trade, than wish I wasn’t in.” This statement is so true. No one likes to miss a prime trading opportunity, but being stuck in a bad trade is far worse than missing out on a potentially profitable one.
4. Find your Niche
The market is filled with an overwhelmingly high amount of information. There are thousands of tickers and plenty of different ways to trade them. As an aspiring day trader, it’s your job to start creating filters. You need to know which trades fit your trading style and which ones don’t. This will allow you to sift through market data WAY more efficiently. In order to do this, you need to work on defining your trading style.
What are you best at? Many traders haven’t a clue. They chase this or that, they short this, they buy that dip, they short that drop and have no real plan. Well, what if you never know what you’re good at because you’re just firing away at different trades? Find a pattern. Find where your gains come from – focus there. Find where your losses are coming from – AVOID those. It’s as simple as saying, “I do really well from 2PM into close but I lose a lot of my money in the first ten minutes after open” SIMPLE FIX: AVOID OPEN. As you do these types of analyses, you can begin to filter out the trades that are costing you money, allowing you to focus more on the trades that are actually making you money.
5. Don’t fight Trend
It’s important to keep in mind that the market has a general consensus at any given point. Either the market is bullish (meaning they believe the stock will go up in price) or it is bearish (meaning they believe the stock will drop in price). This consensus is more commonly referred to as a stock’s “trend.” A stock that is going up in price is experiencing an uptrend, while a stock dropping in price is experiencing a downtrend. DON’T FIGHT THE TREND!
It can be tempting to make predictions about what the market will do next, but you cannot let your own intuitions blind you to what is happening at the moment. We always want to find the bottom or the top but if we are fighting a trend, our risk isn’t defined. Yes, later on as you excel as a trader there can be some GREAT trades that come from buying a washout or shorting a parabolic, but that’s not for the new trader. It’s best to stay away from this action out of the open and let things settle down a bit THEN join a trend. Think a stock has gone up too much after a parabolic break out? Wait to short it until there is some sort of confirmation of a reversal. Otherwise, you are exposing yourself to undefined (and unnecessary) risk.
If a stock is over VWAP and you are long, use VWAP as a guide to risk. If a stock is under VWAP and you are short, you can use VWAP as a guide to risk. As it gets further away and speeds up in either direction consider profits, as this may indicate a reversal of trend. Any time you’re fighting a trend (i.e. short and it’s over VWAP or long and it’s under VWAP) realize it, and realize that you should ONLY be trading contrary to the trend in times of volatility and quick scalps never add add add against a trend.
About Nathan Michaud
Nathan Michaud is a veteran day trader with over a decade’s experience in the markets. Nathan Michaud is a consistently profitable full-time trader, renowned for his ability to read the markets. Currently, Nathan runs one of the largest online day trading communities, Investors Underground. Investors Underground is a day trading chat room and educational service that teaches new day traders how to trade properly and helps traders of all skill levels stay connected during trading hours. The site offers three trading chat rooms, daily watch lists, trade recap video lessons, educational courses, and more.