How I (finally) Transformed My Day Trading
In this video, I break down 5 key lessons that have been crucial for transforming my trading.
Market First
Supply & Demand
Relative Strength / Weakness
Size Down
Buy Pull-backs
I’m about two years into day trading, so I thought I’d cover 5 ways how I’ve transformed my trading so I have far more green days than red.
I think my experiences as a newer trader closely resemble that of many others on a similar path. I have traded small caps, options, futures, and forex. I’ve tried a plethora of different strategies and indicators, subreddits and paid groups, and brokers and trading platforms. There is a natural urge to keep looking for the next shiny object or some indicator that will make trading easier and make you profitable. But as it turns out, no such thing exists. The hard truth is trading is extremely difficult, and there’s no way around that.
So in my video last week about stock trading courses, I mentioned a few resources that I actually thought were well worth the money, and I’ve combined aspects from all of them to develop some rules for myself to help me become a better trader. Day trading stock options is my preferred route, so that means at the end of each trading day, I am not holding any positions – just 100% cash.
Right now, my main goal is just to stack green days after green days. I don’t have a profit target goal for the day or anything, I just trade when the market gives me the opportunity. And before I start, these things may sound obvious to you – but to actually execute them is difficult – at least for me, and I think many others struggle with actually executing their strategy. It’s easy to look back in hindsight and see obvious trades, but it’s much different than when you’re trading in the moment.
So let’s get into it.
Market First
When I was just starting out, many more experienced traders always started their day or week by analyzing the S&P and Nasdaq. I used to kind of brush this off and think “I don’t really care. Just give me your analysis on Tesla. Or Nvidia. Or whatever stock I was most interested in that week.” But, dummy, the context of the overall market is more important than your favorite stock. If Nasdaq is looking weak, chances are Nvidia is going to tank with it, since they are closely correlated. So the first thing I do in the morning before the market opens is I first look at the market as a whole. For the stocks I like to trade, this generally means the S&P and the Nasdaq, and also knowing what other events may cause market fluctuations that day. So you can pull up an economic calendar like one on MarketWatch so you know what to be on the lookout for and how it could affect the market.
Throughout the trading day, I have a chart of S&P Futures and Nasdaq Futures, /ES and /NQ respectively, so when I’m looking to enter a trade on Tesla or Apple or Nvidia or whatever, I first will check ES and NQ to see the market structure. If ES is looking bullish and Tesla is also looking bullish, I can be more confident in entering a long position. However, if ES is right below the 200 daily moving average and I still want to go long on Tesla, I may hold off to see how price interacts at that moving average before entering, because if the ES rejects that moving average and moves lower, chances are my Tesla long may not get the upward movement I’m looking for.
Now again, if I want to enter a short position on Nvidia by buying put contracts and the Nasdaq (/NQ) is about to hit supply, well, I can feel better about this trade knowing that Nasdaq could get selling pressure and price can move back down in the direction of my trade, with Nvidia following with it.
If the markets are in a tight range not trending in any one direction, I may be better off not taking any trade at all, knowing I am not likely to get the follow-through I want, as the markets are balanced and the trading range will chop me up.
So the bottom line here is if the equity I want to trade is correlated to the Nasdaq or S&P, I am always going to check those charts first for confirmation before entering a trade.
Supply & Demand
I kind of alluded to this in the last section, but trading supply and demand is pretty key for my strategy, so as I am starting my day looking at the markets, I am also charting out supply and demand zones for the S&P and Nasdaq, along with any equities that look interesting to me that day. I trade Tesla almost every day, and I look for large cap tech stocks that may be setting up for a nice trend day, so I will look for supply and demand zones to map out on my charts to guide me throughout the day.
If you aren’t familiar with supply and demand, there are a lot of videos on YouTube that will help you better understand it. Here is a link to an article if you prefer reading about it. Even if you are familiar with it but aren’t drawing it on at least the S&P, I would highly recommend you do so.
I usually start with a larger time frame like the daily chart, and then work my way down all the way to the 30 minute chart, looking for key zones. If I don’t find any good supply and demand zones close to the current price, I will chart out daily levels of support and resistance that can help guide me in and out of trades. If I’m in a long position and we are close to entering supply, I will look to exit, and on the flipside, if I’m short and we’re coming into demand, I will also look to exit.
And as I mentioned earlier, knowing where these zones are can help you from entering a long position right below supply and a short position right above demand, so this can help you stay out of trouble.
Relative Strength / Weakness
Another aspect I will look for when trading is a specific equity’s relative strength or weakness relative to the overall market. If the market is moving sideways and a particular stock is trending up, this can give you a good opportunity to enter long. If the market then starts trending up, that can act as an accelerant for the stock’s move upward. If the market, however, never gets upward momentum and instead makes moves down, a relatively strong stock will likely hold onto a little of that momentum giving you a chance to exit before it moves lower. Let’s look at an example from last Friday. Ford had great relative strength at open as Spy attempted a move higher, which failed. Ford however made a 3.3% move higher as Spy started moving down. When Spy made new lows on the day, Ford held its strength for another 15 minutes before moving lower, giving you plenty of time to take profit.
So while you can just trade the ETFs SPY and QQQ, trading an equity that has relative strength or weakness to the market can give you more explosive trades when you get market momentum or a little bit more leeway when the market drags an equity down with it.
Sizing Down
Trading is mostly a mental game against ourselves. The market is not our enemy. Not hedge funds. Not algorithms. It’s us. Since every trader experiences losses, you need to be able to take losses without it causing you to go on tilt and revenge trade. If you’re sized too large and the trade goes against you, it will be hard to accept the loss without it affecting your emotional state, which can cause you to make further losing trades. I’ve found that when I enter a trade with more size than I’m comfortable with, I either take profits way too quickly out of fear of losing money, or I move my stop-loss even further away because I really need the trade to work out. Either way, it’s not a good outcome. When I sized down to trading just one contract, I found I made more money than when I traded multiple contracts because I was better able to stick to my plan and stay in my winning trades longer.
As you’re learning to trade, size down as much as you need to in order to trade your plan without your emotions associated with the dollar amount getting in the way and distorting our thinking.
Buy Pullbacks
Here’s something I still screw up at times. When a stock I’m watching starts ripping, I get tempted to hop in, so I don’t miss another big move. But here’s what happens when I do this: the stock makes an ordinary pullback and either shakes me out of the trade, or when it finally continues in my direction, I am just relieved I made it through some drawdown and want to take my small profit before I experience any more of that pain.
So instead, wait for a pullback to enter. This allows you to have a tighter stop-loss or a stop-loss that is less likely to get hit.
Let’s look at a move on Tesla. It broke it’s downtrend and had a nice impulse candle up. We don’t want to miss this move up, so we enter. But where do we place our stop-loss? There’s not really a place here that makes sense without skewing our risk to reward. Now, if we wait for a pull-back – I usually use the 9 EMA for this – and enter here, we can keep our stop-loss just under the moving average and have a 1 to 2.5 risk reward. And we hit that easily in the next 10 minutes in a stress-free trade. If we didn’t wait for a pullback, this trade would probably make us sweat a bit, and by the time it came back up, we may just want to exit and get out of the trade altogether. Almost every time I chase a trade, it pulls back soon after I enter, and I just have to kick myself for chasing and not waiting for an entry. And if there isn’t a pull-back - just a runaway freight train – that’s alright. You don’t have to catch every trade. The market will provide other opportunities.
Recap
Okay, let’s recap:
Market First. Pay attention to what the market is telling you and how it will affect your trading plan for the day.
Supply & Demand. I recommend charting out these zones for anything you trade and use them as a guide throughout the day.
Relative Strength & Weakness. Finding stocks with these qualities can help you find huge winners for the day or provide more leeway when you’re wrong.
Size Down. If the money you’re risking in each trade causes you to divert from your trade plan or make emotional errors, size down until it has no impact and you can follow your plan.
Buy pullbacks. This allows you to have a more favorable risk to reward with a better entry and makes it easier to stay in a trade longer to capture more upside.
If I could go back and tell myself these 5 things 2 years ago, I would’ve saved myself a lot of pain and a lot of money. Trading still takes lots of screen time, but I hope that these 5 things help you turn a corner with your trading, as they have for me.