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A Day Trading Strategy – Should Be Specific!

I feel that a well-defined strategy is essential in day trading. Without a specific system, traders are like soldiers without a mission. The strategy has to specify when to get in and when to get out of a position. Every step that a trader must take has to be spelled out because generalities in trading are a disaster waiting to happen (pardon the cliché).

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Many of my students are surprised when they hear statistics that claim that over 80% of day traders lose money. They incorrectly conclude that trading is a loser’s game.

To me, day trading is a BUSINESS; PERIOD!!! – not a game. It is no different than the many small businesses that are formed every year. Statistics say that about 80% of new businesses go bankrupt in their first two years of existence.

Why is this? – It could be because most new entrepreneurs are not properly equipped to run the operations they start. Whether it is due to a lack of enough practical experience or a lack of understanding of the risks and inner workings of the
business, many are probably not prepared to operate the business. They likely start a business out of impulse, thinking only about the great potential rewards that lie ahead.

Since trading is a business too, most people that start doing it also fail to prepare themselves properly before beginning. Without plenty of learning and practice, most traders simply become another small business statistic.

So what kind of strategy do I need to learn, you ask? There are many out there.

You are constantly being bombarded by internet, TV, and print advertising from gurus that want to sell you their “secret” trading system. Since most people are looking for shortcuts (A.K.A. “secrets”) all the time, they tend to wind up buying these magical systems or courses, sometimes spending thousands of dollars in the process. Eventually, they find out the hard way that these secret methods probably don’t work and give up trading altogether

The reality is that there are many different strategies that day traders can use that might work. What I feel is important is that the strategy be as well defined and as objective as possible; in other words “if this specific condition happens, then take this specific action (OBJECTIVE),” rather than, “analyze the market and get a feel for it before placing your order (SUBJECTIVE)” or, “based on your interpretation of what Yellen (or some other important person) says about the economy, place your order (SUBJECTIVE).”

Many that use a subjective strategy might wind up making the wrong decision or staying in a trade too long because even though they reach a “logical” conclusion, the market still acts “illogically.”

A lot of these “logical” strategy traders try to determine where the market SHOULD BE heading, instead of reacting to what the market IS doing (click here to see an example of a simple moving average crossover strategy).

What should a complete trading strategy include? (click on the individual sections to see more information)

  1. Entry and Exit Signal
  2. Stop Loss Placement
  3. Smart Money Management

Remember that these three sections of a strategy have to be as specific as possible and they have to make sense. A day trader cannot be thinking in the middle of a trade, “Where will I place my stops this time?” or “I wonder if I should be buying or selling now?”

These things have to be clearly defined by the system being used, so that the trader has a clear plan of attack to follow in any given market situation. When this is accomplished, every new position that the trader enters or exits builds the discipline the trader will need to survive over time.

Mastery of the strategy will be a gradual process that is materialized as the trader learns to execute the steps involved with precision and consistency. That is why it is also important that the strategy [at first] be simple enough to apply without having a Ph.D. from MIT.

When the strategy has too many indicators and conditions, a novice trader can be easily confused, and a confused trader has a lower chance of executing successful trades.

Before having any chance of success, a trader also has to make sure that he’s applying all the steps of the strategy correctly. The problem is that many traders tend to shift their style out of boredom or frustration – changing the strategy or abandoning it altogether before they have even mastered it – a very common and costly mistake in the trading world.

In my opinion, only highly experienced day traders should start experimenting with strategy modifications. The great majority of traders should instead first execute the strategies they learn without any deviation (like a soldier following orders – SIR YES SIR!!!).

In the risk management section, you will learn guidelines on how much money should be risked on each trade and how big your positions should be to make this possible (an essential part of trading).

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