Friday, 13 November 2009

Day Trading For Beginners

Trading the financial markets has become extremely rewarding, for those investors that have mastered the intricacies of intra-day and other short-term trading techniques. Day-traders focus on rapid or short-term day-to-day methods to potentially profit from market movements. The markets traded are usually highly liquid index futures, currencies or stocks. Traders use either intra-day strategies designed to generate buy and sell signals within the same trading session, or short-term strategies designed to be open for a period of up to three days.

If you wish to day-trade then you must develop a strategy, for trading volatile markets that has historically demonstrated the required intra-day or short-term price ranges needed for success. The results from your testing should provide a reasonable expectation of profitability from your chosen market. The best financial markets to trade, in my opinion, are index futures or index forward contracts, which are tradable financial instruments that mimic the movements of stock market indexes such as the Australian S&P/ASX 200 Index

The tradable instrument that can be bought and sold is the SPI 200 futures contract, which is the benchmark product for investors trading or hedging in the Australian equities market. The SPI 200 enables the investor to trade movements in the S&P/ASX 200 Index in one simple transaction, thereby allowing direct exposure to the top 200 Australian companies, without having to trade shares in every single company listed on the index. The main forward and mini forward instruments mimic the SPI 200 futures contract, and are basically no different to trade.

I have developed a mechanical 2-day gap strategy, for trading the Australian ASX 200 forward contract that is currently producing 36% annual compound return. The strategy is designed to exploit short-term market inefficiencies resulting from regular over-reactions to the US equities market. Mechanical trading is an automated method that uses pre-determined entry and exit techniques. Traders that have eliminated human decision making from entry and exit levels are usually more successful than other traders that do not uses these proven methods. It is well documented that professional traders have used mechanical trading, for well over 30 years, ever since the advent of cheap computing technology.

The reason why mechanical trading works is because it is unemotional and forces the trader to apply the rules of good trading that we all know, but find hard to apply. The rules that you consistently read in investment books such as "run with profits, and quickly cut losses" are absolutely correct. The real skill is to consistently stay true to those rules. The average author of an investment book usually likes to quote that "90% of futures traders will lose their trading capital", but they always neglect to tell their readers that the 10% of individuals consistently making big returns are the people using mechanical trading strategies. It makes logical sense that if you test multiple trading ideas then you will eventually develop complete strategies that consistently work.

My trading strategy can be traded long or short in any market environment. Trading long is the process of buying to open and then selling to close a market position, similar to any normal share market transaction. Short-selling is the process of selling to open a market position in the expectation to buy-back later to close that market position to potentially profit from a fall in the market price. I use a gap entry method combined with a 150-day Moving Average calculation to determine the initial entry signal. The gap is the difference between today's opening price relative to yesterday's closing price, which must be within a specific pre-determined price range on market open.

The stop-loss and profit-target methods are derived from a Standard Deviation calculation, which is a very common mathematical formula. The calculation is a statistic used as a measure of the dispersion or variation in a distribution, equal to the square root of the arithmetic mean of the squares of the deviations from the arithmetic mean. I have used the Standard Deviation calculation to determine stop-loss and profit-target levels, which I have tied into the lot-sizing calculation that balances the leverage, thus producing consistent compounding returns. These methods of money management are universal to all good short-term or long-term profitable trading applications.

The final component of this particular strategy is that I am only in the trade for a maximum of two trading sessions. This reduces market exposure, while taking adequate advantage of the short-term over-reaction to the Dow Jones index. I enter at "market-on-open" for my initial trade, and if the stop-loss or profit-target is not hit then I will exit at the end of the following session, usually with a profit. Exiting the following session allows for additional time to benefit from any strong favorable price movement.

I have tested my complete mechanical trading strategy over a three year period using computer code that I personally developed, and I have traded live funds to make sure the complete strategy produces my expected results. I now have a complete fully automated trading strategy that can produce consistent income, for both my retail clients and my own account. If you wish to generate a part-time or full-time trading income, then you should consider intra-day or short-term trading as a new entrepreneurial home-based opportunity.

Matthew Corica is a full-time private trader and managing director of licensed investment firm Titan Securities Pty Ltd AFSL: 307040.

This article has been written for educational purposes only. If the reader wishes to trade any financial market due to this article, then to satisfy any unforeseen disclosure obligations of the writer as an Australian Financial Services Licence holder, please refer to the standard risk disclaimer located at

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