Tips to Improve Your Day Trading Profits

In the current financial climate, it has paid virtually no one to hold sizable positions in the markets for more than a few days. Therefore, traders have continually focused on capitalizing on the volatility in the markets through holding shorter term positions. With that in mind, day trading is fast becoming the weapon of choice to profiting in the markets.

Unfortunately, most new traders continue to use old ideas and techniques in an effort to grab profits quickly. In this article, I will provide a few trading tips that professionals use to find the maximize their day trading profits.

First of all, it is important that you determine how you want to trade, and what markets you want to trade. Due to its excellent liquidity, E-Mini S&P futures are a popular trading vehicle for many day traders. The Forex markets are another popular vehicle, as the major currencies provide excellent liquidity, and can be traded around the clock. Some traders like to be diversified and trade stocks, currencies and futures. The key though is to focus only on those markets and stocks that allow sufficient liquidity and volatility. You want to trade a market that moves, but one that allows you to get in and out of your positions with minimal slippage.

Next, you must determine whether you want to be a scalper, making multiple trades throughout the day in an attempt to capture small profits within a few minutes, or more of a position trader looking to capitalize on sizable directional moves. Generally speaking, I think that latter idea is an easier concept, as it does not force you to sit in front of the computer all day long. Once you enter a position, you can adjust your orders on an hourly basis, then decide whether you want to exit at the close or hold overnight.

No matter what style of trading you decide on, it is critical that you pay close attention to the market action leading up to each trading day. You must view the market from multiple time frames to detect any underlying trends. Ultimately, a market will revert to its underlying trend at some point. Therefore, even if you are trading off of a 5 minute chart, you will want to view daily charts and 60 minute charts and even 15 to 30 minute charts, to have a good feel for the trends that may impact market direction for the day.

Once the trading day begins, it really makes no sense to start trading right after the market opens. You want to monitor the price action for a while to determine whether the market will trade in a choppy trading range, or whether it will trade in one direction. For individual stocks and stock index futures, I prefer to let the market trade for at least 30 minutes to get an idea of how the market will trade, and maybe even up to 45 minutes. I want to monitor how a market reacts when it breaks out to new highs or lows for the session, and I want to monitor the volatility of the market during that time frame. If the market trades within a few wild swings during that time frame, it likely will be a range bound day. If it seems to creep higher or lower with little retracement, then it may be a one direction trading day.

For stock index futures and individual stocks, I like to pay close attention to tape indicators such as the Tick, Trin, other market indexes and advances versus declines to get a feel for what the underlying market is doing. For instance, if the tape indicators are weak while the S&P futures are making new highs, I may want to consider taking a short position once the futures start to weaken. If they are strong, I will use an opening range breakout and try to hold the position the entire trading day.

As I mentioned, the Forex markets are very popular for day traders. However, you must remember to trade when these markets are most liquid. For instance, the Japanese Yen will be most liquid when it is evening here in the U.S. Economic news coming out of Japan will greatly influence the direction of that currency, and that news will come out after U.S. trading hours.

I can’t emphasize enough the need to use stop orders in your trading to protect yourself from steep losses. No matter what style of trading you use, you must know when you will exit if the position goes against you. With that in mind, it is a good idea to develop an overall trading plan before you start to trade, rather than just trade by the seat of your pants.

These are just a few common sense tips that you should employ in your day trading. By applying these tips, you will avoid many of the common pitfalls in day trading.

Scott Cole