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The Complete Guide to Day Trading

The Complete Guide to Day Trading

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Published by vantagev12

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Published by: vantagev12 on Jul 23, 2011
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  • Introduction: Why Day Trading?
  • Part 1: Day Trading Basics – What You Should Know
  • What Is Day Trading?
  • Who Should Be Day Trading?
  • Is It Really Possible to Make a Living As a Day Trader?
  • How to Get Started - Define Your Goals and Make a Plan
  • 1.) Define Your SMART Goal
  • 2.) Make a Plan
  • 3.) Execute the Plan
  • How Much Money Do You Need to Get Started?
  • Determining Your Risk Tolerance
  • What You Need to Begin Trading
  • A Computer
  • An Internet Connection
  • A Charting Software
  • A Broker
  • A Properly Funded Trading Account
  • A Trading Strategy
  • How to Develop Your Own Profitable Day Trading Strategy
  • Step 1: Selecting a Market
  • Trading Stocks
  • Trading Forex
  • Trading Futures
  • Trading Stock Options
  • Step 2: Selecting a Timeframe
  • Step 3: Selecting a Trading Approach
  • Fundamental Analysis
  • Technical Analysis
  • Day Trading Charts
  • Technical Indicators
  • Popular Trading Approaches
  • Step 4: Defining Entry Points
  • Step 5: Defining Exit Points
  • Stop Losses
  • Profit-Taking Exits
  • Trailing Stops
  • Taking Partial Profits
  • Time-Stops
  • Step 6: Evaluating Your Strategy
  • How to Read and Understand a Performance Report
  • Step 7: Improving Your Strategy
  • The 10 Power Principles – Making Sure That Your Trading Plan Works
  • Principle #1: Use Few Rules – Make It Easy to Understand
  • Principle #2: Trade Electronic and Liquid Markets
  • Principle #3: Have Realistic Expectations
  • Principle #4: Maintain a Healthy Balance Between Risk and Re ward
  • Principle #6: Start Small – Grow Big
  • Principle #7: Automate Your Exits
  • Principle #8: Have a High Percentage of Winning Trades
  • Principle #9: Test Your Strategy on at Least 200 Trades
  • Principle #10: Choose a Valid Back-Testing Period
  • There’s More To Trading Than Just Having a Strategy
  • The Seven Mistakes of Traders and How to Avoid Them
  • Mistake #1: Struggling To Identify the Direction of the Market
  • Mistake #2: Not Taking Profits
  • Mistake #3: Not Limiting Your Losses
  • Mistake #4: Trading the Wrong Market
  • Mistake #5: Lack of a Trading Strategy
  • Mistake #6: Not Controlling Your Emotions
  • Mistake #7: Overtrading
  • The Trader’s Psyche
  • The Three “Secrets” to Day Trading Success
  • Here are the three “Secrets” to Day Trading Success
  • The Tenets of Day Trading
  • How to Start Trading Without Risking a Single Penny
  • Bonus Materials
  • Appendices
  • Appendix A – Trading Plan Template
  • Appendix D – Reading Resources
  • Appendix E – Glossary

While testing your trading strategy, you should keep detailed records of
the wins and losses in order to produce a performance report. Many
software packages can help you with that, but a simple excel sheet will
do the trick just as well.

If you get in contact with us here at Rockwell Trading®, we can send
you an excel sheet that will automatically produce a performance report
for you after you’ve entered several trades.

Here’s an example of a performance report:

Total (Net) Profit

The first figure to look for is the total, or net, profit. Obviously you want
your system to generate profits, but don’t be frustrated when, during the
development stage, your trading system shows a loss; try to reverse your
entry signals.


The Complete Guide to Day Trading

You might have heard that trading is a zero sum game. If you want to buy
something (e.g. a certain stock or futures contract), then somebody else
needs to sell it to you. And, you can only sell a position if somebody else
is willing to buy from you at the price you're asking.

This means that if you lose money on a trade, then the person who took
the other side of the trade is MAKING money. And vice versa: if you’re
making money on a trade, then the other trader is losing money. In the
markets, money is not "generated." It just changes hands.

So, if you’re going long at a certain price level, and you lose, then try to
go short instead. Many times this is the easiest way to turn a losing sys-
tem into a winning one.

Average Profit per Trade

The next figure you want to look at is the average profit per trade. Make
sure this number is greater than slippage and commissions, and that it
makes your trading worthwhile. Trading is all about risk and reward, and
you want to make sure you get a decent reward for your risk.

Winning Percentage

Many profitable trading systems achieve a nice net profit with a rather
small winning percentage, sometimes even below 30%. These systems
follow the principle: “Cut your losses short and let your profits run.”
However, YOU need to decide whether you can stand 7 losers and only 3
winners in 10 trades. If you want to be “right” most of the time, then you
should pick a system with a high winning percentage.

Understanding Winning Percentage

Let's say you purchased or developed a system that has a winning per-
centage of 70%.

What exactly does that mean?


Step 6: Evaluating Your Strategy

It means that the probability of having a winning trade is 70% – i.e. it is
more likely that the trade you are currently in turns out to be a winner
rather than a loser.

Does that mean that when you trade 10 times you will have 7 winners?

It means that if you trade long enough (i.e. at least 40 trades) then you
will have more winners than losers. But it doesn’t guarantee that after 3
losers in a row, you’ll have a winner.


If you toss a coin then you have 2 possible outcomes: heads or tails. The
probability for each is 50% – i.e. when you toss the coin 4 times, then
you should get 2 heads and 2 tails.

But what if you tossed the coin 3 times and you got heads 3 times?

What is the probability of heads on the fourth coin toss?

50%, or less?

If you answered 'less,' than you fell for a common misconception. The
probability of getting heads again is still 50%. No more and no less.

But many traders think that the probability of tails is higher now because
the three previous coin tosses resulted in heads. Some traders might even
increase their bet because they are convinced that now “tails is overdue.”
Statistically, this assumption is nonsense; it’s a dangerous – and many
times costly – misconception.

Let's get back to our trading example: if you have a winning percentage
of 70%, and you had 9 losers in a row, what’s the probability of having a
winner now? It's still 70% (and therefore there's still a 30% chance of a


The Complete Guide to Day Trading

Average Winning Trade and Average Losing Trade

The average winning trade should be bigger than the average losing
trade. If you can keep your wins larger than your losses, then you’ll make
money even if you just have a 50% winning percentage. And every
trader should be able to achieve that. If you can’t, reverse your entry sig-
nals as described previously.

Profit Factor

Take a look at the Profit Factor (Gross Profit / Gross Loss). This will tell
you how many dollars you’re likely to win for every dollar you lose. The
higher the profit factor, the better the system. A system should have a
profit factor of 1.5 or more, but watch out when you see profit factors
above 3.0, because it might be that the system is over-optimized.

Maximum Drawdown

The maximum drawdown is the lowest point your account reaches be-
tween peaks.

Let me explain:

Imagine that you start your trading account with $10,000, and, after a
few trades, you lose $2,000. Your drawdown would be 20%.

Now, let's say you make more trades and gain $4,000, which brings you
to $12,000 ($8,000 + $4,000 = $12,000). And after this, on the next
trade, you lose $2,000. Your drawdown would be 16.7% ($12,000 -
$2,000). The $12,000 was your equity peak; that was the highest point in
the period we looked at.

If you started your account with $10,000 and the lowest amount you had
in your account over a six-month period was $5,000, then you had a 50%


Step 6: Evaluating Your Strategy

You would need to make $5,000 from the lowest point in order to recoup
your losses. Even though you lost 50% from your high of $10,000, you
would need to make 100% on the $5,000 to get back to your original

Measuring Drawdown Recovery:

Drawdown recovery can confuse many traders. If a trader loses 20% of
his account, he thinks he needs to make 20% in order to get back to even.

This isn’t true. If you started with $10,000 and lost $2,000 (20%), you
would need to make 25% in order to get back to even. The difference
between $8,000 and $10,000 is $2,000. If you calculate the $2,000 as a
percentage of $8,000 (not the original $10,000) it works out to 25%.

A famous trader once said: “If you want your system to double or triple
your account, you should expect a drawdown of up to 30% on your way
to trading riches.” Not every trader can stand a 30% drawdown.

Look at the maximum drawdown that your strategy has produced so far,
and double it. If you can stand this drawdown, then you’ve found the
right strategy.

Why double it? Remember: your worst drawdown is always ahead of
you. It’s best to plan for it now.


The above examples provide you with some guidelines, but it’s up to you
to decide whether the numbers in the strategy’s performance report work
for you or don’t.

Ultimately, YOU’RE the one trading the strategy, and YOU’RE the one
who has to feel comfortable with the expected results of your strategy.


The Complete Guide to Day Trading

Action Items:

Start back-testing your trading plan on at least 40 trades. The
more trades the better. You can download an excel sheet to re-
cord your trades from our website:


Analyze the performance report and decide if YOU feel comfort-
able with the statistics.

Continue your trading plan on page 245 and write down your ex-
pectations for your trading strategy based on the results of your


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