Day trading

March 20, 2022   ·   0 Comments

Christine Ibbotson


Dear Money Lady:  I am now retired and considering day trading.  Can you give me any tips?  –Bryan

Dear Bryan, the first tip – be careful!

Day trading is not easy and if anyone says it is, they are not a real trader.  Once you begin day trading you will find that it is far more difficult and involved than you probably anticipated.  The stock market eats up inexperienced and naive players every day without batting an eye.  It is a tough arena to be playing in without sufficient knowledge.  Fear and greed fuel the financial markets and these emotions motivate every trade for all players from institutional managers to the novice day trader.  These two emotions will be your constant companion while in the market.  The difference between the meek to the mighty is that those who prosper in the stock market have learned to put their greed and fear behind them.  Emotion has always been the number one killer of a day trader. 

The first rule of day trading is that you never trade with money you can’t lose.  Money that is important to the welfare of your family or future can never be sacrificed for day trading.  If you invest with your retirement savings, emotion and fear always work their way into clouding your decisions.  Guaranteed, you will make the worst possible trades and lose your money faster using savings that matter to your future.  Inexperienced traders that get hooked on the market lose money – simple but true.  So, if you are not investing with money that you are okay to lose, then don’t get in.

Second rule of day trading is that you must be well informed.  Of course, you will not be able to know when the market makers change direction, but you can be prepared for it.  Level II systems are imperative if you plan to be a day trader.  Level I platforms only show the inside bid, (highest price you can demand if you want to sell as a market order) and the inside ask, (lowest price you can buy at the market price).  Level II screens are much more transparent showing all bids and asks including those waiting with different prices.  You will also want a platform that shows the TICK and TRIN of the exchange you are trading on to give you a gauge to monitor resistance.

Third rule is to never chase a stock that is running on news.  Many people tune into CNBC daily to follow the important events pertaining to the global markets.  This is indeed important to keep you informed on financial news, but be careful.  Remember that CNBC and other news sources like it will always be broadcasting second hand information.  Often the market makers have had many early morning hours with the news before they announced it and have already absorbed a lot of the buying with the stock poised in a position for a pull back.  Run ups on news is usually always from inexperienced traders that drive the stock up only for the benefit of market makers that short it and drive it right back down again.  This is often a mistake of new traders who buy the stock at the highest price of the day and then hold on in an effort to regain their losses.

Fourth rule is to never overtrade.  Let the market come to you based on your technical and fundamental analysis of the stock.  Rookie traders make the mistake of frantically moving in an out of a stock and often trade over the lunch hour, which has the worst odds, buying and selling on anything that moves.  Be aware of commissions and trade fees that can quickly turn gains into losses.  Decided what type of trader you want to be.  Are you a top-down trader who considers the overall market trends and studies a stock’s weekly, daily and intraday charts?  Or are you a bottom-up trader that ignores market conditions and industry group action, basing all their decisions on stock timing and fundamentals?

Lastly, to be an effective day trader you must work at it.  Have a business plan, a trading log, educate and read as much as you can.  Displace your fear with knowledge and never stop studying to be better.  Understand swing trades.  Watch for run ups and stick to your planned stop-loss and exit strategies.  Never trade if you’re having a bad day.  If the market is choppy and unpredictable one day – protect your principal and profits.  Track market trends to position yourself properly and if the market suddenly rolls over into a high-risk zone or begins to go sideways, move into cash to prepare for future selective buying opportunities.   

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