Last Updated on 14 October, 2021 by Samuelsson
The idea of sitting on the beach with a laptop and making a lot of money from the market can appeal to anyone. In fact, many people tend to think that day trading is an easy gateway to great riches. But can day trading really make you rich?
Yes, you can become rich from day trading if you are lucky and everything goes just right, but it is extremely difficult. Most people fail in day trading because the odds are already against them as retail traders. The competition in the market is so stiff that finding a strategy with an edge to trade manually is almost impossible. The only little chance you may have is in a systematic trading approach.
Obviously, this is quite different from what you were expecting to read. It goes against the perception you get from those deceptive brokerage adverts — a flashy young fellow with a sports car and seemingly endless riches. Well, that is far from reality. Our hope in this post is to tell you exactly what day trading entails. So, in this post, we will discuss the following:
- What day trading is
- The unrealistic expectations
- What day trader experience
- Why day trading is difficult
- How you can make day trading a lot better
- The best way to start trading as a beginner
What is day trading?
Day trading refers to a style of trading where the trader buys and sells a security within a single trading day. This style of trading can be used in any market, but it is most commonly practiced in the foreign exchange (forex) and stock markets.
In the stock market, the trades are usually placed after the market opens and closed before the closing bell, so day traders have only a few hours to get money out of the market. So, to make money from day trading, the trader must have a good strategy with a proven edge in the market and must also be very efficient in executing the strategy. In other words, the trader must have a robust trading plan and always follow the plan. It is normal to use leverage and short-term trading strategies to capitalize on small price movements that occur in highly liquid stocks.
There are different strategies day traders use in their trading, but all of them are designed to capture intra-day moves in the market. So, trading based on the news is a popular technique, as scheduled announcements such as economic statistics, corporate earnings, or interest rates tend to cause intra-day market movement when the actual data beat or do not meet expectations. However, many day traders base their strategy on technical analysis, which they either execute manually or with an automated system.
Manual (discretionary) trading is very difficult these days because the competition in the market is very stiff that manually identifying a strategy with an edge and efficiently implementing it is almost impossible. Automated trading, or what they call algorithmic trading, makes things a little better because the strategies can easily be backtested on the historical price action to be sure that it is profitable before using them in live trading.
Whether manual or automated, day trading is not for everyone, as it involves significant risks. Timing those short-term price movements requires an in-depth understanding of how the market works and a high level of mental strength to withstand the pressures associated with trading frequently. Moreover, luck plays a major part — a stroke of bad luck can hurt even the most skillful trader.
The expectations of prospective day traders
Most aspiring day traders tend to think that day trading is a get-rich-quick scheme. They believe that day trading is a fast way to make tons of money in the shortest possible time — after all, it offers more trade setups and hence, more opportunities for making money. To them, day trading is about sitting in front of a big trading screen and placing orders and getting excited by one winning trades after another — there’s never a dull moment.
Some may even have the idea of a digital nomad in an exotic beach trading with a laptop while having fun. This is the kind of lifestyle that many brokers and so-called trading gurus sell to them with their deceitful Instagram and YouTube adverts that portray day trading as the key to an effortless life full of riches, and they naively bought the idea.
To put it simply, most aspiring day traders think that they are coming to make easy money, with all their trades turning out winners and making them lots of money. Another expectation is constant excitement from trading activities and market movements that they wrongly assume to always move in their favor. To them, there will be no losing trades. Above all, they think about all the free time they will get since they are effectively their own bosses and can choose when to trade or not. Moreover, they already believe that they can make all the money within a few hours of trading and use the rest of the time to enjoy their limitless wealth.
What they don’t realize is how far away they are from reality. While there are a few traders who make a successful living from day trading, so a lot of factors are involved.
The reality in day trading
Well, “Experience is the best teacher”, they say. It is only when you have traded for some time that you will realize that all those expectations are different from the real thing. The truth is that most day traders fail to make money — a great majority lose their trading capital in less than a year. Most of those adverts that paint pictures of effortless success in trading are made for internet day trading scams that promise unrealistic returns in a short period. But many people fall for them and jump into day trading without sufficient knowledge.
Succeeding in day trading requires a lot of effort — from learning how the market works and how to analyze the markets to mastering the skills necessary for the proper execution of the trading strategies. So, day trading is not an easy way to make money. In fact, it is the toughest way to make easy money.
To be able to make money from day trading, you will have to be diligent, persistent, and hardworking. You can’t just trade occasionally only when you want to and expect to be profitable. Trading is a game of probability with random outcomes. It could be that most of the profitable trades for your strategy are the ones you missed when you are away from your trading screen. Thus, the idea of trading when you want, and having lots of free time, is deceptive.
Moreover, there is much more to trading than placing buy and sell orders in the market. Experienced day traders would agree that most of their trading time is spent watching and analyzing the market to find the right trade setups. You must have a functioning trading strategy and be ready to drop it and use another if the market condition does not favor that strategy. Also, you need to keep track of your trades and emotions in a trading journal to know what areas of your trading you need to work on to improve your trading skills.
While all these may seem like a lot of work, remember that day trading is not for everyone. If you are not ready to put in the hard work, it may be better to look for some other job. If you intend to day-trade, what you must keep at the back of your mind is that day trading is time-consuming and extremely hard — it is the toughest way to make easy money.
Why is day trading difficult?
There are many reasons why day trading is very tough, especially when you follow the discretionary approach where you manually execute your trades. These are some of them:
- Lower timeframe: In day trading, you make your trades on the lower timeframes, and it is a well-known fact that trade setups that form on the lower timeframes don’t work as well as those that form on the higher timeframes. Creating a profitable trading strategy with an edge on the intra-day timeframes is quite difficult.
- Random price movement and too much noise: On the lower timeframes, the price movement is almost completely random. A market may have a trend in a particular direction, but the price movement on the lower timeframes may just be random. The excess market noise makes it difficult to know the right direction to trade.
- Time-consuming and constant monitoring: Apart from the issues about trends and finding good trade setups, day trading is time consuming. You need to be monitoring the market all the time because price bars are being printed in hourly or 15-minute intervals (depending on the timeframe you are using) and the data can affect your position in the market.
- Prone to mistakes due to stress: As a result of the need to constantly monitor the market and make quick trading decisions, you may often feel stressed out. And, when you are under stress, you are prone to making trading mistakes, such as placing larger position sizes, jumping the guns, and chasing missed trades.
- Mental skills to execute properly: Owing to the high pace nature of day trading and the stress involved, you need to have superior mental skills to be able to effectively implement your trading plan. While trading emotions, such as greed, fear, hope, despair, and anger, can affect any style of trading, those emotions are most dangerous in day trading where you have to make trading decisions within a short time.
The alternative approach to day trading
Now, you may ask, “if day trading is this difficult, can one really become successful in it; can day trading make one rich?
Well, as we stated earlier it is near impossible to make money from discretionary day trading as it has become too difficult to find a profitable day trading strategy. The markets are becoming more random, which makes it harder to find any real edge that can be exploited manually.
However, you can still become a successful day trader if you follow a systematic approach where you can simulate the performance of your strategy on historical price action before bringing trading the strategy on a live market. A systematic approach can be completely automated with trading algorithms that are based on the strategy, or it could be a manually implemented system with specific rules that have been simulated on a strategy tester.
Backtesting a strategy to confirm that it truly has an edge in the market helps you to have an idea of how the strategy has performed in the past so that you know what to expect when you start implementing it in real trading. In the case of a manually implemented systematic approach, while the trade execution may be manual, the backtesting is automated, so you can easily backtest many strategies in a short time. But with a fully automated approach, both the backtesting and the actual trading are automated.
So, with a systematic trading method, day trading can make you rich if you do everything the right way and have a bit of luck. The ability to simulate a strategy on the historical price action to see what works or doesn’t before going live is crucial in today’s efficient markets. You can’t do without out it.
Start with swing trading as a beginner
Even though you may prefer day trading, it may be better to start with day trading if you are new to trading. There are many reasons why this is important. One of them is that swing trading gives you enough free time to do other things, including keeping a 9-5 job. That is not possible with day trading as it can easily become your full-time job.
So, testing the waters with swing trading allows you to determine whether your interest really lies in trading while you still keep your full-time job and earning an income. Another reason to start with swing trading is that it is easier and less stressful, so it is the right place for a beginner.