An associate of mine, Eric Patterson, wrote a brief lesson a few months back that I felt would be appropriate to re-post here (with his permission of course =) I hope you guys enjoy!
The advice I'd give to a friend or relative that was just getting started daytrading.
TAKE THINGS SLOW The first advice I'd give to the new trader is to not rush things. The best way to lose money fast (very fast) is to either play the lottery or make numerous rapid-fire trades in the stock market. Your initial goal is not to make a lot of trades, it should be to gain a lot of knowledge without losing your shirt. You will not make money in your first 3+ months. Use this time to learn as cheaply as possible. In fact, perhaps the worst thing possible is that you will make money in your first several months, giving you much more confidence than you are entitle to and, ultimately, a much more expensive tuition fee (trade losses) in the long run.
DON'T DAYTRADE IF YOU CAN'T AFFORD TO LOSE This is critical for two reasons. First, most daytraders lose! Second, if you absolutely can't afford to lose the ! money in your account, you won't be able to make unbiased, unemotional trading decisions. If you're constantly thinking about your next mortgage payment, you won't likely be a successful trader.
BE EXTREMELY SELECTIVE IN YOUR TRADE CHOICES It is okay to not take a trade. You will not lose a dime in a trade you didn't take. A missed trade can be a great learning experience, as you see the outcome (win or lose) of your potential trade without risking any money. I would suggest a new daytrader wait for the absolute perfect trade setup before entering a position. A perfect trade may only appear once per week, but it will likely be profitable 80%+ of the time. Again, try to avoid losing money, and LEARN from what you see in the market. Eventually, you will gain experience, hopefully cheaply, and you will gain the corresponding confidence to initiate trades in less than perfect situations. In the meantime, look for the perfect trade opportunity. For starters, stick! with long positions only. Perhaps look for a stock in an uptrend on t he daily chart, that is pulling back down to support on the daily or intraday chart. Ideally, the stock will be rising on heavy volume, and declining on weak volume.
DON'T TRADE ULTRA SHORT TERM Leave the scalping and very short term trading (i.e. trades of less than an hour) to the more experienced professionals. Instead, you should give the stock some room and some time. Don't expect to cash out in less than an hour for a months pay. Purchase a smaller number of shares (100?) so that you won't be too concerned if the stock goes down a bit. Remember, the goal is to LEARN. Watch what the stock is doing. What what the market is doing. Pay attention. Recognize what happened when you made/loss money. Eventually, you will see patterns and develop a 'feel' for the market.
AVOID NEWS PLAYS Trading based on news and hype is again something to leave to the more experienced than you. Don't attempt to buy the stocks mentioned on CNBC. This is a losing gam! e for the new trader. To profit from these stocks, you will need to be extremely fast to enter your order before the thousands of other daytraders watching CNBC. They will beat you every time. Don't waste your time with these plays. Similarly, avoid trading stocks based on stories from other news media. If a stock is favorable mentioned in Barron's, or the Wall Street Journal, the stock will gap up the next day, but by then it will be too late to purchase the stock. The news has already been taken into account in the price of the stock.
DON'T BECOME EMOTIONAL If you are emotionally attached to your trading, you will have a much more difficult time making money. This is another reason why it is best to start trading with an almost insignificant position size (100 shares or less). Unemotional trading is a huge advantage (or even prerequisite) towards successful daytrading.
CONSIDER PAPER TRADING Perhaps you should consider paper trading or tradin! g with a practice account. If you do, make sure you record every 'buy' and 'sell' on paper as it happens. Otherwise, you might fall into the trap of remembering only the good trades and forgetting about the poor ones. Don't fool yourself, stick with cold, hard facts. Also, recognize that it is much easier to 'make money' paper trading than it is to make money in the real market. There are many reasons for this, but the biggest problems are getting your 'real' orders filled and avoiding the emotional mistakes that can be made when trading for 'real'.
BUY LOW, SELL HIGH There are as many successful daytrading techniques as there are successful daytraders. However, for new traders, I would encourage them to buy stocks with limit orders on pullback during an uptrend. Don't chase stocks, you will ultimately buy the stock at it's top. Buy waiting for pullbacks, you will win the spread on every trade and be buying the stock at a discount from it's highs. To summarize this entry philosophy, your candidate list of stocks should be stocks! in an uptrend that are now in a short term downward move within the context of the uptrend. Ideally, the stock should be approaching some support level on the pullback at the point of entry.
AI
