The stock market has been booming throughout 2018, and investors may thus believe that now is a good opportunity to try trading on the NASDAQ. For the overwhelming majority, this is a terrible idea. Multiple studies have established that as many as 99 percent of day traders fail to consistently make money. There are many reasons for this, such as tax and commission issues discussed by The Motley Fool as well as psychological issues with trading.
But if you still want to give day trading a shot with some spare money, there are some steps you can take to improve your odds. By following these steps, you can adjust your entire trading mentality and gain the knowledge to have a better chance of being that successful 1 percent.
- Find Your Own Strategy
Plenty of day traders have no real trading strategy. They go with their gut, or perhaps they mindlessly do what someone on a website or CNBC tells them to do. That is a path towards disaster. Psychology is a tricky field which we do not entirely understand, and rational judgment can fly out the window when confronted with suddenly rising or falling stocks. All too often, traders try to lock up their gains too early when things are good and double down when things go badly.
Consequently, the most important thing a beginner day trader can do is to develop a strategy. Figure out certain things in advance before you buy a single stock. How much of your portfolio are you willing to risk in a day or trade? What are your profit targets? And perhaps most importantly of all, what is your stop loss target? It is far easier to figure these questions out in advance instead of trying to decide it on the fly with your money at stake.
Anyone can create a strategy. Practice is needed to ensure you have the mental fortitude to stick with your strategy and the instinct to understand what to do depending on the given trading situation. A basketball or chess player does not have to think about what moves to make most of the time, as their training and instincts kick in for them. The same is true in day trading.
Practicing day trading is not just reading articles and watching videos. It is not even fiddling around with demo accounts for laser hair removal and making random trades. It is about taking your trading strategy, implementing it into a demo account, and observing what does and does not work.
Practice not just with the NASDAQ, but with all kinds of markets and in all kind of conditions. You may practice with a demo account now and feel like a genius under the current market conditions. But if the market declines within the next few months, you have to be prepared for that as well. Do not start trading with real money until you have been practicing with a demo account for at least six months.
- Review Trades
When you are practicing with a demo account, even following a bad plan is better than having no plan at all. But eventually, you must revise your plan to account for changing conditions, which means reviewing the trades you have done every day. Of course, this entails taking screenshots and keeping a detailed ledger of every trade you have ever made.
There are two things in particular you must review. First, you must look back at your daily trades to ensure that you are following your prescribed forex strategy and are not making emotional trades. Second, you must look at your trades on a weekly to monthly basis to review whether your trading strategy is effective. Are your profit targets and stop loss at the best points, or should they be revised? While you cannot radically overhaul your trading strategy week to week without looking weak, making small adjustments over time will make for a better trading strategy.
- There are no Shortcuts
Learning the skills to become a more successful day trader is hard work, and it is hard work which you have to do on top of your regular job. As a result, you see scammers and teachers selling day trading software or teachers which promise to make you wealthy in no time at all.
But despite the advance of technology, trading today is not really any different from how it was 50 years ago. There is no substitute for hard work, practice, and building the discipline to maintain your strategy and avoid any wild goose chases. A good trader does not try to win every trade, because that is impossible as a 1.000 batting average. A good trader aims to minimize the losses when they appear and maximize gains. Stick with a strategy, revise it every now and then, and work and read whenever possible. Even that may not ensure success as a day trader, but it will improve your chances.