Tips for Winning at Day Trading
Making money is easy–it's keeping it that's tough. Here
are some suggestions to help you profit over the long term
By Ben Levisohn
I was 25, teaching preschool in Colorado, and getting tired of listening to a
childhood friend tell me he was making more money each day "day trading"
than I made in a month. When he offered me the chance to come to New
York and learn how to do it too, I jumped.
At the time, of course, I knew nothing about the stock market or how it
worked. But I gradually learned. At a now-defunct day-trading firm, I was
taught how to trade, but the system I was taught was useless if I didn't
have the mental bent to stick with it. At least there were rules I could follow.
Some were ready-made; others I had to figure out myself. Some came
easily; others took time to internalize. I'm no longer a day trader, but the
rules are still with me. Here are the ones that helped me earn a living as a
day trader for nearly eight years.
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1. Have a system and stick to it like Crazy Glue.
As a trader, I was a tape reader. But I was a tape reader with a niche: mid-
cap stocks on the New York Stock Exchange. I watched the stocks trade,
and I watched the quotes change, looking for an entry point. If a large order
appeared on the tape, I'd buy myself a few hundred and see what
happened. That was my system.
When you're trading, you have to have a system—rules that define which
stocks you watch, and when you buy or sell. Whether you're buying
undervalued large caps or short-term momentum plays, find a system that
works and stick to it. There's a word for trading on tips or because a talking
head mentioned it on CNBC: gambling.
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2. Cut your losses.
As a trader, you have to minimize your losses. When I was wrong (that is, if
I knew I was wrong), I would try to exit my position with as little damage as
possible. No trader makes money all the time. At my best, one-third of my
trades were winners, one-third were losers, and the remaining third were
negligible. But I knew I'd traded well if my biggest winner was three times
the size of my biggest loser. Of course, I wasn't able to do this every day. I
once lost $3,000 on a Friday and, as punishment, I got to chew on it all
weekend. But there's always tomorrow. That is, unless you blow through
your capital. Then you're finished, kaput.
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3. The only thing you have to fear is fear itself.
I was a preschool teacher before I became a day trader, and believe me, I
was more suited to playing with 4-year-olds than I was to watching market
machinations. When I started, I sat at my desk for a week without making a
trade. My boss finally emerged from his office and informed me that it was
time. So I did it. I bought 100 shares. I lost money. And I lived through it.
Still, I had a hard time accepting the notion of risk. I cost myself money
every day because I was afraid of losing an eighth or a 16th on a trade. I'd
dump my stock for a small profit, only to see it run up a point right after I got
out. It took me a year, and cost me thousands of dollars in profits, to learn
to control my fear. And you know what? During that whole time, the
downside was never worse than my imagination.
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4. Don't get greedy.
You can't live on paper profits. But when you're holding a position that has
done everything you expected—and more—it's very easy to get greedy.
You start thinking, "Sure, I'm in the money a couple of grand, but it could go
higher." So you hold on, long after the signs have started to indicate
momentum is turning. And your gain turns into a loss. There's nothing
wrong with selling into strength and taking some of your gains off the table.
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5. Worry about what you can control. Ignore
what you can't.
When I started trading eight years ago, I heard whispers on the desk about
a new trader and a trade gone bad. It was our version of the horror story
around the campfire. The trader, so the story went, owned 200 shares of a
stock and was in the money $200. It was a winning trade. Then the stock
was halted because of accounting irregularities. It reopened down 20 points
and the trader lost $4,000.
This is an extreme example, but it teaches a great lesson. In the market,
events occur all the time that we have no control over. Earnings are
preannounced. A takeover attempt becomes public. A CEO dies in a plane
crash. Stuff happens. That story, by the way, turned out to be true. That
trader could have walked away, but instead kept at it and is still in the
business eight years later. The moral? Control what is in your ability to
control and let the rest go.
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6. The market is always right.
You might think you know better than the market. Think again. The market
always knows best, and if you try to fight it, you will lose. Guaranteed. I've
seen trader after trader lose gobs of cash after buying a stock and watching
it plummet. As they count their losses, they all say the same thing, "But the
stock had good news." Good news isn't always positive, and bad news isn't
always negative. If it were that easy, I'd still be trading.
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7. A little bit of technical analysis never hurts.
As a tape reader, I didn't care much for technical analysis. Or rather, I didn't
understand most of it, and I certainly wasn't going to place an order
because a computer told me to. I'll leave that to the quants. But some
technical indicators are easier to understand, and more important, they
matter. Take support and resistance levels: Resistance occurs on the
upside, when a stock reaches a point and can't go any higher. Support is
the level a stock won't trade below on the downside. They're usually pretty
easy to spot. When a stock price breaks through one of them, watch out,
because everyone else is. A move isn't guaranteed (there are no
guarantees), but interesting things can happen.
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8. Don't try to catch a falling safe.
Many traders are gamblers at heart, and nothing appeals to the gambler
more than trying to guess when a stock has hit rock bottom and is ready to
reverse direction. The upside move is usually quick and violent, and if
you're right, you stand to make a lot of money. But picking the bottom isn't
In 1999, I witnessed firsthand what can happen when you're wrong.
SunTrust Banks was getting hammered, and rather than doing the smart
thing and shorting the stock, one of my colleagues figured he would try to
catch the bounce. He bought some shares. The stock dropped. He bought
some more. The shares continued to fall. The firm finally ordered him to
sell. He lost $20,000.
It's really quite simple. Don't fight momentum.
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9. Buy low, sell high.
We hear this so often, it's easy to ignore. But forgetting it is one of the
biggest mistakes a trader can make. If you're dollar-cost averaging, timing
is unimportant, but if you're trading, price matters.
A stock starts to move, but you want confirmation, so you wait to buy. It
moves a little more, but you're still unsure, so you let it go. Then it really
starts to fly and you place your order. Your order gets filled just as the move
ends. You've bought the stock from someone who had held the shares
since the move started. He makes a big profit; you take a big loss, cursing
your bad luck.
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10. Know your exit.
When the dot-com bubble popped, it took many a trading profit with it.
Why? Because a lot of traders didn't have exit strategies. A stock would fall,
traders would "buy the dip" and wait for it to bounce. The stocks always did.
But then they didn't.
Regardless of your time frame, have an exit strategy for if a trade doesn't
go your way. I liked to use stop-loss orders, which triggered a sale if a stock
hit my predetermined loss threshold. But whatever you do, know when
you'll get out, so a small loss doesn't turn into a big one you can't recover
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11. Build a pyramid.
If you have 100 shares and a stock moves a point, you make $100. With
1,000 shares, you can make $100 on a 10¢ move. Obviously, you can
make more money with a larger position, but with it you also have more
risk. So how do you balance the risk and reward? Build a pyramid.
I would typically start my position with anywhere from 500 to 1,000 shares.
As the stock went up, I'd add more shares along the way. But I would try to
add in smaller increments, keeping the base of my position larger than
subsequent purchases. That way, if I ended up buying 100 shares more at
the top, I had 1,000 from the bottom. A top-heavy pyramid topples; a
bottom-heavy position protects your risk.
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12. Making money is easy. Keeping it is hard.
Anyone can make money in a trade. It's easy. You buy a stock, it goes up,
and you sell it. Every trader can regale you with a story of his big winner.
But even a monkey at a keyboard can be right every once in a while. What
separates a profitable trader from that monkey is the ability to hold on to
hard-won gains. Maybe these tips will help you do just that.