Your first trade of the day will probably lose

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Your first trade of the day will probably lose

Hi all, I’m going to discuss some trades I made a few days ago, I’m just now getting time to discuss them. As I said yesterday, I will be transitioning from posting about multiple trades to one high probability trade a day. It’s just easier and I can go in more depth with one trade. I will go ahead and discuss these last couple of trades.

My first trade I placed finished ATM, which was my first trade of the day. In Brian’s trading videos he mentions that your first trade probably will be lost, and it does seem to be true to a certain extent, maybe its because when we first enter the market, you have to get in the groove of things. Anyways, after price was in a strong downtrend, I was waiting for a pullback in price, because after a strong and fast move the market many times goes into a range. I was looking for a trend continuation signal (ex: 2 leg pullback) and I waited for price to retrace back and I entered on the next candle as price dropped below the low of the previous bar. I should have waited for a 2 leg pullback at least, but I entered on a so called “1 leg pullback”. After I entered price dropped ITM for a while but on the open of the next candle came back up. Once this happened I knew price was entering a range.

My second trade was OTM, and after I entered I immediately knew what I did wrong, and I hate it when I do that. On the 1 minute chart I was waiting for a breakout since price was respecting a clear resistance line. I entered because I was impatient and I didn’t wait for the candle to close before I placed the trade, and sure enough price respected the level again and dropped back down.

My third trade I placed after I waited for price to break out of the range. Since price had a very defined level of resistance that was not broken, I had belief that price would continue south, which also agrees with the previous sharp bear trend. As price broke through the range to the south side, I placed a put, ITM. One thing I must address is the value chart not being at ideal levels, the value chart doesn’t always work and especially during strong trends it doesn’t help much. That’s why I use PA and many other forms of confluence to place trades because not every piece of information will agree all the time. I had faith in price going further south because once the market trends, it tends to stay that way until the balance of bears and bulls changes, and that is reflected on your chart.

My fourth and final trade was also a put, simply because the market was not showing much interest in changing direction. I entered my trade after price had a small pullback, and on the 1 min chart it hit the 20 EMA line and bounced back down. Also I waited for price to move below the low of the prior bar pullback, ITM. This is another example of market inertia. The Value Chart was of no help with this trade either.

Day Trading Tips for Beginners

Image by Brianna Gilmartin © The Balance 2020

Like starting any career, there is a lot to learn when you’re a day trading beginner. Here are some tips to steer you in the right direction as you start your journey. These tips will get you set up with the proper equipment and software, help you decide what to trade and when to trade, show you how much capital you need, how to manage risk, and how to practice a trading strategy effectively.

Picking a Day Trading Market

As a beginner day trader, you may already have a market in mind that you want to trade. A pattern day trader executes four or more “day trades” within five business days. 

Stocks are the shares of the companies, such as Walmart (WMT) and Apple (AAPL). In the forex market, you’re trading currencies, such as the euro and U.S. dollar (EUR/USD). There is a wide assortment of futures available to trade, and futures are often based on commodities or indexes.   In the futures market, you could trade crude oil, gold or S&P 500 movements.

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One market isn’t better than another. It comes down to what you want to trade, and what you can afford. The forex market requires the least capital to day trade. You can get started with as little as $50, although starting with more is recommended.   Trading certain futures markets may only require $1,000 to get started.

Stocks require at least $25,000 to day trade, making them a more capital-intensive option.   While more capital is required to day trade stocks, that doesn’t make it a better or worse market than the others. But if you don’t have $25,000 to trade (and can’t maintain your account above $25,000), then stocks likely aren’t the best day trading market for you. If you have more than $25,000, then stocks are a viable day trading market.

All markets offer excellent profit potential. Therefore it often comes down to how much capital you need to get started. Pick a market, that way you can start focusing your education on that market, and not wasting your time learning things about other markets which may not be of help in your chosen market.

Don’t try to master all markets at once. This will divide your attention and making money may take longer. Once you learn to make money in one market, it is easier to adapt to learn other markets. So, be patient. You don’t need to learn all markets at once. You can learn other markets later if you desire.

Equipment and Software for Day Trading Beginners

To day trade you need a few basic tools:

  • A computer or laptop: Having two monitors is preferable, but not required. The computer should have enough memory and a fast enough processor that when you run your trading program (discussed later) there is no lagging or crashes. You don’t need a top-of-the-line computer, but you don’t want to cheap out either. Software and computers are constantly changing, so make sure your computer is keeping up with the times. A slow computer can be costly when day trading, especially if it crashes while you are in trades, causes you to miss trades, or its slowness causes you to get stuck in trades.
  • A reliable and relatively quick internet connection: Day traders should be using at least a Cable or ADSL type internet connection. Speeds vary across these types of services, so strive for at least a mid-range internet package. The slowest speed offered by your internet provider may do the job, but if you have multiple web pages and applications running (that use the internet), then you may notice your trading platform isn’t updating as quickly as it should, and that can cause problems (see above). Start with a mid-range internet package, and try it out. You can always adjust your internet speed later if needed. If your internet goes down a lot, that’s a problem. See if there is a more reliable internet provider. Day trading isn’t recommended with a sporadic internet connection.
  • A trading platform suited to your market and style of day trading: When you are just starting, finding the perfect platform isn’t your goal. Download several trading platforms and try them out. Since you are a beginner, you won’t have a well-developed trading style yet. Therefore, your trading platform may occasionally change throughout your career, or you may alter how it is set up to accommodate your trading progress. NinaTrader is a popular day trading platform for futures and forex traders. There are loads of stock trading platforms. Ultimately, try out a few that your broker offers and see which you like best.
  • A broker: Your broker facilitates your trades, and in exchange charges you a commission or fee on your trades. Day traders want to focus on low-fee brokers since high commission costs can ruin the profitability of a day trading strategy. That said, the lowest fee broker isn’t always best. You want a broker that will be there to provide support if you have an issue. A few cents extra on a commission is worth it if the company can save you hundreds or thousands of dollars when you have a computer meltdown and can’t get out of your trades. Major banks, while they offer trading accounts, typically aren’t the best option for day traders. Fees are typically higher at major banks, and smaller brokers will typically offer more customizable fee and commission structures to day traders.

When to Day Trade

As a day trader, both as a beginner and a pro, your life is centered around consistency. One way to generate consistency is to trade during the same hours each day.

While some day traders trade for a whole regular session (9:30 a.m. to 4 p.m. EST, for example, for the US stock market), most only trade for a portion of the day. Trading only two to three hours per day is quite common among day traders. Here are the hours you’ll want to focus on.

  • For stocks, the best time for day trading is the first one to two hours after the open, and the last hour before the close. 9:30 a.m. to 11:30 a.m. EST is a two-hour period you want to get good at trading. This is the most volatile time of the day, offering the biggest price moves and most profit potential. The last hour of the day, 3 p.m. to 4 p.m. EST is also typically a good time for trading, as some sizable moves occur then, too. If you only want to trade for an hour or two, trade the morning session.
  • For day trading futures, around the open is a great time to day trade. Active futures see some trading activity around the clock, so good day trading opportunities typically start a bit earlier than in the stock market. If day trading futures focus on trading between 8:30 a.m. and 11 a.m. EST. Futures markets have official closes at different times, but the last hour of trading in a futures contract also typically offers sizable moves for day traders to capitalize on.
  • The forex market trades 24-hours a day during the week. The EURUSD is the most popular day trading pair. This currency pair typically records greater trading volumes between 1 A.M. and 12 P.M. EST. During these hours the London markets are open. Day traders should trade within these hours. The hours from 7 A.M. to 10 A.M. EST typically produce the biggest price moves because both the London and New York markets are both open, so this is a very popular and active time for day traders.
  • As a day trader, you don’t need to trade all day. You will probably find more consistency by only trading two to three hours a day. 

Manage Your Day Trading Risk

You’ve picked a market, have equipment and software setup, and sometimes know what is good for day trading. Before you even start thinking about trading, you need to know how to control risk. Day traders should control risk in two ways: trade risk and daily risk.

  • Trade risk is how much you are willing to risk on each trade. Ideally, risk 1% or less of your capital on each trade. This is accomplished by picking an entry point and then setting a stop loss, which will get you out of the trade if starts going too much against you. The risk is also affected by how big of a position you take, therefore, learn to how to calculate the proper position size for stocks, forex, or futures. Factoring your position size, your entry price, and your stop loss price, no single trade should expose you to more than a 1% loss in capital. 
  • Also, control your daily risk. Just as you don’t want a single trade to cause a lot of damage to your account (hence the 1% rule), you also don’t want one day to ruin your week or month. Therefore, set a daily loss limit. One possibility is to set it at 3% of your capital. If you are risking 1% or less on each trade, you would need to lose three trades or more (with no winners) to lose 3%. With a sound strategy, that shouldn’t happen very often. Once you hit your daily cap, stop trading for the day. Once you are consistently profitable, set your daily loss limit equal to your average winning day. For example, if you typically make $500 on winning days, then you are allowed to lose $500 on losing days. If you lose more than that, stop trading. The logic is that we want to keep daily losses small so that the loss can be easily recouped by a typical winning day. 

Practicing Strategies For Day Trading Beginners

When you start, don’t try to learn everything about trading at once. You don’t need to know it all. As a day trader, you only need one strategy that you implement over again and again.

A day trader’s job is to find a repeating pattern (or that repeats enough to make a profit) and then exploit it.

You don’t need a college degree or professional designation, nor do you need to read through hundreds of books, to do that.

Find one strategy that provides a method for entry, setting a stop loss and taking profits. Then, go to work on implementing that strategy in a demo account.

For forex and futures traders, one of the best ways to practice is using the NinjaTrader Replay feature, which lets you trade historical days as if you were trading in real time.

This means you can practice all day if you want, even when the market is closed.

No matter which market you trade, open a demo account and start practicing your strategy. Knowing a strategy isn’t the same as being able to implement it. No two days are the same in the markets, so it takes practice to be able to see the trade setups and be able to execute the trades without hesitation. Practice for at least three months before trading real capital. Only when you have at least three months in a row of profitable demo performance should you switch to live trading.

Stay focused on that single strategy, and only trading the market you picked, only during the time you have chosen to trade.

From Demo to Live Trading

Most traders notice a deterioration in performance from when they switch from demo trading to live trading.   Demo trading is a good practice ground for determining if a strategy is viable, but it can’t mimic the actual market precisely, nor does it create the emotional turmoil many traders face when they put real money on the line.

Therefore, if you notice that your trading isn’t going very well when you start to live (compared to the demo), know that this is natural.

Start with the smallest position size possible when you first begin live trading, as this helps alleviate some anxiety of losing large amounts of money.

As you become more comfortable trading real money, increase your position size up to the 1% threshold discussed above. Also, continually bring your focus back to what you have practiced and implementing your strategies precisely. Focusing on precision and implementation will help dilute some of the strong emotions that may negatively affect your trading.

Bottom Line

Pick a market you are interested in and can afford to trade. Then, set yourself up with the right equipment and software. Choose a time of day that you will day trade, and only trade during that time; typically the best day trading times are around major market openings and closings.

Manage your risk, on each trade and each day. Then, practice a strategy over and over again. You don’t need to know everything to trade profitability. You need to be able to implement one strategy that makes money.

Focus on winning with one strategy before attempting to learn others. Hone your skills in a demo account, but realize that it is not exactly like real trading. When you switch to trading with real capital, a bumpy ride is common for several months. Focus on precision and implementation to steady your nerves.

10 Avoidable Mistakes Forex Day Traders Make

Your success depends on avoiding these pitfalls

The foreign exchange market (forex) has a low barrier to entry, which makes it one of the world’s most accessible day trading markets. If you have a computer, an internet connection, and a few hundred dollars, you should be able to start day trading.

This easy-entry is not a promise of a quick profit, however. Before you take the plunge, consider these 10 common mistakes you should avoid, as they are the main reasons new forex day traders fail.

If You Keep Losing, Don’t Keep Trading

There are two trading statistics to keep a close eye on: Your win-rate and risk-reward ratio.

Your win-rate is how many trades you win, expressed as a percentage. For example, if you win 60 trades out of 100, your win-rate is 60%. A day trader should work to maintain a win-rate above 50%.

Your reward-risk ratio is how much you win relative to how much you lose on an average trade. If your average losing trades are $50 and your winning trades are $75, your reward-risk ratio is $75/$50=1.5. A ratio of 1 indicates you’re losing as much as you’re winning.

Day traders should keep their reward-risk above 1, and ideally above 1.25. You can still be profitable if your win-rate is a bit lower and your reward-risk is a bit higher, or vice versa. Try to keep it simple though, and develop strategies that win more than 50% of the time and offer a better than 1.25 reward-risk ratio.

Trading Without a Stop Loss

You should have a stop-loss order for every forex day trade you make. A stop-loss is an offsetting order that gets you out of a trade if the price moves against you by an amount you specify.

When you have a stop-loss order on your trades, you have taken a large portion of the risk out that investment. If you start taking losses on a trade, the stop-loss prevents you from losing more than you can handle.

Adding to a Losing Day Trade

Averaging down is adding to your position (the price you purchased the trade at) as the price moves against you, in the mistaken belief that the trend will reverse. Adding to a losing trade is a dangerous practice. The price can move against you for much longer than you expect, as your loss gets exponentially larger.

Instead, take a trade with the proper position size and set a stop-loss on the trade. If the price hits the stop-loss the trade will be closed at a smaller loss than it would have without it. There is no reason to risk more than that.

Risking More Than You Can Afford to Lose

The key part of your risk management strategy is to establish how much of your capital you are willing to risk on each trade. Day traders ideally should risk less than 1% of their capital on any single trade. That means that a stop-loss order closes out a trade if it results in no more than a 1% loss of trading capital.

That means that even if you lose multiple trades in a row only a small amount of your capital will be lost. At the same time, if you make more than 1% on each winning trade your losses are recouped.

Another aspect of risk management is controlling daily losses. Even risking only 1% per trade, you could lose a substantial amount of your capital in a single bad day.

You should set a percentage for the amount you are willing to lose in a day. If you can afford a 3% loss in a day, you should discipline yourself to stop at that point. Day trading can become an addiction if you let it. Only play with the money you have set aside, and stick to your strategy.

Going All In (Trying to Win It All Back)

Even if you have a risk management strategy in place, there will be times you will be tempted to ignore it and take a much larger trade than you normally do. The reasons vary, and you’ll be tempting fate to do her worst.

You might have had several losing trades in a row, which will make you want to earn back some of the losses. A winning streak can make you feel as if you can’t lose. There will always be one trade promising such good returns, you are willing to risk almost everything on it.

If you risk too much you are making a mistake, and mistakes tend to compound. Traders have been known to their stop-loss order in the hopes of a turnaround. Many also get caught up keeping their margin, telling themselves it will turn around and they’ll win big.

When you feel this way, stick to your 1% risk per trade rule and your 3% risk per day rule. Resist temptation, stick to your risk management strategy and avoid going all in or adding to your position.

Trying to Anticipate the News

Many pairs (two stocks—one long, one short, both correlated) rise or fall sharply in the wake of scheduled economic news releases. Anticipating the direction the pair will move, and taking a position before the news comes out, seems like an easy way to make a windfall profit. It isn’t.

Often the price will move in both directions, sharply and quickly, before picking a sustained direction. That means you are just as likely to be in a big losing trade within seconds of the news release as you are to be in a winning trade.

There is another problem. In the initial moments after the release, the spread between the bid and ask price (highest purchase price and lowest sell price) is often much bigger than usual. You may not be able to find the liquidity you need to get out of your position at the price you want (using smaller trades to get out of the position).

Instead of anticipating the direction that news will take the market, have a strategy that gets you into a trade after the news release. You can profit from the volatility without all the unknown risks. The non-farm payrolls forex strategy is an example of this approach.

Choose the Wrong Broker

Depositing money with a forex broker is the biggest trade you will make. If it is poorly managed, in financial trouble, or an outright trading scam, you could lose all your money.

Take time in choosing a broker. There is a five-step process you should go through when deciding on which broker to use. You should consider what you want to accomplish, what a broker offers, and use reliable sources for broker referrals. Then, test the broker using small trades at first, and don’t accept offers of bonuses with their services.

Take Multiple Trades That Are Correlated

You may have heard that diversification is good. Diversification is a strategy that depends on your knowledge, experience, and what you are trading. Warren Buffett once said about diversification:

“Diversification is protection against ignorance. It makes little sense if you know what you are doing.”

If you believe in diversification you may be inclined to take multiple day trades at the same time instead of just one, thinking you are spreading your risk. Chances are you are actually increasing it.

If you see a similar trade setup in multiple forex pairs, there is a good chance those pairs are correlated. That is why you are seeing the same setup in each one. When pairs are correlated, they move together, which means you will probably win or lose on all those trades. If you lose, you have multiplied your loss by the number of trades you made.

If you take multiple day trades at the same time, make sure they move independently of each other.

Trade Based on Fundamental or Economic Data

It is easy to get caught up in the news of the day or to form a bias based on an article you read that says economic conditions are good or bad for a particular country or currency.

The long-term fundamental outlook is irrelevant when you are day trading. Your only goal is to implement your strategy, no matter which direction it tells you to trade. Bad investments can go up temporarily, and good investments can go down in the short-term.

Fundamentals have absolutely nothing to do with short-term price movements—using fundamental analysis causes you to focus on the wrong concepts and form biases. Any long-term biases can only cause you to deviate from your trading plan. Your trading plan and the strategies it contains are your guide in the market and prevent you from taking unnecessary risks, or gambling.

Trading Without a Plan

A trading plan is a written document that outlines your strategy. It defines how, what, and when you will day trade. Your plan should include what markets you will trade, at what time and what time frame you will use for analyzing and making trades.

Your plan should outline your risk management rules and should outline exactly how you will enter and exit trades for both winning and losing trades.

If you don’t have a trading plan, you are taking unnecessary gambles. Create a trading plan and test it for profitability in a demo account or simulator before trying it with real money.

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