Daytrade part 2

Daytrade Part 2

OK – you've decided you want to daytrade, you think you can handle the pressures of daytrading, you've got hold of some “How to daytrade” books and signed up to a daytrading or trading internet forum and browsed the daytrading posts. What is next?

Tools to daytrade. We have already mentioned some of the important daytrade tools (ie daytrading books and forums) but there are some other obvious ones such as:

A Plan: So many people start daytrading without any form of a plan. It's like starting out on a drive somewhere but not having a map or any idea of which way to go. At the start your plan maybe very simple (I'm going to buy XYZ when it reaches the resistance line and then sell when it touches the next resistance line and have my stop loss set at X) – but stick to your plan. Trail it with some back testing on previous data. Do a bit of paper trading and then place an order. Watch what happens carefully and then assess. You may need to adjust your plan a bit after you have traded a few times. I am still adjusting my trading plan after almost 20 years. The market changes frequently. You need to as well to keep up. Remember – if you don't have a trading plan, then your are part of someone elses trading plan!

A Diary: Don't laugh this one off. You need to keep an accurate account of what you did and why. Entry points, exit points, stop losses, support and resistance lines. You can then go back at the end of the trade/day/week/month/year and see what you did and why. You can see what worked and what didn't. This is an important part of refining your trading plan.

A Computer: If you already have a computer then there is no need to rush out and buy the latest turbo charged humdinger of a computer just to daytrade. As long as your computer can access the internet and run spreadsheets and draw graphs you are OK. I would say if your computer is less than 4 years old you shouldn't have too much trouble. If you do want to buy a new computer then get something simple. Again – don't go for the top of the line turbo charged graphics games machine just to do your trading – you don't need it. A middle of the range is fine. I prefer a laptop because I can take it with me if I need to move anywhere but this is a personal preference. I would however suggest you do have a computer dedicated to your daytrading. If you share one with other people in your family I will guarantee that they will be using it when you need and when you finally get on the share you were trying to sell at a profit will have dropped!

The Internet: This is a must. Do NOT try and daytrade by phone or fax. You may as well be using carrier pigeon. When you daytrade you need to be able to react to a buy or sell signal within seconds (or quicker). If you don't have good, reliable internet access then you are kidding yourself. You can guarantee the time you need it will be the time it crashes. There are enough things working against you without you have a bad internet connection.

Trading Software: There are many types of trading software – enough to fill several books. From basic charting programs through to others that are called “black boxes”. I suggest early on that you stick to some of the basic charting programs. You can find several free on the internet or you may find that your broker will provide one with the broking package that you have (go to your broker site or click on one of the brokers advertised on this site). If you want to buy a package look around and ask some questions on the trading forums. Go with a mainstream one (eg metastock) as you can find plenty of help online to set up your charts and things. You will find that there are so many indicators and tools that come with these packages you can play with them for days. However, after a while you will discover that the basics are what works and the others are usually just basic indicators with “fancy” bits laid over them – some people swear by them but from my experience – most go back to the basics.

A word of warning – stay away from what are called “black” or “grey boxes”. These are programs that provide buy and sell signals, meaning less analysis effort is required. Grey boxes disclose details of how the trading signals are derived, while black box systems provide signals without divulging their methods, thus creating the impression of a secret formula. These are attractive to new daytraders. They are nearly always expensive - some costing many thousands of dollars. Many traders who use black boxes admit they know next to nothing about the stocks they trade. It's been said that the only way to make money from a black box is to sell one. Australian Securities and Investments Commission regularly issues "consumer alerts" about black-box trading systems and has taken action against companies for misleading advertising. There is no holy grail of software that will guarantee success in the markets. Experienced daytraders know that consistent success requires effort, skill and discipline.

Working Capital: Working capital is another issue to consider. It's fine to start small but you aren't going to make heaps if you only have $5000 or $10,000 to play with. You can increase the “bang for your buck” by looking at things like options, CFDs, futures, warrants etc but be aware - these are highly leveraged. If the underlying share goes down $1 you may find your option, CFD or warrant has dropped $3 in value or may now be worthless costing you all of your investment. You can also borrow money to increase your working capital but his also has its dangers. Leveraging magnifies your profits but also magnifies your losses. This leads to increased pressure and faulty decisions.

This is just a small taste of the things you need to get a start in daytrading. If you do decide to go down this path – please tread carefully. There are many people out there who are eager to take your money and this is before you place a trade. Read lots of books and watch the market. How it reacts to certain news, views and announcements. Start out small and gradually build your experience and capital up over time – don't expect to take huge amounts out of the market from the start. Use stop losses EVERY TIME!!! Don't leave your job yet. Wait until you have 1 years wages in savings so you are not placing trades because you have a bill to pay at the end of the week. Even then I would suggest you take “unpaid” leave if you can – just in case. And have fun because it can be a lot of fun.


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