Now that we’ve outlined the 6 best elements of a successful business trading plan, let’s get to the heart of building your day trading business. We’ll discover topics like how to create a business book, the best tools for your business, and more.
CREATE A TRADE BOOK FOR TRADING STRATEGIES
Essential to your business is your exchange book. Aside from your trading business plan, this is undoubtedly the most important part of your trading activity.
Every trader should have one.
What is a commercial book?
A business book is a collection of your business education, style, strategies, statistics, rules, and more. It’s a roadmap for where you want to be as a trader and how you’re going to get there. It will take a lot of guesswork from trading and it will merge you into a tested strategy.
That’s not to say your business book is set in stone. It will undoubtedly evolve as your career progresses. Along the way, you’ll want to add bits of information, evolved strategies, and more.
A trade book should be a document that you keep handy and consult frequently to ensure you trade according to the process you have outlined for yourself. This will keep you from the pitfalls of overtrading, trading less than stellar configurations, and falling off the wagon into “style drift.”
What to include in your business book
Everyone’s exchange book will be different. However, at a minimum, you should have all the criteria and information you need to successfully execute trades every day, from start to finish.
Here are a handful of items you should have in your business book:
- Your trading “why”
- Teaching materials
- Current areas for improvement needed
- Your margin/trading strategy
- Trading rules for your strategy
- Examples of trading plans (can be for multiple configurations)
- Money management rules
- Trade management rules
- The best examples of annotated exchanges
- Worst exchanges with annotations
- Any data or statistics to support your trading edge
Let’s take a look at some examples of these 10 chapters of commercial books and how you can enrich them for your own purposes.
1. AREAS TO IMPROVE AND MAINTAIN DISCIPLINE
This section of your trade book will need to be updated from time to time as you grow as a trader. The goal here is not to be yourself, but to be realistic with the weaknesses you are showing in your trading.
Here’s a snapshot of a personal list of things this author wrote in his category book:
- Tendency to enter operations before technical criteria are met
- I’m running out before the move I want occurs
- Limit my profits by being happy to get back the money I lost on the trade
- Entering too large without the A+ configuration revealing itself
- Lack of patience and management once a trade goes in my favor
- Impulse entry or output based on time intervals too low to base decisions
- Make decisions based on P/L
- Internalization of bad performance
- Overtrading in an attempt to perfectly time the entrance
- Be aware of the alpha mindset that wants to force exchanges
- Restore after each operation
- Breathing exercises for calm and relaxation
As you can see, there are many problems that traders face. Some of these may affect you, or you may have your own set of struggles to overcome. While trading, keep a journal to write down the weaknesses you want to work on and set a goal each week to address these issues.
2. EXPLAIN YOUR ADVANTAGE/STRATEGY IN THE MARKET
This is another important aspect of your trading book, perhaps the most important. The goal of your exchange book is to define how you trade, what you trade, and when you trade so that you remain grounded in a systematic approach to your business.
Your benefit will vary, but here’s an example of what your edge description might look like in your trading book:
My advantage is a combination of things that involve a certain feeling about the daily time frame, followed by smaller time intervals. Here are a handful of what I consider my edges:
- Reversals of daily/weekly moving averages, usually in bear or bull flag formations.
- Shifts and rebounds of the trading range or mean regression operations
- Wyckoff Wave Patterns that consolidate into a tight price action with Volume Dry Up (VDU) and pocket pivots as entry points waiting to take off.
- Intraday parabolic reversals
- Shorting has manipulated low-buoyancy stocks that are very extensive
Within these, my trading strategies for the entries remain the same as described below in the Trading Plan section. I’m looking for exactly the same entries in any time frame.
Once you’ve broadly defined your advantage in this way, you’ll also create a solid business plan on how to execute these strategies. But before you get to that, you should also take the time to set your own trading rules.
3. TRADING BOOK TRADING RULES
For your trading rules, we suggest taking some time to think about what time you will trade, the size of your position, any mental hacks you need, stop loss criteria, and more. These can be broad or very specific. It’s up to you to tweak it over time to find the set of rules that work best for you.
A great example of a set of rules for trading can be found in a book called The Complete Turtle Trader by Michael W. Covel. In this book, Covel uncovers the incredible story of how a small group of traders became millionaires by applying themselves to Dennis Richards’ experiment to train traders to succeed by following his strategies.
Richards was a floor trader for the Chicago Mercantile Exchange who earned $10 million in the 70s and beyond. His “turtle traders,” as he called them, were given a set of rules to follow that looked like this:
- Entry: Buy when price breaks above 20-day high
- Stop loss: 2 ATR from entry price
- Trailing stop loss: 10-day minimum
- Risk management: 2% of your account
- Conversely for short-term transactions
They were trending traders and the rules were very simple. However, your rules may be very different and more involved. Here is an example of some typical rules that traders like to follow:
- Always cut your losses fast
- Never lower the average of a losing trade
- Take profits at 20-25%
- Maintain at least a risk/reward ratio of 1⁄3
Again, this is just a small sample of rules. It will be up to you to determine the rules you need not only for your strategy, but also for your mentality and personality. This will help you maintain your trading activity for the long term.
4. HOW TO CREATE A TRADING PLAN
Let’s go deeper into how to create a solid trading plan in our tutorial found here. However, the best trading plans will discuss the following topics in more detail:
- Maximum daily loss
- Daily profit target
- Change in stock %
- Equity catalyst
- Volume metrics
- Real mean range
- Short percentage
- Relative volume
- Necessary indicators
- Confirmation of the strategy
- Input signal
- Stop Loss
- Trade management rules
Compile all these metrics and you’ll be well on your way to having a solid trading plan. Be sure to really enrich the details of each policy and then give examples of operations that fit these criteria.
5. MONEY AND RISK MANAGEMENT FOR YOUR STRATEGIES
No trading plan is complete without defining your money and risk management protocol. Each trade may be slightly different, but as a general rule, we recommend risking only about 0.5-2% of all capital on a given trade.
Here’s an example of how you might define your risk management strategy to short-circuit a head and shoulder model:
Risk per trade: $450 or HOD, whichever comes first
Profit target per trade: $1000 +
Maximum loss per trade: $750
- Give the stock enough time to bounce and fail and get back into the trading range.
- Look for a compression before a drop if the title feels weak
- The first entry can be about a “subside and rally” or “overmark and fall” if the momentum is really waning.
Time constraints: pre/post and normal hours depending on volume, after 10:30 usually the best
Stop loss mechanism: hard stop just above the High of Day (HOD) and LOD at early entry. Hard Stop just above the low top / lower high on the “right shoulder” entrance.
Break-even Win% – This will depend on your stats with the trading strategy.
6. USE STATISTICS IN YOUR TRADING BOOK
One of the
absolute best ways to determine your chances of success on a strategy is to test it in a simulator by testing the results. At TradingSim, we have the analytics that allows you to do just that.
As you test your strategies and start populating your trading book, be sure to include the statistics you found in the simulator for each edge you document.
Studying your winners and losers based on the specific strategies you use will give you the confidence to undertake these trades in real life. So be sure to specify your win rates and any warnings for your strategy by testing these results in a simulator first.
Computer and day trading monitors
If you’re going to be a day trader, you’ll need a decent computer and monitor. While we’ve heard about people trading daily on their phones or iPads, it’s less than ideal.
The reason for this is that not only do you need to be able to analyze the charts in real time, but you may need to check other data as well. You will need screen space for your broker, your charting platform, any newsfeed or chat room, twitter, etc. A solid computer and multiple monitors make it more efficient.
Similarly, you’ll probably want multiple chart windows at once. This helps you keep track of the movements of individual actions as the day goes by. Not having screen space for this could result in missed operations. And we wouldn’t want that!
Day Trading Stock Brokers
Although we are not in the business of recommending stock brokers, this will be a key component of your trading activity, so the decision should not be taken lightly. We recommend that you try many different brokers and do your research before pulling the trigger on one.
When choosing the right broker for day trading, you want to consider the type of trading you want to do. For example, many day traders like it short. To do this, you will need a broker with a solid list of shortable stocks. Not all brokers will have this.
Consult your broker and ask online for answers to some of the following questions:
- Do you have a good list of hard-to-take stocks?
- What trading platform do you provide?
- Is pre-market and after-hours trading allowed?
- What are the cutting times of trades?
- Do you have a margin and what are the rates?
- What’s customer support like?
- Does the platform include a mobile app?
At the very least, you should be able to demonstrate their product to get an idea of it and decide whether or not it suits you and your trading style.
Charting and trading platforms
While many brokers will include a charting and trading platform, you may find that their charts don’t meet your needs. After all, there are some standalone charting services available that deal specifically with charts, regardless of brokers or trade execution.
Many traders will run their charting platforms as standalone so they can use unique trading indicators and technical analysis tools that may be missing from their broker. This can boost your trading, allowing you to delve into the volume and price action without needing a clunky brokerage chart.
It also frees you to choose which broker could provide the best service or execution regardless of their software.
Merchant tax accounting
There are two things guaranteed in life, death and taxes, right? Well, day trading has the potential to accumulate a lot of fees, so you’ll need an accountant who knows what they’re doing.
Making a few investments here and there can be easily managed by your typical CPA. However, there are many rules and regulations involved in active trading. Washing/selling rules, what constitutes an active trader, mark-to-market rules, and many other things can affect your status and tax responsibility as a day trader.
For this reason, we recommend that you hire a professional who knows what they are doing before entering trading. Be sure to consult them about your other assets, how much you plan to trade, and any other source of income you have.
While we don’t recommend any specific accountant over another, there are some trading-specific accountants that we know:
CPA, LLC – Tax Consulting & Compliance For The Active Trader
Use them at your own discretion and risk, but understand that reconciling thousands, if not hundreds of thousands of trades, requires specialized software and accounting. You may be able to figure it out on your own using https://www.tradelogsoftware.com/. But the help of an experienced accountant is always beneficial.
Find a day trading community
Day trading is a solitary affair. You’re sitting at your desk for hours on end, pouring graphs and data. Not only that, but you will experience emotional ups and downs during this process. To this end, we recommend that you find a good trading community to support you.
We’ve already written about chat rooms and how to make the most of them, so be sure to check out that article. In it, we discuss the role that chat rooms play in the market and in the development of trading.
However, not all chat rooms or educational services are created equally. So, make sure you check out the services properly and as cheaply as possible until you find one that resonates with your trading style and social interaction.
Being part of a community also serves as an instrument of responsibility in the market. A good business will likely have some kind of audit board that oversees and provides accountability for the company.
In trading, you are responsible for your actions. And, for this reason, it would be ideal for you to have a trusted group of business partners who can bounce ideas, conduct review sessions and keep you on track both mentally and professionally.
The best simulation software for your trading activity
Although we may sound biased, we truly believe that this piece of the puzzle is one of the most important and overlooked aspects of day trading. Many traders are willing to risk their hard-earned money before they have a proper understanding of how the markets work. It’s irresponsible and risky, at best.
Here at TradingSim, we offer the best simulator for replay, simulation and market analysis. Unlike most stock market simulators, we allow you to reproduce level 2 and intraday data for up to 3 years. As a day trader, you have the chance to “relive” the market as much as you want and when you want.
Since day trading can be both systematic and discretionary, you will appreciate the built-in analysis software offered by TradingSim. To test your trading skills and test your results on a specific strategy, you will need it. Any great trader knows the power of statistics. Be sure to spend time simulating by testing your process before entering the market with real money.
Not convinced? Don’t take our word for it. The world’s most prolific trading psychologist has this to say about simulation trading:
In fact, it is often because of our need to make money and our overconfidence that we pursue shortcuts in our learning processes as traders and follow too many risks. This leads to P/L volatility and losses, which in turn trigger our nervousness, tension, stress, fear and worry.
What I’ve long liked about TradingSim is the focus on learning how to trade and doing it in safe ways where we can’t trigger and traumatize ourselves.
Think about every field of performance: athletics, acting, music. In none of these do we start by following people online, doing some reading and then trying to make a living from our performance. Rather, we recognize that it takes years of practice and mentoring to become a professional athlete, movie star, or recording artist.
When we take shortcuts in the development process, our unrealistic expectations create disappointment, frustration, and pain.
Many, many times the answer to emotional disruptions in trading is to work on our trading.
Dr. Brett Steenbarger, Ph.D.
What are the best day trading courses?
Day trading courses abound on the internet. You can find free ones on YouTube or pay tens of thousands of dollars to join day trading, services and “exclusive” challenges. There are also many books written about day trading and the many different trading styles.
Although we will not recommend one over the other, what we recommend is to spend as little money as possible to get started with education. The Internet abounds with free resources. We are even dedicated to helping the cause here at TradingSim with our blog and educational materials.
That said, once you’ve scoured the net and read as much as possible, you’ll want to try out all the services you can comfortably afford that suit your desired trading style. If it’s about shorting small-cap stocks and momentum, find a good trading service that teaches you how to do it.
Regardless of the trading style, we recommend that you use discretion to find a trading course that offers an approach to tape reading, volume and price analysis, and trader development. Study some of the greats, such as Richard D. Wyckoff. You won’t go wrong with an understanding of sound technical analysis, which you can apply to any trading style.
Find a system for your day trading activity
As part of your educational growth and development, you will eventually have to land on a solid system. For example, if it is Wyckoff’s methods that really talk about your trading style, then perhaps you want to establish a trading system that depends solely on springs and retaliation.
Maintain a routine schedule – Just like regular employees
If you plan to be a professional day trader, you need a professional routine. The markets open and operate from 9:30 a.m. to 4:00 p.m. EST every single day. You have to be there, of course.
Routines can stifle creativity or balance if taken to extremes, but your need for routine in the markets will largely depend on your trading system. For example, if your system requires you to be present at the opening bell, then you may need to wake up early, have an exercise routine, do some meditation, then research the morning engines for that day in the pre-market.
This kind of routine will allow you to come to the market prepared. Less preparation = Less long-term profits. With no plans, your system is really just a series of impulsive and reactionary trading ideas that may or may not work. Basically, don’t be a gambler.
The more routine you become in your trading activity, the more disciplined you will become. Similarly, the more disciplined you become, the better your chances of success.
Here are some tips we recommend you adopt in your routine:
- Get up early in the morning
- Nourish your brain and belly
- Exercise before the start of the day
- Arrive at your desk at routine time every morning
- Give yourself plenty of time to research the day’s activities
- Plan your trades before you take them
- Allow breaks in the middle of each day
- Balance your work life with family time
- Leave room for review every day
- Become aware of how healthy your routine is
- Be willing to change some aspects of your routine
No matter the routine, it is imperative that you treat yourself well and pay attention to your mind and body. Day trading can be a destructive career if you don’t.