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Profitable Day Trading – No matter what market you trade – stocks, forex or futures – every second that the market is open provides a trading opportunity. However, not every second provides a high probability trade. In a sea of almost infinite possibilities, put every trade you consider through a five-step test so that you only make trades that align with your trading plan and offer good profit potential for the risk being taken. Apply the test whether you are a day trader, swing trader or investor.
It will take some practice at first, but once you get the hang of the process, it only takes a few seconds to see if a trade passes the test, telling you whether you should trade or not.
Profitable Day Trading
The setup is the basic conditions that must be present for a trade to even be considered. For example, if you are trending after a trader, then the trend must be present. Your trading plan should define what a trading trend is (for your strategy). This will help you avoid trading when the trend is not there. Think of the “arrangement” as a reason to trade.
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Figure 1 shows an example of this in action. The stock price is moving higher overall, as indicated by higher swing highs and lows, as well as a price above the 200-day moving average. Your trading setup may be different, but you need to make sure that the conditions are favorable for the strategy being traded.
If your reason to trade isn’t there, don’t trade. If your reason for trading – setup – is present, proceed to the next step.
If your reason to trade is present, you still need a precise event that tells you it’s time to trade. In Figure 1, the stock has consistently gone up, but some moments within that uptrend offer better trading opportunities than others.
Some traders like to buy at new highs after a price move or pullback. In this case, the trade trigger could be when the price rises above the $122 resistance area in August.
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Other traders like to buy during pullbacks. In this case, when the price pulls back to the support near $115, wait for the price to create a bullish capture pattern or to consolidate some price bands and then break above the consolidation. Both are precise events that separate trading opportunities from all other price movements (for which you have no strategy).
Figure 2 shows three potential trading triggers that occur during this stock rally. What the exact trading trigger is depends on the trading strategy you are using. The first is consolidation near support: A trade is initiated when price moves above the consolidation high. Another potential trade trigger is a bullish capture pattern near support: Along is triggered when a bullish candle is formed. A third buy trigger is a rise to a new high after a pullback or range.
Putting. With a trading trigger, you always know in advance where your entry point is. For example, during July, a trader would know that a potential trade trigger involves a rise above the June high. This allows time to validate the trade, with steps three to five, before the trade is actually executed.
Having the right entry conditions and knowing your trade trigger is not enough to create a good trade. The risk in that trade must also be managed with a stop loss order. There are several ways to set a stop loss. For long trades, the stop loss is often placed just slightly below the recent low, and for a short trade just above the recent high support.
Only Take A Trade If It Passes This 5 Step Test
Another method is called Average True Range (ATR) stop loss; it involves placing a stop-loss order a certain distance from the entry price, based on volatility.
Determine where your stop loss will be. Once you know the entry price and stop loss, you can calculate the position size for the trade.
Now you know that the conditions are favorable for trading, as well as where the entry point and stop loss will go. Then consider the profit potential.
The profit target is based on something measurable, not just randomly chosen. Chart patterns, for example, provide targets based on sample size. Trend channels show where the price has tended to change; if you are buying near the bottom of the channel, set your target price near the top of the channel.
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In Figure 3, the EUR/USD triangle pattern is about 600 pips at its widest point. Combined with the price of the broken out triangle, this gives a target of 1.1650. If trading the triangle breakout strategy, this is where the target is set to exit the trade (with a profit).
Set where your profit target will be based on the trends of the market you are trading. A trailing stop loss can also be used to exit profitable trades. If you use a trailing stop loss, you will not know your profit potential in advance. That’s okay, though, because a trailing stop loss allows you to take profits out of the market in a systematic (not random) way.
He will focus on trading only when the profit potential is greater than 1.5 times the risk. For example, losing $100 if the price reaches your stop loss means you should make $150 or more if the target price is reached.
In Figure 3, the risk is 210 pips (the difference between the entry price and the stop loss), but the profit potential is 600 pips. That’s a reward-to-risk ratio of 2.86:1 (or 600/210).
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If you use a trailing stop loss, you will not be able to calculate the risk reward ratio for the trade. However, when placing a trade, you should still consider whether the potential profit is greater than the risk.
If the profit potential is similar or less than the risk, avoid the trade. It may mean doing all this work only to realize you shouldn’t accept the trade. Avoiding bad trades is as important to success as participating in good trades.
The five-step test acts as a filter so that you only take trades that match your strategy, ensuring that these trades offer good risk-relative profit potential. Add other steps to suit your trading style. For example, day traders may avoid taking positions right before big economic numbers or company earnings are released. In this case, to make the trade, check the economic calendar and make sure that such events are not scheduled even though you are likely to be in the trade.
Make sure the conditions are right to trade a particular strategy. Set a trigger that tells you it’s time to act. Set a stop loss and a target, then determine whether the reward is greater than the risk. If so, accept the trade; if not, look for a better opportunity. Consider other factors that may affect your trade and take additional steps if necessary.
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This can be a tedious process, but once you know your strategy and get used to the steps, it will only take you a few seconds to go through the entire list. It’s worth the effort to make sure every trade you make passes the five-step test.
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Day trading can turn into a lucrative career (as long as you do it right). But it can be a challenge for beginners – especially those who don’t have a well-planned strategy. And be aware that even the most experienced day traders can hit rough patches and experience losses.
Day trading means buying and selling a set of securities within a day, or even within seconds. There is nothing
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