There is a certain type of person who'll find success in day trading, according to Alton Hill, co-founder of TradingSim.com. You're either born with the skills and mindset needed to play the game, or you practice. A lot.
And even if you are a natural, it's still smart to hone your skills regularly.
"Do you know that fighter pilots are required to take mandatory training throughout the year?" Al says. "Any specialized skill requires a constant nurturing of that skill in order to stay sharp. It baffles me whenever I speak with traders and they say they don't need to practice trading."
Up there with practice is also learning to master your emotions, he adds: "The biggest difference between winners and losers really comes down to a winning attitude. If you are unable to keep your head while trading, the market will eventually get the best of you."
We recently checked in with Al to learn more about what it takes to be a day trader and why applications like his - which allows traders to practice using real stock data - are critical to long-term success in the markets.
Here's what he had to say:
Tell us about TradingSim...how does it work?
TradingSim is a web-based stock simulator geared for active traders who focus on trading through technical chart patterns and trends. Our tool is focused on allowing traders to speed up their learning curve, as quickly as possible. We achieve this goal by providing our users with a tremendous amount of REAL stock data with which they can practice their trading strategies to figure out what works.
Simply put, TradingSim is a streaming market replay tool that aims to provide the most realistic trading simulation experience in the marketplace. Our users can replay stock data for every single stock, from every single trading day for the last 18 months. That's right, we stream every single trade for every single stock so you can get the most realistic experience.
The beauty of this application is that we provide an all-inclusive solution. We provide the tool to simulate trading with and all of the data behind that as well. This is a unique offering in the marketplace that no other company provides.
As mentioned, the tool is extremely valuable for active traders. Active traders focus on trading volatility and the stocks on the move for the day; this is how they make money. TradingSim does the leg work and provides a list of Market Movers so users can focus on trading the hot stocks of the day.
Who should use this tool?
TradingSim is for anyone who is currently trading or thinking about a career in day trading or swing trading. Our clients have seen dramatic improvements in their trading performance after using TradingSim for just a few weeks. This is because TradingSim will allow you to simulate a week of trading in a few hours with our scanning tools and fast forward features.
You may be saying to yourself, there are other free simulators out there. True. They are free on the surface, but the value of these applications is less than stellar. The standalone GUI apps always want you to pay for data. Our data is included in our subscription model. TradingSim automatically downloads and stores every tick for over 11,000 symbols daily.
Then there are the free brokerage firm simulators. Some will only stream data during market hours, which is useless, because you need to trade during the day to make money.
Other brokerage firms will offer you a simulator that can replay historical data for a period of time, generally a few months before pushing you to fund an account with a minimum deposit ranging from $2,500 to $5,000.
So, that free simulator will actually end up costing you way more than TradingSim because brokerage firms want to make money off your commissions, and while they hope you are profitable, they realize that most will fail.
What is day trading, and who can do it? How much expertise do you need?
Day trading is the act of buying and selling securities within the same trading day.
Technically, anyone can become a day trader as long as they have the minimum amount of money required by the SEC.
To be a successful trader, you are either born one or you need to spend north of 5,000 to 10,000 hours before you see any real traction. Day trading is like any other extremely difficult skill; you have to invest a lot of time before you become a seasoned vet.
What are the advantages of day trading over other means of investing?
For me, it's knowing whether I won or lost on a daily basis. You also limit your risk by not holding positions overnight. Lastly, trading is about taking money out of the market. Just by the sheer fact you have to close your positions before the end of the day, you get in the habit of closing positions and taking money out of the market.
Can you give us a little Day Trading 101? What are some best practices for newbies?
So, where do we begin? If I had to define a blueprint for how to day trade, I would group it into seven core competencies.
- 1. Money Management
- 2. Mastering One's Emotions
- 3. Strict Adherence to the Rules of the Game
- 4. Taking Profits
- 5. Simple Technical Analysis
- 6. Trading in the Morning
- 7. Practice Makes Perfect
Below are a few best practices for newbies:
- 1. Your rules must reflect your goals and risk profile as a trader. What works for Joe Trader may prove disastrous for you.
- 2. Always follow your rules to the letter.
- 3. Never break rule 1 or 2.
- 4. Wait until 9:50 to open your first trade. The first 20 minutes of trading is so random you will lose your marbles trying to piece it all together.
- 5. Do not enter any new trades after 10:20. By keeping yourself locked to a 30-minute window for opening new positions, it forces you to have laser focus and reduces your risk of over trading.
- 6. Only trade volatile stocks. If you are in the business of making money, then your stock needs to have enough in her to move the required distance for the trade to be worth your time.
- 7. You must have balance in your life. A trader looking at screens all day doesn't make for someone other people want to hang around. Spend time with those you love; it will recharge your soul.
- 8. Only use 10 percent of your margin. For example, if you have $100k cash, which would afford you $400k in margin, only use $40k on any one position.
- 9. Never have more than 30 percent of your margin in float at any given time. If you figured out that this translates to holding a maximum of three trades at once, you are pretty sharp!
- 10. Never lose more than 2 percent of your trading capital in one trade. This would mean if you have $100k in cash, the maximum you can lose is $2,000. This would translate to a loss of 5 percent. Just in case you are wondering, you should never lose 5 percent on a day trade.
How much of an investment do you need to make to get started?
If you are looking to try your hand at day trading, I would say you need between $50k and $75k. This will give you enough money to stay well above the $25k minimum if you hit a rough patch and also provide you enough profit potential that trading commissions do not eat you alive.
If you are planning to take on day trading as a full-time profession, you need 50 times more cash than your monthly expenses. For example, if your monthly expenses are $5k, you will need $250k cash on hand for day trading. If this sounds excessive to you, well, it is. The goal here is for you to have a successful day trading career and not an expensive vacation from your day job. After you pay your bills, taxes and life just happens, trust me when I say you will need this much liquid cash.
What do you think are the most common mistakes novice traders make?
Novice traders make two mistakes that hold them back from making money. First, they change their system before there is any statistical significance. Second, new traders have horrible money-management skills. They will go all-in on a highly volatile stock, which triggers this vicious cycle of boom and bust on their trading account.
A simple fix for this "disease" when day trading is to make 50 or more trades using the same system. Also, whatever number you are thinking in your head you should use per trade, cut that in half until you can prove to yourself through actual profits that you are on to something.
How much money can you expect to make to start with (or maybe the question should be, how much money might you lose)?
I think it's safe to say if you are any good day trading, you should make 25 percent or more per year. Using some basic math, if you start with $100k, you can expect to make $25k. Of course, if you are a seasoned trader, this number can be far greater.
The key point you should think of is not how much you can make, but rather how much will you need to start trading. If you have a family or a lot of expenses, you will need to start with a sizable trading account in order to have a decent quality of living and not put too much pressure on your trading performance.
What kind of money management skills should you have before getting into day trading?
You need to define your own money management rules, but below are a few rules of thumb:
- Avoid losing 2 percent of your trading capital on one trade.
- Avoid using more than 10 percent of your total margin available on one trade.
- If you trade a really volatile stock, remember to use less margin (things can get away from you in a heartbeat otherwise).
- Remember to pay yourself. If you don't take money out of the market, it will find a way to leave your pockets and go into someone else's.