Day-trading is a very serious business; if you don't have all the right ingredients in place before you begin trading, you're dead. One of the most important aspects of the day-trading business is your "team:"
- Your broker
- Your trading advisor
- Your live quote feed
- Your trading software
- Your back office (clearing firm)
Best broker If you think you're going to be doing size -- 10-100 contracts -- then you must have a great relationship with your broker. The broker is just as valuable as the methodology.
Before the opening bell, I'm in contact with my floor broker to find out what has occurred in the overseas and night sessions and what information is coming out that could affect the markets. I never trade in the face of information. You shouldn't either unless you understand what could happen if you're wrong.
The broker is my eyes and ears on the floor -- after all, that is his job. I pay my broker well; however, I expect him to look after my best interests. Never select a broker on the basis of cheapest commissions.
I also expect excellent executions on my orders, and I get them. I picked my clearing firm because of its commitment to the client. My clearing firm also allows every client electronic order placement directly to the trading floor with the "ZAP" system, which is cutting-edge technology and the future of day-trading.
With the pace and stress involved in day-trading, it's essential to your style to trade within the capabilities of the broker and clearing firm so you can eliminate from your trading the worry of order placement and execution. For me, it's important for the brokerage firm to have great floor presence, offer 24-hour access to my account and have a fast back office.
When it comes to floor brokers, I use one who has years of experience in the pits and understands my needs, which fosters a special relationship because of his patience and concern for all of my clients. Friends like these in the pits are extremely important for an off-the-floor day-trader to be successful.
With a great team in place, next you add the trading methodology. Anyone trading the markets should learn and understand as much as he or she can about what to do before trading begins. It's an outrage to pay a vendor a steep price for a system when you don't know how or why it performs as it does.
The markets are based upon supply, demand and psychology. To trade, you must be aware of many different scenarios and factors that will occur every day.
The first item your methodology must have is a strict money management system. I don't care what you think about the market -- you need to know where you are getting out before you get in and what is the maximum loss you will sustain.
I do not go into the market, for example, unless certain psychological price levels, like 50s, hold twice. Understand that in the United States we are brought up to round numbers off. (If the cab ride is $4.30, we say, "Make it $5" and add another 0.50 for a tip.) Most of the time we round off to psychological numbers like 25, 50, 75, 100. The big ones are 50 and 100.
The same thing occurs in the markets every day. I challenge you to go over your charts -- you'll find that markets hold big psychological points every day.
When you begin to understand this, you'll start to see there are more desirable numbers off which to buy and sell. But the markets are funny; each day the same patterns occur and it is our job to react when this happens.
Every day the market goes up, down, up, etc, which is called backing and filling. The market backs and fills within a certain mathematical number every day (at least most of the time), similar to a Fibonacci parameter.
By knowing this occurs every day, I never want to get into the market unless I'm as certain as possible that it is finished backing and filling. In the methodology used by my company, if the market has backed and filled 1.45, held psychological points twice, and the pattern we are looking for has occurred, we are getting ready to execute a trade.
In many respects, day-trading is not much different than war -- if you are not totally prepared to react to something you've been waiting for, you should not be trading. Let's assume you are ready to take a long position. When executing a trade, you need to know exactly where you're going to get out, both on the upside and downside. This should be done systematically through strict money management techniques.
The market does not know where your stops are unless you are doing size. When in the market, however, your broker should be aware of your trading strategies and understand exactly where to trail your stops the second you get into a position. You should not have to pester your broker with stops; if you do, you have no game plan.
Never trade without a game plan. Paying money for a computerized trading system and a live quote feed and waiting all day for the system to issue a signal is not a game plan; it's an insane way to trade. If that's the case, give your money to a professional to trade. My methodology looks at two different time horizons. The first is a long-term, 90-minute time frame in which we get an idea for the trend. (Note: Only trade when you know the trend.) The second time frame is a shorter-term, 13-21-minute period to get our entry.
I use my long- and short-term charts, along with my brokers' assessments of the markets, to form the basis for my trade. I react only to the market; I never give my opinion. My methodology uses anywhere from $325 to $1,500 stops. I like to use a bit larger stops when trading the S&P 500 Index futures. However, stops are a personal decision and one you will need to evaluate to determine the amount you can handle.
Finally, never hold trades overnight because the second you let your guard down and forget you are a day-trader, it's likely you'll get slaughtered.
Author Resource:-
Martin Chandra is a full-time investor. He has been researching investment strategies and make his own living. For more information please go to here.
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