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Two Day Trading Strategies You Haven't Tried

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Yesterday's price action closely followed the template for two useful day trading concepts: opening range analysis and the "spike and climb" pattern.

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Where do most day traders go wrong? The list could be almost endless. Here are a few critical errors that are all to easy to make:
  • They are far too zealous to day trade. Because the toughest competitors have more advanced technology, more capital, and a better cost structure, trying to trade too frequently or too actively will put you at their mercy and cause you to lose.
  • All too often, individual day traders use approaches that are almost doomed to fail. It is very important to understand which market niches are available to you, and which ones are not. I go into this very important concept in this article.
  • Looking at small bits of information that are next to (or completely) useless, while not seeing the big picture. For example: I sometimes get emails from readers asking about one-minute or five-minute bar chart patterns or intraday indicators. In some of my short-term trading articles, I use a five-minute chart to document a particular trading idea. However, the ideas are not really about five-minute charts; they are about larger concepts. For example, getting long when it looks like institutions will be dog-piling the market higher and staying long for the duration of the morning trading session is in an important day trading concept. The individual five-minute bars are not necessarily that important.
  • Over-managing trades and going on tilt. This can happen if one is over-focused on day trading or is feeling too much pressure to trade. Just realize that for an individual trader, making trades is a business expense, not a profit center like it might be for a HFT firm. It is best to implement a strategy in a way that lets you capture the overall concept without getting sidetracked by market noise. For example, staring at the quote screen or order book is not going to give your trades a special advantage; in fact, it will likely just entice you to overtrade. (Why do you think brokers offer these tools for free?) Day traders need a bigger picture edge in order to overcome trading costs.
  • Not tracking results for your different trading styles. In my own trading, I have certain styles or approaches that I have a high degree of confidence in and others that are "extras" that I don't want to lean on too much. Regardless, I keep the different things I do separate and track the equity curve of each approach. The easiest way to do this is to have a different trading account for each fundamentally different approach or strategy.
I cut back very quickly on day trading strategies when it looks like they might be breaking down. I have learned from experience that when market conditions change, day trading approaches can go from lucrative to a money pit very quickly. A perfect example of this would be the late spring and summer of 2009.

Day trading can be like the fashion business. Selling a trendy item can be lucrative, but you don't want to get caught with a ton of inventory when the fashions change. In day trading, we are lucky that we don't have to carry inventory, but we do need to have the insight and fortitude to identify and act when market conditions change and our approach is no longer in fashion. The next step is to put your finger to the wind and update your research and determine what the current market fashion has evolved into. Don't start day trading again until you are confident that you have it figured out.

My personal choice is not to over-focus on day trading. I only want to do it when the opportunity looks very strong and I would basically be a fool not to take the trade. Not over-focusing on day trading is largely a business decision (managing day trades sucks up time and mental capital, and would make it more difficult for me to manage large amounts of money down the road) and partly because I think day trading is overall a tougher, less potentially lucrative way to trade given my skills, infrastructure, and place within the market.

Given the above, why day trade at all? Very simple: Smart day trading strategies can make more money with less risk than any other approach that I am aware of. This is the positive flip side to all of the negative, difficult aspects of day trading and is why I keep it as a secondary approach.

Nat Stewart runs the trading-strategy website www.nastrading.com. The site's mission: "Help traders capture explosive moves in the forex, futures, and stock markets."

Twitter: @NASTrading
No positions in stocks mentioned.
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