We discussed the advantages of getting started in the day trading industry in our last post. If you have decided to take the plunge it’s time to start looking for your strategy (assuming you’re not creating your own). First and foremost, you want to identify what your comfort level. Do you want a strategy where you can complete a trade in a few minutes or a few days? The next thing you want to look for is a high probability system with good risk management. You want the odds in your favor especially since only 10% of professional day traders make money.
There are three different kinds of strategies:
- Black Box Systems
- Discretionary Strategies
- Grey Box or Rules Based Systems
Black box systems are completely automated trading systems that have a machine or a robot that makes all your trading decisions for you. This option is great if you want to buy a system and have it do the work for you. All you do is buy the system, plug it in, and then you live happy ever after. That is assuming that the market dynamics don’t change. Automated day trading systems are based on the history of the market so if there is a slight change in the environment the automated system fails. There isn’t a way to adjust an automated system for a personal trading style since the rules are already built into the system.
The only disadvantage of automated trading systems, they all eventually fail
Discretionary strategies rely solely on the judgment and expertise of the trader. Generally used by experts that have developed their skill over years of practice. These traders use a specific set of indicators and skill set to know where the market is heading and where it can pivot from. This strategy allows for a great amount of variation to personal trading styles since it does rely on trader judgment. A trader can decide to adjust his strategy at the blink of an eye since he is using his own discretion.
Grey box or rules based strategies are a great combination of both a black box system and a discretionary strategy. They provide a specific set of rules to follow and also allow for a specific amount of discretion. Like discretionary systems, there are rules in place to make sure you stay on the right side of the market. These rules can also be helpful in identifying market changes and how to adjust to those changes.
If you want to learn more about how I personally trade check out TheDayTradingAcademy.com where I will be sharing more of my own personal results and tips on day trading as well.