Introduction
Everyone has heard of it, everyone has been warned about it, and everyone feels reluctantly curious as to the daily life of a successful Day Trader. The thought of making quick, fast, and ‘easy’ money from home by reading the markets is strongly appealing. So appealing, in fact, many people use this as the basis in arguing that can’t be profitable. The expression “if it’s too good to be true, it probably is” is a cliché that guides our life choices. We’d rather risk missing out on a large opportunity then look like suckers. Luckily in day trading, there’s a time-proven method of avoiding becoming just another ‘sucker’. Developing a fundamental understand of the market, creating a system that matches this system, trading within its rules, and using sound money management to ensure this works into the distant future. A combination of aptitude, hard work, discipline, and strict capital management are the key ingredients to a successful Day Trader.
I’ve heard it’s impossible to be profitable Day Trading. Who is right?
This is a common argument against Day Trading – it’s impossible to make a profit because the market is efficient, and even if it wasn’t, you’re competing against people who are much smarter then you. Some, however, should be heeding the advice, as the skill set and mental attitude they possess is not high enough to be able to trade profitably. Just because something is extremely difficult, and takes a huge degree of understanding, doesn’t mean Day Trading is some sort of scam. Although it may be advertised like a scam, it’s really no different to poker. Poker promises great riches to the talented player prepared to take risks. If you think about how a layman views and rationalises poker, and ask them for how they ‘beat’ the game, you’ll hear baseless theory, often built on results orientated finds from anecdotal experience. Day Trading is no different; the theory and skill gap between the top traders and the rest is startling (but not unexpected).
The myth that Day Trading can’t be profitable is one which usually leads back to the gospel perpetuated by academics. Academics have a vested interest in keeping Day Trading as a ‘gambling’ venture, theoretically unprofitable; most economic and financial models are based on theories which were written under the assumption that the market is ‘perfectly efficient’. They have half a point, but it’s not the full story. A better way to think of the markets is them being ‘effective’ rather then ‘efficient’. The price rarely ever sits at its mean, its rational value, all factors considering. Instead, it’s like a rubber band, which bounces around the mean like a pinball. Much like a rubber band, the further price moves away from its true mean (or value), tension grows, and using certain systems we can devise the strength of that tension, and what the short or long term expectancy is for that price.
This is of course, my opinion. You’re entitled to your own. What I do ask, is instead of pointing fingers using second hand evidence, take a step back and look at the whole picture. Read both sides; think about the rationality each exhibit. If you’re convinced of a side of thinking, stick to it. Buy and hold is a viable strategy, not the strategy I would choose, but some great thinkers have turned it into great money, so I respect that. At the same time, there are undoubtedly traders that have turned great fortunes using a different strategy, but still with the idea of exploiting pricing differences. Day Traders, Market Makers, Swing Traders, Arbitragers, Value Buyers, there’s a rich guy behind every level.
Is our job as a Day Trader to predict the market?
NO! Prediction is for CNBC analysts and ivory tower banking macro economic think tanks. Seldom is either on target and even if they were, the advice they give is to obscure and based on too many variables to be profited off in a realistic sense. The goal of an astute Day Trader is to develop theories about his chosen market(s) through observation and testing, and using risk managements strategies, in order to show a long term profit. This is not prediction. We’re exploiting statistics in order to create a competitive advantage in the market place.
How does one profit from Day Trading?
By constructing two facets; build a dynamic system, and tailoring a risk strategy to that system. A risk strategy is using your capital, or ‘bankroll’, and optimally allocating it for each trade you make. Obviously, risking too much on a single trade can be disastrous, and increases our risk of ruin. Allocate too little, and we may see sub optimal profits. A balance must be struck. TraderMike has a fantastic article on the types of position allocation and the conventional thinking among traders:
Everyone has heard of it, everyone has been warned about it, and everyone feels reluctantly curious as to the daily life of a successful Day Trader. The thought of making quick, fast, and ‘easy’ money from home by reading the markets is strongly appealing. So appealing, in fact, many people use this as the basis in arguing that can’t be profitable. The expression “if it’s too good to be true, it probably is” is a cliché that guides our life choices. We’d rather risk missing out on a large opportunity then look like suckers. Luckily in day trading, there’s a time-proven method of avoiding becoming just another ‘sucker’. Developing a fundamental understand of the market, creating a system that matches this system, trading within its rules, and using sound money management to ensure this works into the distant future. A combination of aptitude, hard work, discipline, and strict capital management are the key ingredients to a successful Day Trader.
I’ve heard it’s impossible to be profitable Day Trading. Who is right?
This is a common argument against Day Trading – it’s impossible to make a profit because the market is efficient, and even if it wasn’t, you’re competing against people who are much smarter then you. Some, however, should be heeding the advice, as the skill set and mental attitude they possess is not high enough to be able to trade profitably. Just because something is extremely difficult, and takes a huge degree of understanding, doesn’t mean Day Trading is some sort of scam. Although it may be advertised like a scam, it’s really no different to poker. Poker promises great riches to the talented player prepared to take risks. If you think about how a layman views and rationalises poker, and ask them for how they ‘beat’ the game, you’ll hear baseless theory, often built on results orientated finds from anecdotal experience. Day Trading is no different; the theory and skill gap between the top traders and the rest is startling (but not unexpected).
The myth that Day Trading can’t be profitable is one which usually leads back to the gospel perpetuated by academics. Academics have a vested interest in keeping Day Trading as a ‘gambling’ venture, theoretically unprofitable; most economic and financial models are based on theories which were written under the assumption that the market is ‘perfectly efficient’. They have half a point, but it’s not the full story. A better way to think of the markets is them being ‘effective’ rather then ‘efficient’. The price rarely ever sits at its mean, its rational value, all factors considering. Instead, it’s like a rubber band, which bounces around the mean like a pinball. Much like a rubber band, the further price moves away from its true mean (or value), tension grows, and using certain systems we can devise the strength of that tension, and what the short or long term expectancy is for that price.
This is of course, my opinion. You’re entitled to your own. What I do ask, is instead of pointing fingers using second hand evidence, take a step back and look at the whole picture. Read both sides; think about the rationality each exhibit. If you’re convinced of a side of thinking, stick to it. Buy and hold is a viable strategy, not the strategy I would choose, but some great thinkers have turned it into great money, so I respect that. At the same time, there are undoubtedly traders that have turned great fortunes using a different strategy, but still with the idea of exploiting pricing differences. Day Traders, Market Makers, Swing Traders, Arbitragers, Value Buyers, there’s a rich guy behind every level.
Is our job as a Day Trader to predict the market?
NO! Prediction is for CNBC analysts and ivory tower banking macro economic think tanks. Seldom is either on target and even if they were, the advice they give is to obscure and based on too many variables to be profited off in a realistic sense. The goal of an astute Day Trader is to develop theories about his chosen market(s) through observation and testing, and using risk managements strategies, in order to show a long term profit. This is not prediction. We’re exploiting statistics in order to create a competitive advantage in the market place.
How does one profit from Day Trading?
By constructing two facets; build a dynamic system, and tailoring a risk strategy to that system. A risk strategy is using your capital, or ‘bankroll’, and optimally allocating it for each trade you make. Obviously, risking too much on a single trade can be disastrous, and increases our risk of ruin. Allocate too little, and we may see sub optimal profits. A balance must be struck. TraderMike has a fantastic article on the types of position allocation and the conventional thinking among traders:
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