Everything a Newbie Should Know About Daytrading – A Super Concise Guide

Edited by Lawrence Chan
Written by Lawrence Chan and other contributors
Copyright 2010 All rights reserved
First edition – July 16, 2010

This is our condensed guide to daytrading and trading in general. A lot of topics are touched so that newcomers to daytrading will have a checklist on hand that they can explore from.

New to Trading
or You Have Never Made Any Money Trading

What is trading, investing, or speculation in various markets? [+ show][- hide]
• Underneath all these complex explanation from too many sources that they are different, the truth is that all these activities are exactly the same.
• The act of putting up money into any activities for the purpose of profiting from the process

What is daytrading? [+ show][- hide]

• The act of completing a trade within one trading session which usually means within a day
• A daytrade can last a short as a few second, or just an instance, to almost the whole day

Why daytrade? [+ show][- hide]

• A way to limit your exposure to overnight risk by closing your trading position every day before the cutoff time
• A way to optimize profit from intraday volatility of the markets you are engaged in

Trading for a living [+ show][- hide]

• Income generated for cost of living from trading activities only
• Do not confuse that with trading other people’s money (a.k.a OPM) as that includes income from commission, management fee, salary, and profit sharing

Daytrading for a living [+ show][- hide]

• Income generated for cost of living from daytrading activities only
• Main difference is that the capital requirement is lower in general

Daytrading as alternative to classic investment [+ show][- hide]

• Majority of capital can be put aside in interest bearing instruments for stability and risk reduction
• Engage in only the best setups in terms of risk reward ratio on a small percentage of the total capital for the purpose of increasing overall return

Full-Time vs Part-Time [+ show][- hide]

• Having steady income while learning to daytrade is much easier
• There is no need to daytrade full-time if it is just a way to grow your saving
• Being profitable trading part-time does not translate to more profit if you trade full-time

Instrument Selection

What should I trade? [+ show][- hide]
• Any financial instruments, or even non-financial instruments, that you can engage in trading
• Deep understanding and mental comfortability with the instrument you choose to trade is more important than the potential profitability of the instrument itself

What should I daytrade? [+ show][- hide]

• Main difference is that for some instruments and the country you reside in will determine if you can daytrade them at all
• Daytrading is possible only if the instrument moves (a.k.a. intraday volatility) and has liquidity (i.e. enough trading volume)

Stocks [+ show][- hide]

• Many to choose from, making it easier to look for better trading setups
• Subjected to news shock from the company
• Subjected to overall market risk
• Daytrading margin not as favourable as other instruments

Commodity/Financial Futures [+ show][- hide]

• A decent basket to choose from, making it possible to look for better trading setups
• The need to monitor the announcement schedules for various commodity reports
• Better leverage than stocks in general, increases both risk and reward
• Daytrading margin available to retail traders

Index Futures [+ show][- hide]

• The need to monitor the announcement schedules for various economic reports
• News from heavy weighting stocks can affect the behaviour
• Market breadth provides extra information good for analyzing the market condition
• Better leverage than stocks in general, increases both risk and reward
• Daytrading margin available to retail traders

Forex [+ show][- hide]

• A decent basket to choose from, making it possible to look for better trading setups
• The need to monitor the announcement schedules for various economic reports, for each country involved in the basket you are tracking
• News from heavy weighting stocks can affect the behaviour
• Currency pairs are interrelated, making it possible to find better risk reward trading setups thru basket trading
• Lowest margin requirement comparing to other instruments

Learning How to Trade

Reading from books [+ show][- hide]
• There are many books on trading and it is hard to distill useful or practical information from them
• Any trading setups or ideas you read from a book must be verified yourself

Learn from a coach or trainer [+ show][- hide]

• If you know that you are not a decisive person, or that you do not have a lot of discipline, having a trading mentor helps a lot in getting you thru the beginner phase
• Given a good mentor, be prepared to empty your mind, keep your mouth shut, and listen carefully
• You will not be able to absorb anything if you do not pay attention and keep an open mind on new ideas
• Some trainers and coaches that we recommend is listed here.
• I am sorry to say this – but some people just cannot learn from their own mistakes, they just cannot. These individuals, if they cannot swallow their pride and give themselves into training programs offered by good mentors/trainers, they should forget about trading, or any form of risk taking in their lives.

Selection of brokerage [+ show][- hide]

• Daytrading requires software for order placement, the software and infrastructure that supports the software will determine if the brokerage is good for daytrading
• Research carefully before sending money to a brokerage
• Do not deposit large amount of money to a new account, especially if you just started learning to trade

Finding the right tools [+ show][- hide]

• If you are not technology savvy then learn to be one
• There is no such thing as the best trading tool. Each software application has its limitation and unique strength. Find the ones that fit your need, then learn to utilize them fully.

Surviving the Learning Curve

Money management [+ show][- hide]
• Trade absolutely the smallest possible number of contracts or amount until consistency in performance is achieved
• Be defensive on the capital you have
• Do not average down at all until after you become consistently profitable and understand fully what the real risk is involved in average down

Control your risk [+ show][- hide]

• Always know your risk before entering a trade
• As a beginner do not assume your trading model (if you have one) will perform at that magical 90% winning rate you get from backtesting. It will likely be 50% in real life.
• Most beginners do not even get close to 50/50 in terms of winning trades. Focus on getting those trades that logically (not your wishful thinking) produce 3 to 1 payoff.

Do not over trade [+ show][- hide]

• For most markets, scalping for retail traders is no longer a profitable method to daytrade. At best, it is labour intensive work with return that do not justify the risk that is involved
• Leave extremely fast trading to the bots and HFTs, if you are trading with limited capital or do not have the know-how in the related technologies
• Several good trades a day is better than exhausting your mind and body into tens or even hundreds of trades a day

Practice [+ show][- hide]

• Simulated trading helps, if and only if you do it seriously
• For those without a trainer or mentor, you are your own teacher during this learning process. Thus you must be critical on yourself. See your own weaknesses and strength. Build from there.

Discretionary vs. Mechanical

Why Discretionary Trading is Better? [+ show][- hide]
• Trading skill grows with you as you gain more experience over time
• Mechanical models are always a lesser sum of what you know if it is created by you
• Complex trading concepts are not that easy to implement into functional mechanical models
• Trading scenarios are never really repeated exactly where an experienced trader can outperform a mechanical model at times of uncertainty

Why Mechanical Trading is Better? [+ show][- hide]

• Human emotions attached to the profit/loss on every trade wears a trader down mentally and in turn affects the performance
• Irrational behaviours from human traders like not honoring their trading plans or money management rules can seriously damage the performance of good trading strategies
• Able to filter a messy scenario into concrete logical rules that a human trader may find confusing to engage with

The Concept of Computer Assisted Trading [+ show][- hide]

• You hire a secretary to type a letter for you based on what you wanted to say. Same go for trading programs – they should be there to assist you in making the trading decision, not making that for you.
• Have the trading tools identify crucial conditions and facts in real-time for you where you can focus on making the right decisions
• Use trading tools to reduce stress and improve your odds, not the other way around.

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