Three Steps That Will Greatly Improve Your Day Trading
Like mastering the oboe or throwing a perfect spiral with a football, the only way to become a better day trader is through practice. But practicing isn't enough. It's only the first step in the three-step process of practicing, reviewing, and adapting that will enable you to dramatically improve your day-trading skills.
How to Improve Day Trading Skills
Once a day trader knows how to place orders, calculate the ideal position size, and manage risk and has developed a basic strategy to follow, they should practice the art of day trading so they can consistently and correctly take the split-second actions necessary to make money under fast-moving trading conditions.
Then they need to take the time—on a daily, weekly, and monthly schedule—to review their individual trades and their trading strategy to determine what works and what doesn't.
Finally, they will adapt their trading plan based on what they learned from their review. These changes will be done incrementally so trades that are carried out based on them can be practiced and reviewed and new adaptations to the strategy can be developed.
Step 1: Practice Day Trading
Reading articles or watching videos isn't enough. Day traders need to repeatedly practice what they are learning before it will become ingrained enough to be useful in making trading decisions in ever-changing market conditions.
Practice isn't just about putting in hours. It's possible to day trade for years, putting in hundreds or thousands of hours, and never see improvement because you're not working on a specific activity.
To practice effectively, focus on a particular activity. This is where the trading plan comes in. A trading plan is a document that specifically outlines how, why, and when a trader will enter and exit trades; how they will control risk; and what their position size will be. It also details which markets will be traded and when.
Why You Need a Trading Plan
Practice involves following a plan so that progress can be tracked. If trades are taken based on random factors or psychological whims, then the trading results will take on the same unpredictable and random nature.
Practice day trading one component of the trading plan at a time, in a demo account, until the strategy becomes second nature. For example, you may go through charts and pick out entry points for your strategy. Do this until you can see all the entry points that your strategy gives. Day trading requires quick reflexes and precise timing. Practice so that entries occur exactly when they are supposed to, based on the strategy.
Then move on to placing the stop-loss correctly. Then practice placing the profit target correctly. It could take a couple of weeks to a couple of months to master each element of the strategy. After you get skilled at placing your entry points, stop-loss levels, and profit targets based on your trading plan, start to incorporate other elements of the trading plan. Practice having the perfect position size on each trade (risking 1% of account capital per trade is recommended) and every other trading element the trading plan covers.
While it may sound a bit odd, this whole time you are also practicing what not to do. Your goal is not only to follow your strategy and take all the trades it tells you to take (when conditions are favorable, based on your trading plan) but you are also practicing sitting on your hands when your strategy isn't telling you to a take a trade.
Trading is as much about the trades you don't take as it is about those you do.
If your strategy doesn't provide a trading opportunity, then do nothing. The patience required to wait for a valid trade signal is lacking in most new traders, but it can be acquired through practice. Practice being patient and pouncing when a valid trade opportunity arises.
How Long Do You Need to Spend on Each Element?
The length of time traders should practice each element of their trading plan will vary. Typically, you should work on each element of the trading plan for 10 to 20 days. When you have mastered one element, add another, and then practice those two elements for 10 to 20 days, and so on. After about six months, a trader using this approach will have a good grasp of their trading plan, will have practiced their strategy for about 120 trading days, and will have a good idea of how to utilize it in all market conditions.
Over a six-month period, the trader will likely have seen very volatile days, very quiet days, trending days, ranging days, up days, and down days. Practicing in one type of market isn't good enough. A trader needs to practice trading—and not trading—in all types of market conditions. For this reason, practice implementing the specifics of trading for at least six months before utilizing real capital.
Step 2: Review Your Day Trades
When you practice and follow a specific plan, you are making deliberate headway toward your goal of becoming a consistently profitable trader, even if the original plan isn't a good one. The review process is where you get to critique both your ability to follow the plan (what you need to work on) and the plan itself (what changes the plan may require).
Self-review should be done a daily basis, while a trading plan review should be done on a weekly and monthly basis.
Self-review is looking at all your trades for the day and assessing how well you followed your trading plan on each. If you took lots of trades that weren't part of your trading plan, that is a problem. If you look at the chart for the day and see trades that you were supposed to take but didn't, that is also a problem. Additionally, look for trades where you may have deviated from your exit plan—holding on to a loss for too long, exiting a loss too early, or exiting at a different price than your profit target. In the future, you should pay special attention to reducing (and eventually getting close to eliminating) these problems.
Trading Plan Questions to Ask
At the end of each week and each month, go through all of your charts for that time period. Look for problems or areas of improvement within the strategy itself. This is your trading plan review. Ask yourself questions like:
- Did the price continue to move past my profit target with regularity? This may indicate that you could expand your profit target, extracting more profit (on average) from each trade.
- Did the price stall and reverse just before my profit target? This means your profit target may be a bit too large. Reducing it may actually improve the profitability of your strategy.
- Did the price often move just past your stop loss, then start moving toward your profit target again? This is a common problem and indicates your stop loss is poorly placed or the trade is poorly timed. Adjusting the stop loss or looking for a slightly later trade trigger will help alleviate this issue.
- Does a certain time of day correlate to more losses or wins? The success of a strategy varies during different parts of a trading day. Stick to trading only during the high-profit times, and take a break during the times you notice poor results.
There are a host of factors you can assess when it comes to your trading plan, but the four questions above will get you started. As you do daily, weekly, and monthly reviews of your trades, you will surely come up with some other ideas on how to improve your own trading and your trading system.
One of the best ways to review your trades is to take screenshots throughout each trading day, with all your trading points on them (entry, stop loss, profit target, and actual exit).
Step 3: Adapt Your Trading Plan
After a full month of trading, you are allowed to make small changes to your trading plan based on what you learned from your trading plan review sessions. Trades based on these small changes in strategy should be practiced for another month and then reviewed. Changes shouldn't be made to the plan before the one-month period, as it becomes very easy to make changes based on individual trades (where anything can happen) as opposed to overall results (which are indicators of true performance).
The issues that arise in your self-review are worked on daily. With the self-review, your only goal is to follow the trading plan, whatever it may be. As the trading plan changes over time, so will your trading, but your goal is still to follow the plan. Your daily self-review doesn't change the trading plan; instead, you work on your personality traits so you can follow the plan.
Keep It Small
Strive to keep monthly trading plan changes small. This allows you to practice the small change effectively and monitor how those changes affect your trading. If you make lots of changes to your trading plan at once, it will be harder to isolate exactly which changes worked and which ones didn't at your next review session.
The same concept applies to your daily self-review. Work on one problem at a time. Trying to correct too many problems at once means you aren't focusing on each problem enough because your attention is too widely spread.
It's better to focus on one issue at a time—and really make progress on it—before tackling the next issue.
To learn about the risks of day trading, visit FINRA's website.
The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.