The Truth About Day Trading
In this video, I dive into the world of day trading, covering what you need to know if trading stocks has ever been interesting to you.
The Truth About Day Trading
You’ve probably heard the statistic that 95% of day traders lose money and you’ve probably seen a bunch of people online show off their day trading wins. Either we’re just seeing the 5% of successful traders, or someone is lying to us. So in this video, we’re diving into the world of day trading.
The allure of sitting at home in front of your computer for a few hours a day and making over $100,000 a year is pretty undeniable and appeals to a lot of people. That’s why there’s hundreds of courses and seminars and online communities selling you the lifestyle and the information you need to make it happen. Or at least that’s what they tell you.
As someone who has day traded quite a bit in the last 12 months, I’ve definitely gained some insights into trading the stock market and the ups and downs that go along with it.
I’ve had days where I’ve made over $10,000 and days where I lost $10,000. I’ve signed up for discord groups, watched tutorials, read blog posts… even paid for a course. The simple fact of the matter is day trading is very challenging to be successful at over a long period of time. So let’s dive in to some of the intricacies and what you need to know if you want to try your hand at it.
The Stats
I often hear the stats about day trading failures, but I don’t ever see a correlating study to go along with it. I did some digging to see what I could find:
A study on individuals that day traded between 2013 and 2015 in the Brazilian equity figures market found that 97% of those that traded for over 300 days lost money and only 1.1% earned more than the minimum wage.
Here’s another study of day traders in Taiwan from 1992 to 2006. They found less than 1% of the day trader population is able to predictably and reliably earn abnormally positive returns.
So that doesn’t paint a rosy picture for those who want to day trade. But I also don’t really believe stats mean too much to the individual. It’s good to know that a particular field is going to be challenging and the likelihood of success is minimal, but if it’s something you really want and will work extraordinarily hard to become the top percentage of traders, then I wouldn’t let that deter me.
Kind of like how 80% of restaurants fail within the first 5 years… but I know there are plenty of horribly run restaurants out there serving subpar food, just like I know there are plenty of traders out there who don’t have a clue as to what they’re doing. If I think I can lease a great location, develop amazing recipes, and hire great staff, well, I’m probably not going to care too much about the stats, but work even harder to ensure its success knowing I’m entering a tough industry.
Getting Educated
One point that I hear a lot of traders make is to think of trading like any other high-paying career. If you want to become a lawyer, you’ll probably be in school for 7 years. To be a doctor, you’ll be in school for 8 years and then years of residency after that. Trading – well, obviously you don’t need a degree to create a brokerage account and deposit money and have at it, but you can’t expect to be successful without years of learning, studying, and practice.
Now with trading, this presents many challenges. First, since there are so many gurus out there trying to sell you courses, it may seem like you can’t learn what you need to learn without paying for it. And while courses may package most of the information you need together all in one place, you can likely find everything for free online that you need to know to build a profitable trading framework. But the bottom line here is it can be hard to delineate between who is providing good, valuable information, and who is just trying to hook you in and sell you something.
I’m certainly not against all courses, but for trading especially, the prices do tend to be high and out of reach for most people. If you’re ever considering purchasing a course, do some research beforehand. Simply searching the course name on something like reddit can yield some feedback from people who have tried it out.
Also, with day trading specifically, you need to be able to trade when there is volume, which here in the US is usually the first 90 minutes the stock market is open. If you have a day job with normal hours, this alone makes trading difficult. You can study as much as you want, but if you can’t put that knowledge into regular practice, you won’t ever be able to develop as a profitable trader.
And then you have the money factor. When starting off, you’re going to have plenty of losing trades and you need to have the bankroll in place that allows you to keep getting better. You can always paper trade, but when the money isn’t real, the emotions aren’t there. Once real money is on the line, your emotions will shift and your discipline may take a hit.
Money Problems
Beyond courses and education, the one thing to keep in mind is that for a lot of day trading strategies, here in the US, you’ll need an account with at least $25,000. This is because the SEC has a Pattern Day Trader rule which prevents an individual from making more than 3 round-trip trades in a 5 day span if they have a margin account with less than $25,000. The workaround to this is using a cash account instead of a margin account. Most brokerages will let you choose which one you want. With a cash account, you can use only settled funds to trade, and depending on what you’re trading and what broker you're using, this will probably take 1 or 2 days for your funds to settle after a trade.
So if you have $1,000 and you use $500 to buy shares of Apple and sell it the same day for $550, you only have $500 left in your account that you can use to trade for the rest of the day.
Otherwise, with a margin account you can still do up to 3 day trades in a 5 day period, but to be honest, it’s pretty limiting and can be frustrating when you’re starting out.
About a year ago, I signed up for one of those courses with the obnoxious ads that get played in front of YouTube videos like this. My goal was to make a video about my experience, but once I got in, I realized it was really tailored toward people with at least $25,000 in their account, which I didn’t have at the time, so it felt like a bit of a waste.
So just keep that in mind.
Psychology of Trading
If you’ve been trying to learn trading and have watched videos of other traders, you’ve probably heard the idea of taking emotion out of trading. That to me has been one of the hardest parts about trading in general. When you enter a trade and it goes the wrong way, and you start seeing red, it definitely messes with your head and affects your decision making.
And conversely, when your trade goes well and you start seeing green, it can be easy to exit too early for fear of the green turning red.
Traders tend to hold on to losers too long, hoping they turn green, and they tend to sell winners too soon. If you take emotion out of your trading and instead rely on a set strategy for your take profit and stop loss levels, you will bring consistency to your trading and – if it’s a good strategy – you can be consistently profitable.
Another emotional factor that can interfere with profitable trading is this: Investors are more likely to repurchase a stock that they previously sold for a profit than one previously sold for a loss. And that makes sense in a very human way – you have a good experience with something so you’ll be more likely to do it again and vice versa. I’ve pretty much sworn off trading Amazon because I’ve rarely profited when I trade it. But if the setup is right and the conviction is there, a past loss shouldn’t affect how you approach a trade.
And if you’ve been burned by a specific ticker, you may be tempted to revenge trade it – try a trade again to recoup your losses. When you’re tilting from a loss, you’re probably better off getting up from the computer and taking a walk than entering a forced trade.
Money Management
Money management is a huge factor that leads to a lot of traders’ downfall. It can be tempted to see an insane YOLO on wallstreetbets and want to do something similar for yourself, but one mistake and your account is blown up and your trading dreams are left in shambles.
To avoid this, it’s important to know what your risk limit is per trade. Meaning: what percentage of your account are you willing to risk per trade. Let’s say you have $25,000 in your account. If your risk limit is 1%, you need to cut a trade once you hit a $250 loss. If your risk limit is 2%, you can take a $500 loss.
With smaller accounts, you will likely have a higher risk limit, but ideally keeping it under 2% will help you preserve your capital. You need to be able to take some losses without your account blowing up and having strict rules in place should help keep you in the game.
And if you do have success with trading, I would recommend regularly withdrawing money from your brokerage to really lock in that profit. Using money from trading to pay your bills or improve your living situation is an incredible feeling.
Consistency
So we’ve covered learning, the financial barriers, emotions, and money management. All of these can affect your overall consistency, not to mention market factors, stress, and your personal life all having an impact on how you trade.
Just because I’ve had some good trades over the past year and a half doesn’t mean I’m a great trader and doesn’t mean I’ve developed a long-term, consistently profitable strategy.
Just to really illustrate this, let’s take a look at my trading from March. The first three days in and I was in the hole $17,450. I had a better day on Thursday, but another red day on Friday. The next week was better, earning $23,294 and bringing me back into the green by about $5,000.
But the rest of the month we have a lot of red, losing days, and just a handful of green ones.
I ended up losing over $11,000 in March. And that’s part of the journey and the learning process. Next, it’s going into each day, seeing the trades I made, why I made them, and what went wrong. Did I overlook something? Were my trade sizes too big? Which rules of mine did I break?
Analyzing your losing trades sucks, but it helps you get better. And the question you have to ask yourself is: can you handle the emotional swings of an amazing trading day where you feel like a genius to a terrible red day where you feel like you’re a complete moron. Can you handle a month or two or three where you’re unprofitable? That’s a tough spot to be in when you rely on it for your full-time income.
This is also why whenever anyone asks if I can mentor them or if I can start a Discord trading community, I always say no. You don’t want someone still in med school performing open heart surgery on your grandma, and you don’t want me telling you how to trade or selling you a course.
Get Started
Okay, we got that all out of the way and you’re still here? If you really do want to be a day trader, here is what I would recommend.
First, read, watch videos, study the markets, stare at charts and absorb as much information as you can handle. Figure out what appeals to you the most. Is it stock options? Penny stocks? Large cap tech stocks? Try to narrow your focus on what you are most interested in.
Next, open a paper trading demo account with a broker. It’s not the same, but it’s a risk-free way to get started making trades. Look for strategies online and backtest them. Where would you have entered a buy order on a specific ticker and where would you have exited the trade? Was it profitable? Go back in time over weeks, looking at price action and seeing where the setups are and how you would’ve traded.
Then, try out the trades for yourself in real-time on your paper trading account.
Once you feel confident in what you are doing, open a real account with an amount of money that wouldn’t financially ruin you if you lost it all. When a trade doesn’t work out, cut it. Remember to keep your risk factor percentage in check.
Analyze your trades, both winners and losers. Are most of your winners in the first hour of trading and after that your win percentage drops? Start to refine your trading by taking a granular look at your trades and habits.
Finally, never stop learning. Find a community of profitable traders to surround yourself with. There are a lot of Discord groups out there and many of them are free, but it’s always good to get insights from other traders as they’ll often see things you overlooked, and it’s always helpful to bounce ideas off of others.
Final Thoughts
No matter what anyone tells you, trading is hard. It doesn’t have to be complex, but it is difficult. If it wasn’t… if it was just learning one system or installing one indicator, that person would just keep that information to themselves and print money like Jpow.
So for me, the day trading journey continues. I have started to invest more in my long-term portfolio which I covered last week, and I’m also re-booting my futures trading experiment that I tried out last year. As I continue to improve as a trader, I will share more insights here with you, for free.
If you would do me a favor and hit the thumbs up button on this video, that’ll really help get my channel out to more people. Consider subscribing if you haven’t already and I will see you in the next one.