Free Investment Advice

Source: daytradersbulletin.com

Day trading means short-term trading. Positions are closed prior to the end of the day and no contracts are held overnight. Day traders are simply executing their trading decisions in a tiny time frame.

Effective day trading consists of a combination of the following factors:

1. technical analysis
2. money management principals
3. psychological issues

Technical analysis is not difficult to learn. Start with a good book and just read about it. This will give you an understanding of what is involved and whether day trading might be something you would like. There are many excellent books available. We’ve listed our favorites in our Daytraders Bookstore. Think of your books as your tuition. When you find a book that looks like a good fit, buy it.

For instance, you want to know whether the market is in a trend and if so, which direction, up, down. Congestion is when the market is not presently trending but is moving in a sideways direction. To determine trend place trendlines on a chart. Start with the charts that come in your daily newspaper.

A trendline is simply a line connecting the most recent highs or lows. A good trendline will require at least two points, and three or more is better. The line must be straight, it cannot bend or twist. Here is a simple chart with a long-term up trendline and a mid-term down trendline. Notice how they connect either the highs or the lows?

Why do you want to know the direction of the overall trend? Because once you know the general trend direction, say for the last week or several months as in our example chart, you can then decide to take trades only in the direction of the trend. If the trend is up you’ll take signals to buy but leave alone signals to sell.

After you read and understand some basics about technical analysis you’ll need to study good, sound money management techniques. These have to do with determining your risk tolerance (based on the size of your account). Money management in trading means how well you handle your trades. Do you follow your rules and exit losing positions immediately?

Many traders fail simply because they refuse to accept that they have made a mistake and won’t exit a loser, or worse, they hope the market will turn back in their favor. You’ll also likely have a target for each trade, i.e. that point at which you’ll exit the trade and take your profits or begin scaling back the trade, if you have more than one contract. This, again, is best learned by reading sound money management principals and then putting them into action in your own trading.

It may seem daunting at first, but it is not difficult to learn to trade. What is difficult is being able to take trades without getting emotionally involved in the outcome. The psychological issues including general fears such as a “fear of failure,” or “fear of loss,” are not easily overcome, but they can be dealt with and they can be controlled.