Big Mike's Trading Blog

Day trading futures, discussing money management and trade management techniques, and more

How to make money day trading

With the addition of the chat box on the blog I have had the pleasure of having some great conversations with my blog readers.  I found that many of them are still having some trouble making money, so I wanted to take some time to write this blog post which I believe will help most people in that position.

I've defined a few key areas that I believe are crucial in order to be successful at trading.  I have no doubt left out some important items, but this list is a good start and it is my belief you should take it to heart if you are having trouble with your trading.  You cannot truly become successful until you look within and conquer these important items.

Focus

Trading must be respected.  You must be focused. Disciplined.  You can't have constant interruptions and distractions around your workplace if you expect to be a good trader.  Many traders say it is like war, you are literally doing battle for life or death in the trading world.  How can you expect to win if your phone is constantly ringing, or if your kids are playing in your office, your dogs barking, or if you are replying to emails, etc.  I don't think those things would go over well in a real battlefield.

Your trading environment needs to be calm, private, and comfortable.  Turn your cell phone off, close your email, and explain to your family that you cannot be interrupted.  Make yourself comfortable, relax.  Move a coffee pot directly into your office, buy a nice office chair.  You need to be "in the zone".

Many of us enjoy most the ability to work from home, but it must be treated with respect.  If you can have a few uninterrupted hours then you can make great trades and be done with earning a living before lunch, then have the rest of the afternoon and evening to devote to your family.


Tools

The proper tools are essential for making money.  Tools can range from your computer, your software, your internet connection, etc.  You need to probe your tools for weaknesses and if it is a major flaw, correct it.  For instance, don't trade if your Internet connection is unreliable.  You need to correct that.  Don't trade if your computer is too slow and your charts freeze during heavy market volume.

But primarily I am referring to indicators on your chart.  Many traders have way, way too many indicators.  Some trades have none, trading strictly based on price action and momentum.  I strike a balance somewhere in between.  If your chart has too many indicators you will get conflicting signals.  How is this useful?  I suggest starting with a clean chart, and then adding only the absolute essential tools to it.

I use three charts to trade the S&P 500.  A big time frame chart for overall trend, a medium chart, and a short time frame chart for entries.   These can be a 10946 volume, 4181 volume, and 4 range chart respectively.  Each chart has a purpose.  Each chart has unique indicators.  The big chart has one volume indicator that helps me visualize upward or downard pressure.  The medium chart shows support and resistance areas and medium trend reversals.  The small chart is just for entries and shows only small time frame entries and a very quick trend reversal indicator.

Many traders also emphasize the importance of picking the right broker and data feed, not to mention charting and execution platform.  I use Amp Futures, Zen Fire, and NinjaTrader, respectively.


 Education

It is interesting how many traders believe they can make 100k a year after six months of looking at charts and reading books.  Why would one think that trading requires less education than say a lawyer or a doctor?  These professionals spend years, many many years, learning their trade.  A successful day trader should expect to spend years as well.

Education is not free.  Most successful traders blow out their account at least once or twice before they went on to make money.  It might help to think of this as tuition, instead of as losing money.  Education is expensive in other ways as well, not just financially but also mentally, emotionally, and time consuming.  You have to devote yourself to it in the same ways a professional athelete would before running a marathon.  They don't just wake up one morning and grab something at McDonald's to eat before they run the marathon.  No, they train for months to condition their bodies, have strict diets, etc.

You need to condition yourself for trading, and to do that you have to educate yourself.  Books, videos, classes, the Internet, and probably most important -- first hand experience.



Experience

Education is important, but experience is key.  Why do employers prefer candidates with not only college degrees but also on the job experience?  Simple, experience is the most powerful way to perfect your skills.  Putting what you've learned into practice is not easy.  The experience of actually trading, not just reading about it, is what will really motivate you to learn and be successful.

You can read about support and resistance, or read about taking the emotion out of trading.  But until you experience a trade that stops on a dime because of support or resistance, and then furthermore it stops you out of a trade that you were confident would be a winner, then you really can't fully understand the importance of what you read about (support/resistance and emotions).

With experience comes wisdom, and wisdom is required to properly assess your trading.  I think most successful traders had that "ah-ha!" moment when they realized they were the problem (ie:  look yourself in the mirror, the problem is you not following your own rules).  You cannot have that epiphany if you lack the experience and wisdom to be a proper judge, even of yourself.

Everyone will recommend that new traders sim trade until they are profitable.  But they also realize that 1) they didn't follow this rule themselves, and 2) even if they had, they would not have learned the same lessons until they traded and lost real money.  Sim trading is great, but it is more like being on the outside looking in.  It is not until you've placed cash trades and lost enough money to be "painful" that you will start to change your ways, your rules, yourself.  That is because you are gaining experience by learning from the past.


Planning

In order to be successful, you must have a detailed trading plan that you trust, respect, and most importantly -- follow.  You wouldn't decide to build your next home from scratch without blueprints, why would you step into trading without a plan?

First, you need a written plan that goes over rules.  These are when you will, and when you will not trade.  I am not just talking about technical analysis, I am also talking about "I will not trade when I am not 100% focused and in the zone".  The trading plan also needs to describe, in detail, your trading methodology.  Describe your setups.  What actions do you take when you get stopped out?  What actions do you take when a trade is going against you?  What actions when you have met your daily goal?

Second, you need to plan your trades in real-time.  You should not try to predict the market, meaning don't try to pick a low, or pick a high, but rather you need to anticipate or prepare yourself for what is coming.  By preparing for the next trade, you can anticipate what your setup will look like when it forms, what your actions will be.  You must be ready to execute your trade when it is your setup and meets all of your rules.  If you hesitate as that is occuring, you can and will lose money.



Conclusion


Take what I have said to heart.  Trading is not for everyone, so if you are having trouble accepting this information then you might want to consider another profession.  It would almost certainly be a lot easier on yourself, your family, and your bank account.   However, for those of us who push onward and conquer our demons, the benefits of being a successful day trader are endless.  It is, after all, the near-perfect job.

Force yourself to realize there is no Holy Grail.  The way to make money in trading is not by having the perfect indicator or automated strategy.  No, no, no.  The way to make money in trading lies within your ability to understand yourself and become an expert in the market you are trading.  There are no short cuts.

Please visit Investopedia for help on creating your trading plan.  I also would like to try and help as many of you as I can, so leave your comments and use the chat box.  Other traders on this site have generously offered up their time to help as well, you will find many of them have gone through everything you have, and more, so take their advice to heart.

Mike

6 comments:

Neal said...

Good post again, Mike.
One concept that has been useful to me is to select a metaphor for trading that is consistent with the mindset I wish to have during my trading. As a trend trader that seeks to identify directionl movements with momentum, the metaphor of surfing or sailing seems appropriate: flowing with price and catching a quality wave/wind to take me to my intended destination, while respecting the power of the ocean/market and always aware of my surroundings and the inherent risk of what I am doing. Not a new idea, but one that seems well-suited to what I intend to accomplish with my trading. I don't think we can, or want to totally eliminate emotions and feelings from what we are doing, but recognize them as possible signals of something we need to pay attention to. If some aspect of fear creeps in, whether it be fear of executing the trade (losing) or fear of missing out on a move (greed), it seems useful to physically withdraw from the computer and expend that emotional energy in a more constructive way, like journaling what is going on internally, going for a walk, doing pushups...instead of releasing that emotional energy by chasing the market and overtrading, or staying frozen at the screen and beating yourself up with all sorts of negative self-talk. Then come back to the charts with an understanding of what just happened, and with a more objective perspective of what is truly going on in the market right now.
If we can't get to a place that we enjoy what we are doing as traders, I don't think we are long for this vocation. We do tend to avoid things that are painful to us, and most of our subconscious programs that are running in the background have to do with our protection and safety.
Just thinkin' out loud with you.

sam028 said...

Good post, and a good first comment ;).

Big Mike said...

Hi Neal,

Like Sam said, I agree with your comment and there is a lot of very important information to take away from what you've said.

Mike

bruce said...

good stuff

i would just switch the indicators you use on large and small time frames

Anonymous said...

The biggest problem we're always facing is to make all that information our own. In order to succeed, we not only have to follow the information written above and in all the good places out there. We have to implement it into our own system. And make it our own.

Exactly the way you did Mike. You took an indicator, used it, developed it and RIP-ed it. But you made it your own.

That's the biggest problem we're facing. Neil is talking about the protective side of the subconscious. And that's very true. But the biggest problem is, not being aware of it (which by the way is not helping you at all constructively). The biggest concern and problem in this case, is to change the information that's in your subconscious. And believe me it's not changing by being aware of it.

Being aware of it, makes you only realize, you're at WAR. And that war, is you against you.
95% on a global basis looses money trading. 5% gains. There's no alchemy we're talking about here . There are big money involved here because, the 5% takes what the 95% looses.

Have you ever wondered why that number is so low?
I would like to say that, it is because those guys are definitely trading in the zone. And in order to get in the zone. You have to master yourself first.

So maybe we do have a Holy Grail. And maybe we're looking in the wrong place for it. It's inside of us. Look no further and you will find it.

But in order to do that. One has to have the discipline, guts, courage to go into war. The war against yourself. And one has to be willing to die, in order to be reborn.

So sure, it is very important to become aware of oneself. But the solution doesn't lie there.
In order to get the change one has to have to courage to become exposed to its biggest enemy. And that's to yourself.

They say that the best way to rid of a fear is by embracing it. How many of us do that?
Maybe less then 5%. What do we do with it? We suppress it. We do whatever lies in our powers to put it away, to forget it.

Did you guys know that the most successful guys out there, that are using the zone in order to perform. That, when they're preforming in the zone, they're very playful and relaxed? Go figure that!

So in order to summarize it. The answer does not lie in an indicator. The answer lies in your perception of the indicator. And the one behind those glasses is always you.

Again, a BIG, BIG THANK YOU to Mike, for making the trading world a better world by sharing his thoughts, methods and strategies with us.

/George

Big Mike said...

George,

Thank you. I couldn't agree more, the most important thing you can do is build confidence in yourself, identify your weaknesses, and resolve them. You can't take someone elses successful strategy and make it profitable until you make it YOURS.

The reason you have to make it yours is because you have to fully embrace it, fully trust it, have 100% confidence in it. And that is the easy part my friends.

The hard part is then not letting your inner demons strike against you. Things like moving stops, missing trades that meet "your setup", getting out of winning trades because you're afraid to lose money, all of these things and more are what separate the winners from the losers more than the software package, indicators, 10 times over.

Mike

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