How to Day Trade: Establishing the Foundation

If you’re interested in learning how to day trade, the first question I’m going to ask you is “Why?” Not because I don’t think that day trading is a worthy pursuit, but rather to help YOU identify the real motive or motivation behind your desire to trade. As I mentioned in my previous post on how to learn to day trade, to answer “money” to that question is many times not looking deep enough. One person may say “Well, how deep do you really need to look? It’s just trading.” Believe me, if you’re interested in learning how to day trade and make some real money day trading, you will not be able to escape having to answer that all-important question. Day trading is such a level of emotional and psychological warfare, if you’re not ready for it, and if you’re not grounded in your real reasons for doing it, you’ll cave at the first adverse market move, or the first time you have a string of losses you’ll begin to doubt yourself, doubt your abilities as a trader, and with enough crappy trades in a row you’ll begin to be afraid of your own shadow. You’ll get to the point where you “scare easily”, and that will eventually lead to more and more losses, as the slope just gets more and more slippery. Again, the term “whipsawed” will take on new meaning if you allow your trading to be subject to your emotions and your passions regarding money. The thing that we all have to face is that the so-called “perfect day trading system”, or the perfect set of trading signals doesn’t really mean a thing if you’re still dealing with greed. Greed is based in fear (you’re afraid of never having enough, so you continue to clamor to get more and more), and that fear will be your motivation to sell at a loss to keep from losing more money, and it also is the motivating factor for buying into a stock only after it has taken off, to get in on the hype. These crazy emotions that drive us to do illogical things for unlikely payoffs even in the midst of completely undeniable evidence to the contrary can be our ruin, if we’re not careful. Nobody is exempt from greed, and greed is something that you can’t necessarily see in the mirror. And regardless of what Gordon Gekko said, greed is NOT good, especially if you plan on making a career of day trading, or if you expect to have any shred of long-term profitability trading the markets. Day trading is a powerful method for achieving profits in the markets, but your foundation must be properly set in order to be truly effective. Again, you must identify the “Why”. Once that is done, there are technical things and trading techniques that you can learn to pull profitable trades, but they must be used with prudence and patience. That seems almost contradictory in such a rapid-paced trading environment as day trading, but patience is still a virtue, because for some people, even day trading doesn’t move fast enough to keep up with their greed. But enough of my philosophizing; let’s talk about a day trading technique (or two, if time permits). I spent some time in a previous post talking about scalping trading, which is one form of day trading. Another technique commonly used by day traders is called “fading” the markets. Basically what you do is you wait for a stock (or commodity futures contract or currency pair) to rally, and once you believe the rally has stalled out or is on its way back down, you begin to short the market at your best guesstimate of where the rally has topped out. Fading is based around that age-old principle that “What comes up must come down” (Spinning Wheel, anyone?). A lot of times a fast buying wave (a.k.a. rally) will drive up prices temporarily, but not enough interest is there to sustain the rally and maintain the new upward price. At this point, prices begin to show weakness, and eventually they slide back down, many times in very short order. When this type of thing happens, you have a great opportunity to short the rally and then cover your short (i.e., liquidate your position) when prices decline once again. I have a friend who does these types of trades with the E-Mini S & P 500. He has the daily price and volume trends down to a science. He knows what type of spikes the E-Mini is going to get in the morning time, and he plays them well. I explained in my previous post how cool scalping (well, my version of scalping anyway) is, and how you don’t have to have a huge spike in prices (if you’re long) or a freefall in prices (if you’re short) to make money; you can make money with one small uptick if you have enough contracts to make a significant profit on a per-contract basis. If one uptick in Corn equals $50.00, if you’re trading 100 contracts of Corn, you now have made $5,000 in one uptick. That’s pretty sick if you think about it. These techniques, my friends, represent just one school of thought on how to day trade. There are several more, but so far, these are the ones that I can say I understand best and favor the most. More on this at a later time.