How To Day Trade & Develop a Trading Edge in 3 Steps
Learning how to day trade is challenging, especially in poor market states. Having an edge in your trading can set you apart from other market participants when learning how to day trade and allow you to succeed in the market.
What is a day trading edge, and how can you get it?
Your edge is when you own a trading plan that wins more trades than it loses. If over 50% of your trades are winners, and you use a 2:1 risk reward at the minimum, then you'll be a profitable trader. Anything higher than 50/50 is remarkable.
Most traders want the dopamine rush instead of learning this process through paper trade. This dopamine addiction leads a trader to emotional trading, forgetting their trading plan, and making mistakes in the market.
A successful trader goes through the motions. He knows the setup he's looking for, waits for his reasons to take the trade, and follows the plan when the trade comes in, executed with the correct risk-to-reward ratio. It's boring, robotic, and how professional day traders run their small trading business.
Follow these three steps if you want to master this skill.
Step 1: Paper Trading
Paper trading is practising looking for setups in the market and taking the trade on paper. Don't put money down; mark where you'll enter, take profits and get stopped. Then, log this "trade", journal your feelings, and watch the trade play out. Speed up this process by using the replay feature in TradingView to see the trade plays out instantly.
3 Reasons Paper Trading Helps Day Trading
1. Confirms the Premise
The first reason is that paper trading confirms the premise of your plan and setup. As you hunt for your setup, taking trades as they come in (on paper), over time, you'll see how this setup is performing with an accurate log of your trades.
2. Ensures execution
Practising trading execution is one of the toughest challenges to conquer. With real money on the line, you must be a consummate professional in executing your plan. Paper trading allows you to develop this execution habit without the risk of your capital on the line. By taking paper trades consistently and practising that execution, you will develop the habit that day traders need to succeed.
3. Subconscious Belief
As you practice paper trading, you'll start to believe that the setup works subconsciously. You'll see how the market keeps surprising you, sometimes stopping you out, other times hitting your target, and you'll develop a stronger belief about how the market works.
Day Trading Probabilities
You'll never know how any individual trade will perform. Even with a perfect plan with a 70% win rate at a 2:1 risk reward (this is exceptional), you'll still have 30% of your trades being losers. You realise your edge through a series of trades, which, as a whole, creates a specific win rate. If the win rate is good enough, you are validating the plan, and you can use real money.
When you develop this trust in your plan and setups, you remove anxiety and any stress that could come with trading. Putting your hard-earned money on the line can be stressful and exciting, so it's best to leave these emotions behind when you step up to trade, or they will stop you from following your plan.
100 Paper Trades
Paper trades help you develop trust in your plan. When you see your setup or trade idea firing, you train yourself to take it. Build the habit of logging that trade, and you'll build trust in your plan. The TRi Level 1 instructor, Grimm, recommends taking 100 paper trades to validate a setup. Brian recommends at least 20 paper trades, 20 1/10th account size trades, and then 20 trades with a maximum 5% risk on any one idea.
Over time, as you practice your day trading, you'll develop a technical and fundamental edge in your trading. In another blog post on "how to start investing in stocks for beginners," we give you a free trading plan and log that you can use to start paper trading. Check out that blog here!
Step 2: Following the "Process"
TRi defines the process as the system you run through daily as a day trader. Every day you repeat this process, and trading through any market state, you always return to this process. The process keeps you alive in dangerous markets and helps you profit significantly from happy markets.
Here's "The Process" laid out step by step.
Establishing plan: First, you'll establish an overall strategy and then outline your investing/trading plan. You'll state all the things you want to do in this plan, the person running it (you), your capital outlay, and any other considerations regarding your plan.
Defining edge: Add in all the steps you need to follow to have an edge, including how much you'll paper trade this plan, your logging process, and anything else you think will give you an edge. (In the TRi Level 1 Program, you learn this in great depth)
Define Execution: What must you see before acting in the market? What causes you to execute, and how does that execution appear?
Implementation: Acting on your plan means taking a trade (paper trade is fine) and logging your entry, stop and targets. Include a screenshot of your chart (easy to do in TradingView) and reference in your log.
Review Results: After the trade completes, review the results and fill out your exit position in the log, along with an exit chart. After a series of paper trades, you can see how your trading plan is coming along.
Modifying Plan: Now that you have a plan up and running, you need to keep tweaking and improving it. If you are making mistakes, getting too many losses, or the setup isn't working for whatever reason, you need to adjust the plan and start paper trading to test the new version.
Part of this process is to understand Rational Analysis. These are ideas that are fundamentally solid and intersect with reasonable technical indications. The TRi Level 1 program goes through many fundamental and technical reasons to take a trade, all of which help you develop your edge.
Step 3: Developing Your Setup Edge
By now, you know to develop an edge. You must follow a specific series of steps in a comprehensive plan. Inside your day trading plan, you'll outline the trading setups you are hunting. Each setup should have three unrelated reasons for taking a trade and a fundamental reason that makes it a rational decision.
You may start with some fundamental screening reasons to hunt for names, then look for technical indicators ripe for a trade. The three unrelated reasons we look for at TRi are Location, Momentum, and Price Structure. These three reasons act as a step-by-step process we call a setup.
In the TRi library, we share setups like the El Tangonater, the BoT and many other setups to use in your trading plan. The TRi Level 1 program details using these setups within your plan and developing a professional trading edge so you can make money from the market.
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Conclusion: Your Day Trading Edge in 3 Steps