Does this sound like you…
You are day trading one of your favourite stocks. Today feels like the day the stock will do a monumental gain. You are on the edge of your seat pounding backward coffee waiting for that gilt moment when your suite of indicators twist ‘light-green’ with an entry signal. You waylay, and ambuscade, and waylay. The trade looks better and better with every minute that passes. Without warning the stock starts to travel. However, the trade did not played the position you were anticipating. The stock moves higher and higher without relenting. Panicking, you participate a market order for a big position. The moment you participate the stock, it falters and trades against you. How was this potential? It was about as if someone set up a trap for you personally.
The above scenario is mutual with unexampled and still experienced day traders. The problem is easygoing to place but hard to right. What is at the root of the trading disaster?
Emotions and Trading
The brain is a complex machine that makes decisions based on logic, intuition, emotion, and millions of variables that cannot be defined in an automated trading program. The human element can be extremely profitable and cannot be mimicked by a computer. Ironically, it is this very quality that inhibits many knowledgeable traders. How can day traders learn to use their emotions for them and not against them?
Limit Orders and Adding Liquidity
One of the worst mistakes a trader tin make is to chase a stock. By the time the stock looks like a ‘sure bet’, it is usually gearing up for a consolidation or a price reversal. How can traders stop the profitless practice of chasing a stock?
Market orders have their place in day trading. New day traders that penny-flip stock need to learn patience and discipline first. One way to control emotions is to trade using limit orders that add liquidity. If a new day trader forces himself to buy at the bid and short sell at the asking price, he will forestalling chasing trades like a trailing running after a car. While he may miss the odd trading opportunity, he will usually find that filled limit orders are generally more profitable.
Using limit orders to buy at the bid and sell at the asking price will also increase profitability for new day traders due to ECN trading rebates. Even if the trade is flat, or without any capital profits, you can still have a nett positive profit on the trade.
Adhering to a System
Another problem in the opening example is not sticking to a trading system. While the trader had some indicators he was watching, he also ignored them when his gut told him otherwise. Sticking to a system can be difficult. There will be many missed opportunities. A day trader is not able to capitalize on every opportunity in the market, but must pick and chose his trades. It can be frustrating when a big trade happens and you are not onboard. But you should remember that for every missed trade that was profitable there are also dozens of trades that would lose you money.
Sticking to a system or a set of indicators can be difficult. Sometimes you can clearly see an amazing trade but, for some reason or another, your system does not agree. That being said, most traders know when they have clearly ignored their system, or when greed or fear overwhelmed them. Be honest with yourself. If you traded on emotion and ignored your system, punish yourself. Bar yourself from trading for a set period of time such as 20 minutes. It will be painful but you must learn patience and discipline.
What else will help a trader stick to a plan? Write a checklist in advance. Look at the list and mentally check off the trading criteria before buying or selling. This simple step might be the reminder you need to keep emotional trading in check.
Trade with a Team
One final tip to help a trader stick to a system is to trade with a partner. Chances are the other trader is not as emotionally attached to the trade as you are. Your trading provide should know your rule and help you stick to them.
Some traders join online groups or physically trade in the same room as other populating.
Day trade does involve learning, practice, and intuition. On the other hand, the trader needs to hone his discipline and commanding emotional trading. If new traders practice using confine orders, making a trading setup checklist, and bounce potential trades off a partner, they can develop the iron discipline that the ‘day traders of fame’ possess.
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