There are many skills needed to become consistently profitable in day trading. Some of these skills only apply to specific styles of trading (such as scripting for algorithmic trading, tape-reading for trend trading), and some of the skills are more universally applicable for all styles of trading.
These are the 5 important skills to master to become successful in day trading, regardless of trading styles.
KEY TAKEAWAYS
- Being able to collect and comprehend data from various sources will effectively help identify the stocks in play, together with potential moving directions and rationale behind the moves.
- Controlling risk is key to minimize losses and trade another day
- The ability to adapt and make quick strategy adjustment in the ever changing market condition is crucial
- Rigorous and dedicated record keeping is vital for continuous learning and improving
- Emotion self-awareness and self-regulation differentiate successful traders from the others
Research
There are tens of thousands of listed companies around the world. Technically a day trader could trade stocks offered by any of them. Most of these stocks, however, are not suitable for day trading.
Being able to research and collect data from various sources, effectively comprehend the information and form a sound trade narrative or strategy is key for successful day traders.
Stock price movements are affected by many factors, from macroeconomics directions and company business performances to trading metrics and technical indicators, or even political landscape and social media trends.
All this information can help formulate trading strategies, identify stocks that are in-play, potential price movement directions and key levels for entry and exit.
Risk Management
Robert Kiyosaki once said – “It’s not how much money you make, but how much money you keep”. This can’t be any truer for day trading.
Losing trades are inevitable for any day traders. The key to a sustainable day trading career is the ability to control how much to lose. Without proper risk management, a trader could have a 4 day winning streak and easily have all the profits and more wiped out in a big loss on the 5th day.
For each and every trade, identify risk and reward, define entry and exit level, as well as trading size and max loss. Only take trades when predefined conditions are met, and rigorously follow the levels. Cut loss relentlessly when the predefined max loss level is hit, and survive to trade another day.
Adaptability
The stock market moves quickly, with stock prices fluctuating in real-time affected by many known and unknown factors.
Day traders often enter trades with predefined trading strategies, only to find out the price movement isn’t as planned. The ability to quickly identify the cause of deviation, swiftly make strategy adjustments when needed and effectively take action accordingly, is vital to thrive in the fast moving and highly dynamic market environment.
Record Keeping
Record keeping, or trade journaling, is the foundation of developing and improving day trading skills.
Traders can take advantage of the recorded data to understand the association between their trade results and various factors, and make adjustments on their trades accordingly.
A solid trade journal should at least include key data such as patterns and trading strategy used, predefined entry/exit levels, actual entry and exit prices with timestamps, profit/loss, trade size and psychology during the trade.
Psychology
Psychology is probably the most important day trading skill differentiating consistently profitable day traders from the rest. As day trading involves frequently making and losing money during a short period of time, it is an emotional rollercoaster for most traders.
Many beginner and seasoned day traders repeatedly fall into the trap of trading emotionally. Chasing a stock that has already moved far away from ideal entry price due to FOMO (fear of missing out), averaging down in a losing trade hoping the stock will somehow rebound, or reluctant to enter any position due to fear of losing. These are all typical examples of emotional traps.
Having self awareness when emotion starts to emerge, and being able to self regulate can prevent emotion-based trading. A clearly defined trading plan, the discipline to execute based on the plan, together with breathing exercise can often help.