Day Trading for a Living….. Some rules to live by.
Day trading for a living is about finding a trading system that will dramatically increase your chances to succeed in trading, because it eliminates many reasons why unprepared traders fail.
Learn to select markets and time frames. Smaller time frames mean smaller profits, but usually smaller risk, too. When you are starting with a small trading account, then you might want to select a small time frame to make sure that you are not over trading your account.
When you are day trading for a living by selecting a smaller time frame (less than 60min) your average profit per trade is usually comparably low. On the other hand you get more trading opportunities.
When trading on a larger time frame your profits per trade will be bigger, but you will have less trading opportunities. It’s up to you to decide which time frame suits you best. Many profitable trading systems use larger time frames like daily and weekly.
These system work, but be prepared for less trading action and bigger draw downs.
Day Trading for Beginners Rules
Define entry rules for day trading for a living:
Let’s simplify the myths of “entry rules”: Basically there are 2 different kinds of entry setups:
• Trend-following: When prices are moving up, you buy, and when prices are going down, you sell.
• Swing-trading: When prices are trading at an extreme (e.g. upper band of a channel), you sell, and you try to catch the small move while prices are moving back into “normalcy”. The same applies for selling.
In my opinion swing trading is actually one of the best trading styles for the beginning trader to get his or her feet wet. By contrast, trend trading offers greater profit potential if a trader is able to catch a major market trend of weeks or months, but few are the traders with sufficient discipline to hold a position for that period of time without getting distracted.
Most indicators that you will find for day trading in your charting software belongs to one of these two categories:
You have either indicators for identifying trends (e.g. Moving Averages) or indicators that define overbought or oversold situations and therefore offer you a trade setup for a short term swing trade.
So don’t become confused by all the possibilities of entering a trade. Just make sure that you understand why you are using a certain indicator or what the indicator is measuring.
Define exit rules
Let’s keep it simple here, too: There are two different exit rules you want to apply:
• Stop Loss Rules to protect your capital and
• Profit Taking Exits to realize your profits
Both exit rules can be expressed in four ways:
• A fixed dollar amount (e.g. $1,500)
• A percentage of the current price (e.g. 2% of the entry price)
• A percentage of the volatility (e.g. 30% of the average daily movement) or
• A time stop (e.g. exit after 2 days)
We don’t recommend using a fixed dollar amount, because markets are too different. You need to balance and normalize this difference when developing a trading system and testing it on different markets. That’s why you should always use percentages for stops and profit targets (e.g. 1% stop) or a volatility stop instead of a fixed dollar amount.
A time stop gets you out of a trade if it is not moving in any direction, therefore freeing your capital for other trades.
For more information like this and a step by step process to build out your trading plan and strategy, check out the Active Trading Blueprint
Remember, “Victory Loves Preparation”