Three Steps That Will Greatly Improve Your Day Trading

Do these three things correctly and your day trading will improve

three steps to improve your day trading
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In the quest for knowledge and making money as quickly as possible, most new day traders skip the most important steps in finding profitability and consistency, and that is practice.

Once a trader knows hows to place orders, how to calculate the ideal position size, manage risk, and knows a basic strategy to follow, the amount of time spent on books, articles, and educational videos should drop dramatically. Time should then be spent on practicing these skills, so the skills can be called upon for taking split-second action in fast-moving day trading conditions. 

Practicing Day Trading

The first process day traders need to learn is how to practice.

In order to improve, you'll need to practice. Reading articles or watching videos isn't good enough. You need to practice what you are learning, a lot before it will become ingrained enough to be useful in making trading decisions in ever-changing market conditions.

Practice is not just putting in hours. Simply putting in hours won't make a trader better. It's possible to day trade for years, just putting in hours, and never see improvement because it is not a deliberate and specific activity. To practice effectively, practice something specific. 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. The key word here is "specific." 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, but deliberate, reflexes. 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 targets correctly. It could take a couple of weeks to a couple of months to master each element of the strategy. As you get good at placing your entry, stop loss levels and profit targets based on your trading plan, then 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 any 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 take as it is about those you don't. If your strategy doesn't provide a trading opportunity, then do nothing. The patience required to wait for a valid trade signal requires a lot of practice...and is a skill most new traders lack. Practice being patient, but pouncing when a valid trade opportunity arises. 

How long you practice each element of your trading plan for will vary by the trader. Typically, 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 the 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 (when no signals are present) in all types of markets conditions. For this reason, practice implementing the specifics of the trading for at least six months before utilizing real capital. 

Reviewing 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 act of following a plan builds discipline and patience, two key traits day traders need. 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. Also look for trades where you may have deviated from exit plan -- holding onto a loss for too long, exiting a loss too early or exiting at a different price than your profit target. On future days, pay special attention to reducing (and eventually getting close to eliminating) these problems.

At the end of each week and each month, go through all 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:

  1. 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.
  2. 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
  3. 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.
  4. Does a certain time of day correlate to more losses or wins? Certain times of day favor certain strategies. 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 snapshots of each trading day, with all your trade levels on them (entry, stop loss, profit target, and actual exit). 

Adapting Your Trading Plan Based on Your Review

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. Any changes must 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 more predictable and a better indication of consistency).

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 the plan, instead, you work on your personality traits so you can follow the plan. 

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 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 (attention is too widely spread). Better to focus on one issue at a time, and really make progress on it, before tackling the next issue.

Summary: Practice-Review-Adapt-Repeat

There are three steps you can use to greatly improve your day trading results.

Start out your journey by creating a simple trading plan that covers what you will trade, when you will trade, what market conditions you will trade in, how you will enter trades, where you will place a stop loss and profit target, and what your position size will be. This provides the basic building blocks of a strategy, which you can practice in a demo account.

Practice each trading plan component individually, then as you master each trading plan component, practice them altogether. This process could take six months or more but is worth it. This whole time you are building the personality traits required for successful trading. 

Each day, review your trades based on how you followed your plan. Highlight problem areas and work on each of these issues one at a time. At the end of each week and month review your trades, this time looking for issues or areas of improvement within your actual trading plan. Make small changes to your trading plan when required, then practice those changes for a month or more until your next review session. 

Continuing with this process/cycle is a sure way to improve your trading. It takes a lot of work but is the most efficient and direct route to becoming a consistently profitable day trader.