Traders are often lured to into the futures markets with a fascination for day trading. The thought of trading leveraged contracts without overnight risk is appealing to many, but underestimated by most. As a retail broker I have had the pleasure, and the pain, of watching day traders attempt to profit through strategies ranging from scalping to "position" intra-day trading which spans several hours. My observations have led me to the conclusion that day trading is perhaps one of the most difficult strategies to successfully employ. However, for those that have the perseverance to dedicate themselves to the practice, contain the natural ability to eliminate emotions and have enough experience under their belt day trading may also be one of the most potentially lucrative forms of market speculation.
The term day trading can be used to describe an unlimited number of strategies and approaches that involve buying and selling a contract in the same trading session. Many are system based, meaning that trading signals are executed according to specific technical set ups; others incorporate a trader's instinct along with the technical guidance. The approach that you take in the markets should be dependent on your personality and risk tolerances and not necessarily what has worked for somebody else. Let's face it; there are only about twenty to thirty commonly used oscillators if there were absolute magic to any of them more people would have discovered the holy grail. Rather than expecting an indicator or an oscillator to do the work for you, I believe it to be more productive that you properly educate yourself to the risks and the rewards of the markets as well as some of the less technical, and thus less talked about, aspects of day trading.
Day Trading is Mental
I believe that becoming a successful day trader comes down to instinct and the ability to control emotion. If you have ever been involved in athletics, you have probably heard the adage that performance is 95% mental and only 5% physical. I have found this to be true in trading as well, although instead of being physical trading is technical. Quite simply, it isn't which oscillators or indicators that you use, it is how you use them and perhaps more importantly how you deal with fear and greed as you are charting your trades. Here are a few day trading tips that may aid in the mental preparation of day trading.
Know the "Vol" and Accept the Consequences
You often hear traders talk about their need for volatility. It is a common perception among the trading community that higher volatility is equivalent to higher opportunity and therefore profit potential. Call me a "girl", but I happen to be a contrarian when it comes to this point of view. Sure, if the markets are moving there is an increased chance for you to catch a large move and make history in your trading account. However, there is another side to the story; let's not forget that if the market goes against your position you could be put in an agonizing position. Also, if you are a trader that insists on using stop orders, increased levels of volatility translates into amplified odds of being stopped out prematurely.
I am not suggesting that you avoid markets during times of explosive trade; however, you must fully understand the consequences and be willing to accept the risk accordingly.
In my opinion, the most convenient way of measuring volatility is through the use of Bollinger Bands. The bands allow a trader to visualize the explosion and contraction of volatility with similar movements in the bands. Simply put, as the bands get wider the volatility and market risk is also on the rise. Conversely, tighter bands suggest relatively lower levels of volatility. Please note that I didn't say lower levels of risk; this was intentional.
Figure 1: Traders can visualize market volatility through the use of Bollinger Bands. It is a good idea to do so on a daily chart to get the big picture of market volatility.
Narrow bands indicate that market volatility is relatively low, but if the contraction is excessive enough it may signal an extraordinary spike in price is imminent. Markets go through times of quiet trade but are often followed by large and sudden increases in instability. As you can imagine, being in the market at such times could be similar to winning the lottery or they could mean financial peril. Before executing a trade in a fast moving market, or one that is trading quietly, you must be aware and willing to accept the risk accordingly. Being conscious of all of the potential outcomes of your trade may prevent panic liquidation or the infamous deer in the headlights failure to act.
Trader's Tool Box
Technology has provided traders with an abundance of readily available information at their fingertips. Accordingly, I strongly believe that traders should properly understand and utilize the resources available to them. It doesn't make sense to pick a single indicator or oscillator and expect it to tell you the whole story; instead it should be viewed as a piece to the puzzle. With that said, it can often be counterproductive to bog yourself down with too much information or guidance; this is often referred to as analysis paralysis.
In my opinion, it is a good idea to pick three or four tools that fit your needs and personality. For example, if you are an aggressive trader with a high tolerance for risk you may opt for a quick oscillator such as the Fast Stochastics. If you are a slower paced individual, the MACD may better suit your needs as it is a much slower moving indication of trend reversals.
It is important to note that after you have entered a trade you shouldn't change the oscillator that you are watching simply because the original isn't telling you what you want to hear, or in this case see. This can be a tempting practice for traders that are caught in an adversely moving market and are in search of a reason to stay in the trade for fear of taking a loss.
Mental "Stop Loss"
As you are probably aware, a stop order (AKA stop loss) is an order requesting to be filled at the market should the named price be hit. A trader long a futures contract may place and stop order below the futures price to mitigate the risk of an adverse price move. Likewise a trader holding a short futures position may place a buy stop above the current market price as a risk management tool against a possible rally. Once executed, the trader would be flat the market at or near the named price.
Most traders or trading mentors will tell you that you should always use stops; I am not most. I argue that experienced and disciplined traders may be better off without the use of live stop orders and believe that mental stops may be a better alternative. Supporting my assumption is the theory that the dollar amount of the risk on any given trade is conceivably higher through the use of mental stops as opposed to actual working stop orders but the risk in the long rung may be less through the reduction of untimely exits.
The concept of a mental stop is simply picking out a price level at which it is fair to say that your position may have been an incorrect speculation and manually exiting the market once your pre determined price is hit. Using mental stops as opposed to placing an actual stop loss order may prevent the natural ebb and flow of the market from stopping you out at what ultimately becomes premature.
I am sure that you have all fallen victim to the stop order that was triggered to exit your trade only moments before the market reversed course and left you behind. Not only is this a frustrating place to be, but it often has an adverse impact on trading psychology going forward. Unfortunately, it doesn't seem to be uncommon for inexperienced traders to behave somewhat recklessly in an attempt to get their money back from the very market that took it from them. It is easy to give in to this mentality, but doing so will almost always end negatively.
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