DAY-TRADING SKILLS FROM THE WORLD OF FOREIGN EXCHANGESaturday, June 12, 2010 1:16 pm
When it comes to investor types, two styles seem to dominate: either an investor likes to study companies at his leisure before employing a “buy-and-hold” long-term strategy, or he prefers the rough and tumble activity of active trade management, timing his market entries and exits by discerning profit opportunities from technical chart patterns. This latter trader would not conceive of holding a position for any great length of time. His objective is to secure short-term gains in the daily price action of a stock, commodity or currency. However, the goal is not to make every trade a winner, but to achieve consistency such that the “net” of all trades shows increasing profits over time.
Much has been written about Day-trading. Some experienced traders that have been successful are quick to point to its rewards, while its critics note the carnage of lost fortunes from novice traders that never got the hang of it. Academics will argue that “Random Walk Theory” debunks the notion that profits can be made from technical indicators that rely on past history. Recent studies, however, have actually debunked their arguments, as well have the experiences of active traders in the field of foreign exchange, or Forex, as it is commonly called.
Most beginners that embark on a day-trading regimen in stocks are ill prepared for the task. They have read about companies, studied financial statements, and bought and sold various shares on their favorite stock trading internet platform. They mistakenly make a giant leap of faith that the only thing different about a day-trading environment is the “holding period” for a position. When the market gyrates for whatever reason, they must know how to react quickly, almost instinctively, to unwind a position or take advantage of the wide swings that volatility can bring. The turmoil seen in recent markets due to debt issues in Europe is a prime example. The seasoned trader saw opportunity, while the novice was scared out of his wits.
How then does an aspiring day-trader in stocks prepare for the action to come? He would be well advised to learn from his day-trading brethren in foreign exchange. Forex offers something directly that stock markets can only emulate, and that is the “free” Forex demo trading account offered by most competent Forex brokers. In Forex, the casualty rate is also high - nearly 60% of novices perish in the first six months. Beginners that are still at it after this six-month trading initiation period are regarded as seasoned veterans.
Forex brokers do not make any money if their clients lose their capital quickly. For this reason and others, they have developed extensive training courses to drive home the necessary skill sets that are required in the topsy-turvy world of currency trading. Fundamentals and technicals are studied in depth. Trading strategies are developed and students are instructed on how to approach the market with a disciplined routine, devoid of any influence by your emotions. Psychology plays an important role. Warren Buffett may never have been a day-trader, but some of his favorite words of advice are to never let your emotions “corrode your intellectual framework”.
After education, practicing your art on the free demo system with virtual currency, but with real time trading data is most important. Believe it or not, most successful traders claim that a minimum of six months should be devoted to this practice activity. That amount of time is required to become “battle tested” such that your confidence rises and consistent trading results are routine. You learn what the best forex indicators are, how to use them in combination, and in which markets they may tend to give false trading signals. One of the benefits of technical analysis is its flexibility. You will find that all of the charting skills developed in the Forex world will also apply when using stock charts.
As for the high casualty rate in any day-trading activity, studies have shown that impatience and the lack of experience are the two contributing factors that make all the difference. Practicing on virtual demo accounts is the only way to address these two issues.
As with any other performance-based activity or profession, the best education is to observe experts at the craft and learn how they have achieved their honored status. It is not about luck. It is all about hard work. “Practice, Practice, Practice” should become your daily mantra before you ever step into the real world and put your own real money at risk. Day-trading, whether in stocks, commodities, or currencies, is a high risk business. However, with proper training and considerable practice, you, too can become a “seasoned veteran”, make good money at it, and have fun in the process, too!