10 Things that give You an Edge in Day Trading

These are the 10 things that I consider to continually improve your day trading edge.

1. Journaling

What do I mean by journaling? I mean writing a diary every day that includes the following things:

  • How do you feel before the trading session? What have you done what are your thoughts for the day?

  • How do you feel, behave during a trade? Do you have insights about the market or your behavior for improvement?

  • Between and after trades, what did you do, what was going through your head?

  • After all how satisfied are you with the trading results on that day?

  • Anything personal, funny, insights about people, books, trivial things. Is there a connection between your trading results and personal activities?

It is helpful to mark important parts of your trading journal to be able to have a quick read-through as a possible preparation for the next day.

Journaling can be done effectively as a day trader whilest going through your daily video recording.

Focusing on doing less mistakes and realizing the improvement advices coming out of the journal is a powerful tool to develop an edge in day trading.

It could be that you develop your edge out of these improvements and before that you didn’t have an edge.

2. Video Recording

Screen capturing programs are easy to use. A good one that I like to use is Apowersoft (link) or kazaam for Linux. They can record your whole trading session. What should be visible in the video is of course your trading terminal and the datafeed you’re watching. Decent hardware is a requirement because otherwise it will slow down your computer too much and of course free disk space.

Video recording is helpful to analyze your own behavior. For example, watch how you move your mouse over the sell button. See how you actually behave and go through your thinking process during trades once more. By doing this you practice twice a day. The first time live trading, another time going through it again from a different perspective.

Know that you, yourself are watching your own behavior and there’s nothing that can be hidden from your future self-observer. It creates responsibility over yourself.

Furthermore, if you missed an important price break, you can stop recording, then watch it again and gain clarity over what happened in that moment with spread and tape.

3. Spread, Orderbook and Tapereading

A trader can have a good system, but if he doesn’t fight for price it can be that nothing results in profitability. Why is that? The market has a silent language that is present in every moment. It is like a melody. Spread and Tape speak to you, and if you listen carefully you can gain an advantage. Sometimes the market will whisper “Take me here.” Sometimes it will say “Something is wrong with me.”

Spread and Tapereading is a bigger topic. Here are a few things you can watch while trading:

Spread:

Is the spread opening, and closing very rapidly?

Is the spread active or stays at the same, even when price moves?

Is the spread only opening up to one side?

Orderbook:

Is the first limit order getting eaten or stacked up?

Are there big orders that are not going away?

Are there certain characteristics like climbing limit orders or a frequent change in order quantity from more in bid, then in ask and vice versa?

Tape:

Are prices coming in slow or fast, how long is the gap between them?

Are Bids or Asks “holding”? (Meaning there is tape activity and no movement further in price)

Are there any big orders throwing around?

I explain a bit more about spread and tape in my free PDF that every subscriber is getting per mail.

4. Statistics

A trader can improve significantly if he has the right insights about his own trading.

To being able to get these insights, you have to have a good track record of your trading p/l with entry time, exit time, entry price, exit price etc. and all the informations that you can eventually gather for any trade. The more data the better. Excel or google spreadsheets are completely enough for this task. Try to also record variables, which you are not even sure that they can give you an edge like volume before you open the trade, open interest in options, VIX price for example. So that you later can find out if there’s anything that can be improved by reacting accordingly to these variables in a “if-then analysis”, that tests different hypotheses about your suspicions.

Finding out more variables to improve upon is generally a good way to continually improve or find your edge in day trading, I think.

Always search for interesting things about your own trading. Isn’t this exciting? You can find out, that you’re only profitable from 15:30-16:00, or you find out that Friday you’re generally losing, it might even be that one of your strategies is not working. Whatever it is, if you find out you can immediately adapt, let out trades reduce risk in certain situations and the list goes on.

5. Specialization

He is a jack of all trades, but master of none.” I think you don’t want to be that. If you’re a stock day trader, stay with that. If you’re an options trader in treasuries or a futures day trader (like me), stay with that.

I’m sure you wouldn’t know about specialties in the FDAX that only specialized people can see. Did you know about kassa-future difference arbitrage, knockout levels, option targeting, kassa settlement at 13:30, EUWAX sentiment, all the expiration dates, holidays, magnitude of price gaps and dividend reinvestment? Probably not all.

A specialized zone, call it “the zone” from mark douglas is not only in the psychology but also in the market, the time that you trade it and your understanding of specialties in market structure.

6. Market profile

Market profile is simple to analyze and especially helpful for day traders. By analyzing the volume mountain highs and valley lows like in the picture you can spot important intraday resistant/support or break levels.

Market profile is not directional but can help in finding good risk/reward opportunities. The logical reason for that is that on the point where many traders are invested (the mountain highs) the breakeven point for many investors disprove the validity of positions taken. On the other side the valley lows in market profile are a point where not many traders are positioned and probably are caught in a bad position. By the price returning to these low MP-Levels traders who are very wrongly positioned can get out of their pain.

You can try to be patient enough to wait for the most important of these levels and use them to stay out of the points that the most traders are stuck in (the current mountain highs and valleys).

7. Limit trading time

Day trading consumes time and energy. It is a bit like a high-performance sport. Imagine yourself playing a 90 minute game of football, with a 15 minute break in between. After that you would be depleted for a while.

However in day trading we take ourselves often to extreme fatigue levels that only result in burnout, like I was doing in the past too.

Really knowing when to start and when to stop trading and let other traders “fight out the rest” is what I think a good way to approach day trading. Why would you trade anyway if it only causes stress and keeps you the whole, beautiful day glued at your computer screen? Not a life that I wanted to live!

8. Follow your own principles

Beware in what you put in your most precious focus-efforts in life. Is day trading something that feeds your possessions? Day trading can and will always lure people into its fascinating world of quick money.

The question really is: what is your feeling of inner self worth really based on? Family, friends, god, money, popularity, academic recognition, being right, how you look?

All of these things are transient and can be taken away but there’s one thing that no one can take away from you: your inner principles, provided you’ve build some of them by yourself.

Following inner principles, your own ethic codex of what is the right thing to do, can give you more security and fortitude in life than any of these blindly followed possesions or clinging to transient things.

You will be able to compare yourself only to yourself. What others do doesn’t interest your trading business.

9. Mental preparation

If you beat your weaker self, you’ve already won the day. At least psychologically. Having more preparation time makes you more relaxed, focused and awake for the following trading sessions.

Meditation or any form of contemplation can help you forget the pressure that is on you and empty your mind to be able to see things in a new way, because every day is different.

Visualization techniques are also helpful. Not only do they create positivity for your day but also can you imagine every possible situation before it happens. This is certainly helpful, because when situations happen that you’ve already felt in your imagination before can’t overwhelm you anymore. For day traders these are the situations for getting stopped out, moving to the next trader, not getting the target for 1 point, having a loss streak, having a winning streak and following your rules consequently.

10. Cutting losses quick

Every day trader knows already that a good risk/reward and win percentage are the only technicalities that have to be improved to increase profit and edge.

Effectively cutting losses quick in reality is not that easy. When you are doubling down, moving your stop loss more far away or hesitate with your exit you’re not doing yourself any good. The problem is that sometimes we, as traders, know all of this but the emotional drama is becoming a possession. The demons win. The one that wants to be always right, the gambler, the madness part of one self. That is all okay. But if this keeps on happening, before continuing to work on a trading edge, these demons should be analyzed more.

Before committing a trade, already accept the trade as a possible loser. This can be helpful. Be fully aware that your winners will take care of your losers, you’re only there to baby-sit your losers and the winners will grow naturally out of your efforts.

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