10 Tips for Winning at Day Trading


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1. Have a system and stick to it like Crazy Glue.

As a trader, I was a tape reader. But I was a tape reader with a niche: mid-cap stocks on the New York Stock Exchange. I watched the stocks trade, and I watched the quotes change, looking for an entry point. If a large order appeared on the tape, I'd buy myself a few hundred and see what happened. That was my system.

When you're trading, you have to have a system—rules that define which stocks you watch, and when you buy or sell. Whether you're buying undervalued large caps or short-term momentum plays, find a system that works and stick to it. There's a word for trading on tips or because a talking head mentioned it on CNBC: gambling

2. Cut your losses.

As a trader, you have to minimize your losses. When I was wrong (that is, if I knew I was wrong), I would try to exit my position with as little damage as possible. No trader makes money all the time. At my best, one-third of my trades were winners, one-third were losers, and the remaining third were negligible. But I knew I'd traded well if my biggest winner was three times the size of my biggest loser. Of course, I wasn't able to do this every day. I once lost $3,000 on a Friday and, as punishment, I got to chew on it all weekend. But there's always tomorrow. That is, unless you blow through your capital. Then you're finished, kaput..

3. The only thing you have to fear is fear itself.

I was a preschool teacher before I became a day trader, and believe me, I was more suited to playing with 4-year-olds than I was to watching market machinations. When I started, I sat at my desk for a week without making a trade. My boss finally emerged from his office and informed me that it was time. So I did it. I bought 100 shares. I lost money. And I lived through it.

Still, I had a hard time accepting the notion of risk. I cost myself money every day because I was afraid of losing an eighth or a 16th on a trade. I'd dump my stock for a small profit, only to see it run up a point right after I got out. It took me a year, and cost me thousands of dollars in profits, to learn to control my fear. And you know what? During that whole time, the downside was never worse than my imagination.

4. Don't get greedy.

You can't live on paper profits. But when you're holding a position that has done everything you expected—and more—it's very easy to get greedy. You start thinking, "Sure, I'm in the money a couple of grand, but it could go higher." So you hold on, long after the signs have started to indicate momentum is turning. And your gain turns into a loss. There's nothing wrong with selling into strength and taking some of your gains off the table
5. Worry about what you can control. Ignore what you can't.
When I started trading eight years ago, I heard whispers on the desk about a new trader and a trade gone bad. It was our version of the horror story around the campfire. The trader, so the story went, owned 200 shares of a stock and was in the money $200. It was a winning trade. Then the stock was halted because of accounting irregularities. It reopened down 20 points and the trader lost $4,000.

This is an extreme example, but it teaches a great lesson. In the market, events occur all the time that we have no control over. Earnings are preannounced. A takeover attempt becomes public. A CEO dies in a plane crash. Stuff happens. That story, by the way, turned out to be true. That trader could have walked away, but instead kept at it and is still in the business eight years later. The moral? Control what is in your ability to control and let the rest go.

6. The market is always right.

You might think you know better than the market. Think again. The market always knows best, and if you try to fight it, you will lose. Guaranteed. I've seen trader after trader lose gobs of cash after buying a stock and watching it plummet. As they count their losses, they all say the same thing, "But the stock had good news." Good news isn't always positive, and bad news isn't always negative. If it were that easy, I'd still be trading.

7. A little bit of technical analysis never hurts.

As a tape reader, I didn't care much for technical analysis. Or rather, I didn't understand most of it, and I certainly wasn't going to place an order because a computer told me to. I'll leave that to the quants. But some technical indicators are easier to understand, and more important, they matter. Take support and resistance levels: Resistance occurs on the upside, when a stock reaches a point and can't go any higher. Support is the level a stock won't trade below on the downside. They're usually pretty easy to spot. When a stock price breaks through one of them, watch out, because everyone else is. A move isn't guaranteed (there are no guarantees), but interesting things can happen.

8. Don't try to catch a falling safe.

Many traders are gamblers at heart, and nothing appeals to the gambler more than trying to guess when a stock has hit rock bottom and is ready to reverse direction. The upside move is usually quick and violent, and if you're right, you stand to make a lot of money. But picking the bottom isn't easy.

In 1999, I witnessed firsthand what can happen when you're wrong. SunTrust Banks was getting hammered, and rather than doing the smart thing and shorting the stock, one of my colleagues figured he would try to catch the bounce. He bought some shares. The stock dropped. He bought some more. The shares continued to fall. The firm finally ordered him to sell. He lost $20,000.

It's really quite simple. Don't fight momentum.

9. Buy low, sell high.

We hear this so often, it's easy to ignore. But forgetting it is one of the biggest mistakes a trader can make. If you're dollar-cost averaging, timing is unimportant, but if you're trading, price matters.

A stock starts to move, but you want confirmation, so you wait to buy. It moves a little more, but you're still unsure, so you let it go. Then it really starts to fly and you place your order. Your order gets filled just as the move ends. You've bought the stock from someone who had held the shares since the move started. He makes a big profit; you take a big loss, cursing your bad luck.

10. Know your exit.

When the dot-com bubble popped, it took many a trading profit with it. Why? Because a lot of traders didn't have exit strategies. A stock would fall, traders would "buy the dip" and wait for it to bounce. The stocks always did. But then they didn't.

Regardless of your time frame, have an exit strategy for if a trade doesn't go your way. I liked to use stop-loss orders, which triggered a sale if a stock hit my predetermined loss threshold. But whatever you do, know when you'll get out, so a small loss doesn't turn into a big one you can't recover from. :cool:
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