3 Methods for Choosing Stocks to Day Trade
So many stocks to day trade, so many choices, so many opportunities…
For the amateur trader, that is the comment most often repeated when they read the end of day news, and see the spectacular price action a particular set of stocks traveled that day or week.
Feelings of “missing out” because there are so many opportunities become stories of missed fortunes and “what if.”
Professional see things differently. A true professional admits resources of time, capital, experience and skill are limited. A sound trading plan is built around your resources, not your dreams. Having big aspirations is good.
Having unrealistic goals to match your resources is a path to deleting your account.
So what do you do?
[PODCAST 13:59] How to Aggressively Trade Your Edge
Identifying new trading opportunities isn’t magic.
Trading your strategy is simple…if you have one! I’m not smarter than anybody, I want to help you understand how to put those pieces together. As a team we are doing a great job of discussing order flow, then momentum, then reading the tape over the last 3 to 6 days, and then you add room-to-go. (profit potential)
So you have all of that criteria, and then you drop down to your intraday time frames.
Only then do you ask which stocks right now match my higher time frames, and which ones are currently giving me a good risk spot otherwise known as acceptable risk which is relative to each of us.
Become a Better Trader. Get Notified.
Reminiscences of a Stock Operator | Ch.1 Pg. 11
Tape reading is not as popular as it was in the old days. Computers have taken care of that.
Savvy traders have adapted and are skillfully implementing tape reading in a much different way today. Chart reading is one method. Another technique is interpreting news and volume traded off the news.
When I say the old days, I am referring to 2007. This is when the NYSE expanded to allow increased amounts of electronic trading. (More on this at the end of the article)
Traders would read the ticker tape (invented by Edward A. Calahan, updated by Thomas Edison) to determine the recent buying and selling pressure. It was much easier to spot a large buyer or seller because daily volume was incredibly light so it was easier to spot a big player.
The down side to light volume was liquidity. It could be difficult to exit a trade at a reasonable price.
3 Tape Reading Examples | Bar-by-Bar Analysis
Reading the tape involves more than simply identifying order flow…
You have profit potential, recent momentum, “saturation points,” but an often ignored aspect of tape reading is bar-by-bar analysis.
Each day on this blog the last scan we run is inside days. The pattern is a strategy, regardless of the recent trend. The contraction in price action, leads to an expansion in volatility, a trend.
Twice this month we posted trade ideas in $TSLA noting the price action was “sneak bullish…” Several inside day breakouts, with increased volume, gave clues to the great day trades and the future breakout.
Make sure you add bar-by-bar to your trading toolbox, the rewards and insights give you a powerful, complete picture to develop your trading ideas.
Tape Reading Analysis #1 $TSLA December 9, 2016 == >>
Tape Reading Analysis #2 $TSLA December 14, 2016 == >>
Click to Expand Each Chart
Planning Your Trades in Advance, Makes Trading Easier…
What if profitable trading was easy?
I know, I know… “He’s crazy, trading is hard…”
Well, let’s think about it. How do profitable algorithms produce consistent winning months? A computer simply follows a checklist of”if-then” scenarios and always makes the same decision.
What if you had the same type of checklist? Wouldn’t that make trading easier? Imagine a custom-built guide that matches your resources, your experience and your goals, just perfectly?
How would it feel to make the correct choice every time? Picture an outline that helps you focus on your strengths and avoids low-probability conditions that don’t match your unique goals or risk tolerance.
How much easier would your trading be, with that checklist?
How to Trade the Best Stocks
Day trade the market or day trade your stock and ignore the market?
What is your game plan if the stock market finally runs out of buyers?
Most day traders like to be “long.” We like to be buyers.
It’s easier to understand than short-selling and technically has defined risk (you know where zero is). If this is you, it’s time to get prepared. Great day traders look for new ideas regardless of positions. You should do the same.
Only plan day trades that match your strategy. It’s very tough to be profitable with spur of the moment ideas.
Always be assessing probabilities for your next move. Always be building if/then scenarios. Day trading is hard work. The stock market has been kind to investors the last 2 years.
We aren’t investors.
The Reason Traders Struggle
Trading is a challenge because what we want isn’t possible. We want certainty.
We seek certainty in a situation that has no structure. The stock market can do anything. Up, down or sideways at any time. We know this and yet we still seek control.
Each trade manipulates our self-image. If we make money we feel smart and successful. If we lose we search for reasons to escape the failure.
As days and weeks go by, our emotions get stretched with each result. Good trade, bad trade, good trade, bad trade. Each trade gets more exhausting. Doubt starts to creep in.
As we struggle, common problems occur: we hesitate on entries and we exit winners too soon. We have too many shares on losing trades, and too few shares on the winners. We focus on the problems but never realize they are merely symptoms of the real issue.
The more we trade, the more confused we get. The challenge to be profitable becomes an obsession, a burning desire to learn what’s missing.
A lucky few eventually discover the answer…
Trading Plan Template
A trading plan is an outline successful traders use to keep focused on decisions with a high probability for profit. The trading plan also eliminates trading scenarios that do not meet your edge.
The outline consists of two core components:
- The trading system, method or process that defines your trading edge, which includes buy or sell signals.
Money management and risk management parameters that match your skills and resources.
- Finally your trading plan includes which markets (or securities) to trade, your goals, your emotional characteristics and then chooses a trading style.
How to Slash Your Trading losses by 40% or More
One of the biggest mistakes I see, especially with prop traders involves leverage.
Too many traders with large accounts, or access to significant leverage, allocate the leverage without proof of concept, or proof of skills.
Proof of concept, means you trade too large without validated results your edge produces a positive return. You trade too big simply because you can, not because you should. The only valid reason to trade bigger is results.
I’m not talking simulated results, or paper trading. Yes, that absolutely helps, but you must go live, for the results to have significance. Back-testing and simulated trading have their place in strategy development, but they are not enough to trade bigger.
They are a signal to begin live trading, not a signal to release the hounds.
To properly use actual results, you need a large sample or time. I recommend results over a 3 month period. Not only will you get statistical results, but you get a clear view of yourself.
There is a different between having a strategy and following it. You need to assess your skills.
Proof of Skills
I’ve seen it all in prop trading. This one is the grand-daddy of doom. A new trader passes the required tests, and believes that makes her a trader. Not even close.
Taking that a step further, learning to read charts doesn’t make you a trader either, but that’s a whole other article.
Your trading journal becomes critical here, as well as a good mentor. We tend to lie about our skills, to ourselves. One good trade or one good day tricks us into trading bigger.
Don’t fall for it.
Read your journal, be brutally honest when you write, then read it on the weekends, not when you are trading. Half of the time you won’t remember what you wrote, but that’s the point.
Write when it’s fresh, read with fresh eyes.
Follow these guidelines and you reduce your losses by at least 40% because you aren’t trading bigger until you should be trading bigger.
Leave a comment if you have any questions…
Learn the Basics of Order Flow | Free Course
Trader education gets a bad rap.
You pay to learn. We all do. It’s just whether we pay with time, or pay for another trader’s experience.
If you pay with time, your learning curve takes longer. Earning your trading education through trial and error becomes expensive, and let’s be honest, it’s exhausting.
If you pay for experience… if you find a trusted mentor, you reduce the cost of learning and speed up the path to success.
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