Once you have learned the basics of the markets, day trading, and how a day trader spends her day, you will need to move to the point of getting set up for trading. It is not wise to just jump right into buying and selling in an account without first writing a business plan, setting up an office, and selecting a computer. Having a basic overview of your software and information requirements will also go a long way in getting yourself set up for day trading.
It is important to begin your day trading career with the full intention that it is a business. Although your day trading business might start out as your part-time job, it should be set up in such a way as to be profitable and tax efficient. The best way to establish these goals is through the writing and use of a business plan.
A business plan is a formal document that you can use to establish the direction and purpose of your day trading business. Although the plan can be changed as you develop, the business plan should serve as your road map as to how to get from A to B. Your A might be just starting out:learning about the markets and day trading, opening an account, funding your account, and your first three to six months of successful trading. Your B can be turning your part-time day trading job into your full-time career.
Think of writing your business plan as a tool that you will be using to ask a bank to invest in your company. With this in mind, you should treat the writing of the business plan as an essential tool to have before your first trade is made. This will force you to do the required research and training to ensure a high level of success at your day trading.
After you get your business plan written, you should then consider yourself in business. Most businesses exist with the thought of being a profitable venture. In the course of making profits, a business usually encounters expenses. When thinking of your company, think of all of the parts that go into making it possible to trade. The expense of books, newspapers, cable, furniture, as well as the cost of meals out can be an expense if they are related to the operation of your day trading business. Your business plan should establish in your mind that you are running a company, and not everything will be profits and income; there will be expenses, too. These expenses should be part of the business plan, and if planned properly, can be not that bad, as they can reduce your overall tax burden at the end of the year.
You business plan should include the following:
TOPICS IN YOUR BUSINESS PLAN
|
Topic of Business plan |
Content |
|
Company Mission |
Your goals of getting from A to B |
|
A Description of the Company's Service |
Day trading what markets |
|
Management Team Description |
Your background, computer skills, and market knowledge |
|
Equipment |
List of equipment needs of the company |
|
Furthering Education |
Description of procedures to gain further market knowledge |
|
Profit Goals |
Procedures as to when to take profits |
|
Risk Management |
Procedures to limit risk: margin, position size, and pyramid method |
|
Capital Requirements |
Initial funding requirements, scheduled capital contributions |
|
Capital Withdrawals |
Procedures for scheduling withdrawals from your trading account |
You can set up your office wherever it is convenient for you. Your office might be an entirely separate room in your home. This room could be a converted extra bedroom or even a converted formal dining room. It need not be formally furnished, but the furnishings must be adequate to hold your books, TV stand, computer, and other equipment. You can even use part of a room if you live in a small space and you would like to double up on the usage of your living area. The only real requirement is that you are comfortable and have good lighting. It's even possible to have a completely portable office where you are able to temporarily move your computer from your reading and research area of your home to the couch. With your portable office, you can casually trade at night while sitting on the couch.
If you have the right equipment, you can have a safe, secure Internet connection, even at your local coffee shop or other public location. It can be a lot of fun to start the day early and begin trading in the early hours of the morning, walk to Starbucks or Caribou Coffee, fire up your computer, and begin trading as the morning sun comes in through the windows.
There are stories of day traders walking to the corner, unloading their computers and trading logs, and beginning to trade at 5:30 A.M. At this early hour they can capture the busiest hours of the foreign exchange (FX or Forex) market, or read all of the overnight news for the commodities and stock market. The old adage “the early bird gets the worm” can really ring true in this instance. You can greet the local early morning regulars as they get their coffee on their way to their jobs while you study the market's developments. With today's modern technology, your office can be anywhere you get a secure Internet connection.
Market knowledge is gained with time and practice. Perhaps you do not want to trade with your big account without the controlled environment of your home office. In this instance you could use your practice or demo account to stay on top of the markets but also spend some time away from your usual work place.
Just as a plumber needs his van and a painter needs his brushes, you will need the proper equipment to day trade. This equipment consists of furniture, a phone, and cable access TV.
The first grouping of equipment is the furniture. It is not necessary to invest a lot of money in furniture and lighting. The goal should be to provide yourself with an environment where you can concentrate on the work at hand: day trading. With this in mind, you will need adequate lighting, chairs, and desks.
If you are setting up an office for the first time, you can shop around to find affordable, quality work-minded furnishings at a store such as IKEA, Affordable Portables, and office supply stores such as Office Max or Office Depot. IKEA and other office furnishing stores can offer a variety of modern and efficient desks and computer stations as well as comfortable, ergonomic chairs and lighting. In addition to office furniture, you should include access to telephone, TV, and the Internet. Your cell phone can act as your office phone, as this will cut down on your monthly expenses — you can generally report the usage of your office phone as a tax write off.
Access to cable TV can be of great use. You can start your day by listening to the business news stations, such as CNBC or Bloomberg, while you get ready for the morning. They can offer some very good insight as to what economic reports are scheduled to happen later on in the day. This can serve as a good way to get into day trading early, before some of the markets open. The combination of a strong cup of coffee or tea and a review of the markets with this method can help you recognize some very profitable day trading opportunities that are coming along in the latter part of the day. It could also alert you as to the fact that the markets are in a state of unrest.
This unrest can be due to what happened overnight in the Asian or European markets, or the fact that a big U.S. economic report is coming out. In this case, a typical scenario could follow: You wake up at 4:30 A.M., start the coffeemaker, read the “Markets” Section of the Wall Street Journal, and casually watch the morning news shows. You could be informed that overnight the markets in Germany and London were in disarray, and at 2 P.M. this afternoon the U.S. Federal Reserve will make an announcement on U.S. interest rates. Armed with this information, you could decide that it is in your best interest to take the day off from active day trading with the following effects: 1) You would miss out on any upside from potential positive news made during the day, and 2) You would insulate yourself from any whipsawing, or wild swings back and forth in the markets preceding and following major news. You could decide that no profit (but keeping your trading account intact) is better than risking your account on a big news day.
One of the key ingredients to your day trading business will be your computer hardware and software. Although the computer hardware offered by most retailers is constantly being upgraded and improved, there are some basic requirements to be met.
Laptop computers have developed to the point where an off-the-shelf version can have a powerful enough microprocessor and enough memory to handle day trading.
HARDWARE SPECIFICATIONS AND BENEFITS
|
Hardware requirement |
Benefits to your Trading |
|
1GHz or higher microprocessor |
Speed. The horsepower of your computer the higher the microprocessor speed, the better it will handle all of the trading screens, research reports, news articles, and charts that are open at the same time. |
|
2–4 gigs of RAM |
The more RAM your computer has, the faster it will allow you to process your buy and sell orders, and upload information and reports from the Internet. |
|
15-inch screen |
The bigger the screen, the more room you have to open up additional applications, such as trading input areas, charts, and news screens at the same time. |
|
High-speed Internet |
The backbone that connects your computer to your broker's order input are — it is essential that it is as fast as possible and private (no shared networks or public-access Internet connections). |
In order to day trade effectively, you will not go wrong in the purchase and use of one of the many quality laptops available in technology stores. Internet connections can be DSL, cable, or wireless and directly connected to your computer (G3 or G4, depending upon your service area).
Trading software, or the trading platform, is usually provided to you by your broker. In fact, the choice of brokers often has direct ties to the quality, efficiency, and ease of their software, including the presentation and creation of technical charts and the order-entry system.
After research, you might choose three or four brokerages for a test run of their software offerings. It is easy to open up a demo account, download the software (trading platform), and try it out for a few weeks. You will be using play money, of course, but you will get the hang of the tools provided by the brokerage. After you have decided upon which brokerage you would like to keep, you can allow the other demo accounts to expire, and remove them from your computer.
Trading platforms should provide all the tools you need to trade, but at the same time be as simple as possible, and not have an overly technical or cluttered appearance.
You should find the order-entry system and method to be simple to use and somewhat intuitive, preferably with provisions to enter in trades other than market orders. While market orders are trades that are filled with whatever price the market is at that time, other types of orders might have a predetermined, set buy and/or sell price, where the order will only be filled at these specific limits. As you get more familiar with day trading and get into more advanced trading techniques, you will discover that this feature is an absolute must have, and should not be overlooked.
The technical charts provided should allow an adjustment for different timeframes with the click of a button. For example, you could be analyzing a potential trade in the S&P 500 futures and be looking at a thirty-second chart, or a chart that shows different changes up or down with thirty-second intervals. To gain a broader perspective, it is good practice to change the timeframe of the same chart to longer intervals, such as five minutes, fifteen minutes, one hour, and one day. With the ability to change the timeframes of your charts in this manner, you are better able to see the bigger picture, and therefore see more potential day trading trends and ideas.
The second characteristic you should be looking for in your broker's trading platform is the quality of the technical chart properties. The properties should include the availability to switch from bar chart to candlestick, and the option for indicator overlays. The switch from bar chart to candlestick chart will change the type of information you will be able to gather from reading the charts, such as previous opening and closing prices or volumes. The availability of indicators would allow you to draw lines over the longer timeframe charts to view trends visually. For example, you could use your chart software to draw a line on a chart and see a pattern such as a breach of a key support level, i.e., a point at which a security has fallen below a statistical (and often psychological) lowest point before a rapid sell off to lower levels.
In addition to your equipment, and computer hardware and software, you will find that reading the various business and trading periodicals will act as an integral part of getting set up for your day.
You will be day trading in markets that are changing week to week, day to day, and hour to hour. In order to day trade effectively in this constantly shifting arena, you will need to have both a strategic view of how the market works, and a tactical, short-term view of where the market is going. You can gain a very broad knowledge of how businesses, economies, and markets function together by keeping a strict reading and studying schedule. You could schedule reading of books, newspapers, and magazines related to day trading for certain parts of your work week. With a set schedule, you can get a lot accomplished with your goal of becoming savvy about where the economy is, where it is going, and how it relates to the markets you trade in. Remember, you are searching for clues as to what offers a good trading opportunity. You should also have a defensive goal of knowing what is going on in the world economy and world markets to allow you to sidestep any pitfalls in trading, i.e., the avoidance of any bad trades.
Once you get into the habit of studying, you will look for the opportunity to study whenever you can in regard to your day trading business. You might subscribe to and read the Wall Street Journal in the morning before you begin to trade, and switch to a monthly magazine such as SFO during your off days when you're not trading, and polish your technical chart reading skills by reading The Active Trader while spending time with your family in the park. You could even find yourself spending your time listening to audio versions of the various periodicals and the on-air news magazines, such as NPR's Market Place or WBBM's (AM 780) Noon Business Hour (Midwest Market). There are also downloadable online versions of Money Talk, a nationally syndicated on-air magazine devoted exclusively to the markets and money matters. You would be surprised how much knowledge you can pick up in relation to the markets and economic matters that can be directly tied to your day trading career.
You must remember that for each trade you make, there is someone making the opposite trade. With each buy you make, someone is selling, and with each sell you make, someone is buying. It is important for you to never underestimate the “other guy's” market knowledge. When you learn to day trade, what you are actually doing is learning how to notice situations in which you can make money by going along with others' ideas or against others' ideas. The markets are, by nature, very difficult to navigate; any skill you acquire along the way can help improve your results and add to your profitability and enjoyment of day trading. By day trading, you are competing against some of the brightest minds on Wall Street (actually, worldwide), and the most powerful computers. You are competing against Northwestern University and Wharton School of Business MBAs, and complex algorithmic computer programs written by PhDs. On the flip side of these advanced degrees and micro-processor speeds is the fact that even the brightest minds can call the market wrong! Keep this in mind when you are gaining skills in your day trading arsenal. Take your time to build up your market knowledge over the weeks, months, and years. And remember, you are always someone else's “other guy.”
In addition to your daily and monthly periodical reading list, you should include the following daily reviews of some of the day trading news feed services and brokers' reports.
Depending upon the broker you choose, you will generally have access to a markets'- and economics-related news source. These are usually more in-depth and focused than the market news that can be accessed from the same companies' free websites. For example, your broker might offer a news wire that is broken down into the following sections:
Equities
Currencies
Commodities
Gold and Silver
Economics
Exchange Traded Funds
Futures
Politics and Policies
Europe
Asia
Banking and Credit
The news service would have staff reporters all over the world available to report on the sector news as it developed over the course of the trading day (and night). If you were day trading gold, for example, you could click on the Gold and Silver section and find anywhere from one to ten articles on the development of the gold market, its current London close, mining output, Central bank purchases and sales, gold ETFs tonnages, and any other recent information that is related to gold. Articles are usually stored for a week or so, so you can quickly get a sense of where the market was and therefore make a conclusion of where it is going. Due to the almost informal nature of the articles, even the smallest amount of news is reported several times during the day. A story on gold reaching a new high can be followed on an almost per-hour basis, along with supporting articles on the mood of traders from London, New York, and Dubai, as well as volume reports, etc.
In addition to the independent news feeds, your broker will most likely offer daily, weekly, monthly, and quarterly research reports of various lengths and depths. They might offer an early morning market commentary that would serve to inform you of their best day trading ideas across all markets. Your broker could also offer a supplemental special report on the direction of main-day trade sectors such as foreign exchange, commodities, and equities. Monthly and quarterly reports could focus on long-term market conditions, economics, or day trading education memos.
These broker reports almost take the form of advisory memos and can really help you in deciding entry (buy) and exit (sell) points for a trade. They can also help you get a feel for how the market is moving over time, as you can look back over the weeks and see a story develop as the reports are written. For example, you could read a three or four week report of the weakness of the U.S. dollar as compared to the euro, and follow the story of how the dollar gained ground over the European currency, gradually to the point where day traders all over the world were worried of future weakening of the euro with thoughts of “when will this end” and “if I only shorted the euro!”
This brings up another point: When you first get into day trading, everything will be new. You will get the impression that the market will always be the way it is today, the S&P will always be this high, gold will never come back, the dollar is dead, etc. When you study the markets over time and develop trading experience, you will see that everything is constantly moving. Sometimes it seems as though the market has its own will, and that will is one of an unruly child, subject to fits of anger, upheaval, and only occasional discipline. This is actually a good thing, as movement in the markets creates day trading opportunities. You will recognize what market is good to trade in at what times, when it's better to go long, and when it's better to go short.
For example, the Switzerland-based brokerage house and financial advisor UBS issued a report in the late fall of 2007 that the world's currencies were out of whack, and that some of the most popular day trading currencies such as the New Zealand dollar (NZD) and Australian dollar (AUD) had become way overvalued against the U.S. dollar (USD) and the Japanese yen (JPY). UBS predicted an unwinding of the massive long AUD/JPY, AUD/USD, NZD/JPY, and NZD/USD positions in traders' accounts worldwide. Since those trades had developed their disproportionate and extreme values over many years, the prediction was that the correction would come suddenly and inevitably. The trigger point for such a massive unwinding was the housing crisis and the banking crisis that followed. All of a sudden, traders were selling risky, high-yielding currencies such as the AUD and NZD, and buying USD and JPY. Problems were compounded when the central banks of Australia and New Zealand lowered their interest rates dramatically and suddenly, which further lessened the appeal of the commodity currencies. Almost two years later, the two currency pairs were back in alignment, with UBS issuing reports to again go long on AUD and NZD. With your market knowledge and trading experience developed over time, you could see the beginning of a new, long-term trend and trading opportunity.