Before we discuss what it takes to become a day Trader, let me first explain to you what a day trader actually is. A day trader is someone who places positions in a financial Market entering and exiting their positions within 24 hours and in many cases, it can be minutes. A day trader does not hold overnight positions and is looking to exploit short-term moves in financial markets that are often created by the release of economic data announcements.
In recent years computer algorithmic trading systems have become extremely popular for day Traders who apply an electronic robot (expert advisor) to their trading account and it trades automatically based on the algorithm that has been built. Investment Banks and Hedge Funds enjoy day trading because their execution platforms are lightning fast along with their servers and internet speeds. They will also likely be subscribing to a Bloomberg terminal which is the world’s most popular and fastest financial news source. A Bloomberg terminal subscription is many thousands of dollars per month, out of the reach of most novice day traders and what it gives professional traders is access to high impacting economic data announcements a split second before the rest of the market. This allows the professional day trader who has a Bloomberg terminal to enter a position instantly the economic data flashes on their screen.
Day trading can appear attractive. In and out of the market inside 24 hours, no overnight positions (sleep well) and the opportunity for a quick buck. But sadly, novice amateur day traders make up some of the biggest losers in financial markets and it is usually the professional investment bank/hedge fund day trader that is making the lion’s share of profits. Speed for day trading is key.
So what types of systems do profitable day traders use? When professional day traders enter the market, it is generally immediately after an economic data announcement such as a Central Bank statement, inflation report or perhaps a GDP growth number. A professional day trader will have the experience to understand how other day traders and algorithmic systems are likely going to react based on what the economic data announcement says. Professional day traders will usually enter the market when an economic news announcement is out of line with what the market expects. Every economic news announcement of high importance is available to review on an economic calendar and next to the data announcement will be an expected result based on a survey of leading economists. If for example, it’s a Retail Sales report for Australia, the leading economists surveyed may come to a consensus that a rise of 0.5% should be expected when the data is released. If the announcement shows a rise above 0.5% then professional day traders will likely buy the Aussie Dollar higher on the good news. Day traders like to try and exploit news announcements when the data is out of line with expectation. Novice traders are often too slow and the market has already moved a significant distance before they enter. When they do finally enter the professional day, the trader is often exiting and thus the price falls back lower and stresses the novice trader. The speed of information flow is extremely important for a day trader.
Another time day traders will enter the market will often be at the opening of the stock market. This is often when a lot of novice traders will enter and novice traders generally always react the same way, emotionally. If they see a price suddenly move higher or lower they will try and trade the move and on many occasions, professional day traders will wait for a few moments and trade their large volume sizes in the opposing direction. To be a successful day trader you really do need to think counter-intuitively to the novice trader.
Professional day traders enjoy trading futures markets such as stock indexes, currencies, oil, gold and also options markets. If you do want to learn to become a day trader I recommend you focus on one market and learn to recognise the characteristics of that market. Every financial market is different and it is also important to learn how various markets are correlated so you do not end up in multiple positions that could see you increase your risk. For example, as a general rule when stocks rise, gold falls. When stocks fall the Japanese Yen and Swiss Franc rise. When commodity prices fall the Aussie Dollar falls. There are multiple correlations across financial markets and professional day traders are generally specialists in one market and understanding the correlations.
If you do want to learn how to become a successful day trader you must learn to trade a system that will allow you to manage risk tightly so you are not overly exposed to the potential of gaps and slippage. Many novice day traders try and put their stop-loss too close to their entry point when entering a trade right at an economic news announcement. The economic data released often drives price sharply and gaps past the novice traders stop loss and increases their risk exposure. Novice day traders, as a general rule, do not manage risk successfully so if you do want to day trade ensure you are trading a market that is very liquid such as the currency market.
Professional day trading requires you to be extremely disciplined as emotion will usually be dictating the novice day trader’s decision to enter and exit a market. A professional day trader will understand the numbers game behind their system and why it is critical to simply win bigger on each of their winning trades and replicate their trading process over a series of trades.
Day trading can be extremely rewarding provided you are trading and learning from other experienced and profitable day traders.
About the Author: Andrew Barnett
Andrew is a professional trader and successful investor who has a strong focus on education. He is a regular Sky News Money Channel Guest and one of Australia’s most awarded and respected financial experts and is regularly contacted by the Australian Media for the latest on what is happening with the Australian Dollar. Director at LTG GoldRock, Andrew Barnett, guides thousands of traders around the world in the live market on a daily basis, advising them on buy and sell directions, as well as trading his own personal account. Andrew, a regular keynote speaker at trading and wealth-creation events throughout the Asia Pacific region, is an authorized representative registered with the Australian Securities and Investment Commission (ASIC).
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