Remember when you were a kid and you would get your favorite video game? You couldn't wait to get the game home so you could rip open the package and start playing. The instruction manual might as well have been part of the plastic wrapper which you discarded in a matter of seconds after opening. Well take those memories and hold onto them dearly, because you can't take the same approach with day trading. Day trading will be one of, if not the hardest thing you will undertake in your life. So, having to practice should not come as a surprise. Below I am going to cover the 10 reasons you should practice day trading.
Talk about dummying it down first thing in the post, but day trading is really fast. I have done it all from swing trading, long-term investing, and day trading and by far day trading requires a unique skill set. If you think about the game of chess, what is one of the ways you can increase the difficulty level of chess? Place a timer on how long you have to make a move. This is where the real skill comes out because intuition, experience and repetition all kick in. Well, the market is no different. If I have days to analyze a position I can draft up a nice trading plan with notes to myself. When you are day trading you may only have a few minutes down to a few seconds to make a decision. So, do you think chess players start out playing with a 1 minute timer, of course not. So, neither should you just run out into the market with your hard earned money looking to place a few harmless day trades. Take time to practice day trading in order to build up the skills required to enter the arena.
#2 Practice Day Trading in Unison with the Market
The market is an actual living entity. While she has a track record of certain price movements each day is unique. You will have to see how you react to her when the tape is streaming and the stocks are in motion. It's one thing to just look at old charts, but you need to get in the habit of feeling the market. A large part of day trading is intuition. This is the part of your trading toolkit that you can't quantify and is unique to you and your trading style. So, while it's important to research your charts, you need to practice trading in a true market environment. This will allow you to learn how stocks react when the broader market makes sharp moves in either direction.
#3 Learn to Manage your Money
One thing I use to say is I can't practice day trading in a simulator because it's not real money. To some degree this is true. But let me ask you this, as a kid did you have fire drills at your school even though there wasn't a real fire? You may have joked with your friends during the drill and even walked a little slower knowing there wasn't any real danger around the corner. But if a fire really broke out, did you know where to go? Did you know what pace you should walk in order to exit the building? Did your teachers know how long it should take them to get all of the kids outside? Did the fireman have an expectation of where to be within a certain period of time?
Well, this is what you need to learn for how to manage your money. You need to get in the habit of calculating profit and loss all in your head. You need to learn how to effectively day trade with margin. You need to quickly assess your risk reward ratios and only execute the best opportunities, because you may have five to choose from at once. Now you can read all of this and say, well it's still not real money so I won't take it seriously, and you know what, you reserve the right to make that decision as an adult. But for me personally I always want to know what to do in the event a fire breaks out.
#4 Discover How to Handle Winning and Losing Trades
Trading is great when you are making money. In my retirement account I am currently down 5% on ULTA and I don't like being down more than 2% on any trade, even in my long-term account. I had placed 7 winning trades in a row prior to this trade and on some level started to slip into the "I'm so great zone". The beauty of being in this losing position is that it has quickly humbled me in a matter of days. The key thing that I know and you will learn to develop over time is that you have to forget your losers and winners the minute you close your position. Carrying your personal baggage to the next trade will only hurt you as there are new market participants in every stock. So, practice trading allows you to get into a rhythm. When I say rhythm, I mean the cycle of putting on trades. Some you win, some you lose, but you have to learn to approach each trade with a positive mindset and sound trading principles. This is another one of those skill sets that just comes from sheer repetition. It takes you placing a horrible trade only to follow-up with 15 straight winners to realize that one bad trade does not require you to start psychoanalyzing your childhood.
#5 You Need Your 10,000 Hours of Practice
I know, I know, fans of the Tradingsim blog hear me preach this practically every post, so I will keep it short. Studies have shown you need to practice something for 10,000 hours before you become an expert. Think about in your personal jobs or careers. If you are an executive, when looking for a job employers require 10 to 15 years of experience. If you do the simple math an annual full-time equivalent is ~2,00o hours. So, if you really think about it, employers are saying you should have between 20,000 and 30,000 hours of experience before they will let you run a department. Well guess what folks; same thing applies to day trading. Practicing off hours will allow you to exponentially ramp up the time it takes to hit that 10,000 hour expert level.
#6 Helps You Realize All Charts don't Go to the Moon
Early on in my career I would scan the market for specific setups that had huge gains. I would identify a particular pattern with the same indicators to find that sweet spot. Once I had my configuration set up, historically these winning charts appeared to be everywhere. Problem was when I tried to do this in real-time things didn't work out as planned. Active trading nowadays is done with computers and the level of games going on in terms of false breakouts is insane. What practicing to day trade taught me is that it is more important to book profits from the singles versus always swinging for the fences. These fly me to the moon setups will only play out 10% to 20% of the time, so stop expecting it to happen every time you put on a trade. Focus on getting in a rhythm of just making money and when the big boy trade comes you'll know it.
#7 Learn Your Own Day Trading Style
I personally believe as adults we are responsible for our own decisions in life. Don't blame your parents or some event that happened to you in third grade about why you do certain things in your life. I'm not trying to discount the impact of life experiences but what I am saying is we have a choice of how long we let them have an influence on how we live our lives. Well for day trading, I think for most it's easier to not "own" your trading strategy and to leave that up to the "expert". Most people will come in and struggle putting together a system - analysis paralysis at its best. So, you go into Google, do a couple of searches and voila there is your friendly "day trading expert" willing to sell you the magical keys to promise land. I'm not judging you; I have spent thousands over the years on other peoples' courses hoping to find myself. What I came to realize is that these courses are other peoples' rules. Trading requires you to figure out what works for you. Guess what folks, it is work. It's going to literally take you thousands of hours tweaking and re-tweaking to figure out what matches your trading DNA. The reason I elected to go my own way, was when these systems started to fail, who did I start to blame? You guessed right, the man behind the curtain that sold me this wonderful course. I was literally transferring responsibility of my trading career and the welfare of my family to another person. Stop this vicious cycle today. When these courses are making you money, everything is great, but because you don't really understand all the rules, when things go south you will lose your confidence. Please do me a favor and skip all of this pain. I'm not saying you can't glean key principles from other day traders, but you need to define your methodology for yourself. Only you can do that, so when things go wrong, you don't blame Mommy or Daddy, you just look in the mirror.
#8 You Need More Reps
If you have ever tried out for a sports team the practices are only for a set period of time each day. Therefore you only have a limited window to show your coach you have what it takes to make the team. Since I only trade breakouts in the morning, I have a maximum of 2 to 4 trades I can place on any given day. It would take me a little over 2 months to have 100 trades to analyze. One of my challenges early on was trying to figure out how well I was doing relative to myself on a daily basis. By practicing day trading I could go through 30 trades in one day. This allowed me to quickly create a trade history that would have taken too long if I tried to do it only during market hours. It had a significant impact on my ability to quickly modify my trading strategy based on my own performance and ultimately led to me making more money.
#9 Prove to Yourself You can be a Day Trader
Researching the market is nothing more than Monday quarterbacking. You start to tell yourself, I would have been in that trade and I would have made this amount of money. But it's you looking back at old charts at things that have already played out; however, there is enormous value proving to yourself in a market simulation environment with real tick data that you have what it takes to make money. At the end of the day you have to believe that regardless of your background, education, or age, you can do this. If you practice day trading long enough you will reach that point where you will be able to say to yourself I am a professional day trader. Far too many of us enter the arena with enough hope to fill up the world, only to be annihilated by more skilled hands. Work on just showing yourself you can actually day trade, and then notice how that will boost your confidence when it's time to fight with the big boys.
#10 See How Much You can Expect to Make Day Trading
I just wrote an article on day trading salary and how much someone can expect to make in the market. While I did a great job of explaining how you can go about estimating your annual income, the only way you will find out for sure is to trade. What better way to see for yourself than going to a simulator and starting your account balance with the cash you have on hand. Depending on your system and how much free time you have, take a few weeks or months to trade an entire calendar year. At the end of the year after you factor in commissions and living expenses, how much money do you have left over? By practicing to trade you can start to answer some of these nebulous aspects of day trading.
As always folks I hope you have found this article useful. If you are thinking about practice trading, pay us a visit over at Tradingsim.com and try out our trading simulator. I know we can help you get going in the right direction.
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