Last Updated on 11 September, 2023 by Samuelsson
Day trading is a trading form that attracts many people. The prospect of fast-paced trades that last for minutes or a few hours at most, attracts many venture seekers who look to make quick money. But is day trading profitable?
Day trading is profitable if you do it right, and that means that you don’t trade discretionarily. You need to base your trading on thoroughly researched strategies, to ensure that you have an edge. Unfortunately, being profitable as a day trader today is close to impossible if you don’t go with a systematic and preferably automated approach.
We understand that this goes against most of what you’ve read and the videos you’ve watched. Perhaps you’ve already got bogged down in trading rules that rely on different types of technical analysis, such as trend lines, trading indicators, and candlestick patterns. Methods that we more times than not debunk in our own testing.
The truth is that a majority of traders that you stumble upon online are fake, or at least teach fake methods. Finding an edge is really hard, even for us who used backtesting to see whether our strategies work or not. As such, we can tell you up-front, that finding a profitable strategy just by studying the market discretionarily is close to impossible.
In this article, we’ll look at why it’s so hard to make day trading profitable. We’ll also share what we believe is the best way of pursuing day trading.
Why Is It So Hard to be a Profitable Day Trader?
In the earlier paragraphs, we talked about that day trading is close to impossible if you are going to use a discretionary approach. Now, according to us, there are two main reasons for that:
- The markets are mostly random
- Daytrading requires discipline that’s beyond what most people manage
Let’s dig a little deeper into these two statements.
1. Markets Are Mostly Random
In trading, be it swing travding, algorithmic trading, or daytrading, we’re looking to use recurrent patterns that indicate that price is about to go in a certain direction. These patterns are what we refer to as edges.
What most traders don’t realize, is that markets are mostly random. Only a limited share of all market action that you see in a chart is preceded by a signal. That is, most market action cannot be used in trading, since it’s random. In fact, markets are becoming more random every year, as more market players enter the market and competition tightens.
In this puddle of randomness, there still are edges that we can use to build a profitable trading strategy. However, these are often well-hidden and hard to spot and rely on logic that most traders never will think of. The traditional approaches, like candlestick patterns and other technical analysis that is shared in the trading community seldom, shows merit. You need other, unconventional methods that go beyond the attention of the typical trader, in order to find an edge that will make you profitable.
Now, imagine all the market data you would have to sift through to find a day trading edge in a 10-year long 15-minute chart. The amount of data is massive. And as if that isn’t enough, you will have to separate all the randomness in that data from the real edges.
Managing to do that discretionarily indeed is a feat, that very, very few manage to do.
2. Day Trading Requires Discipline
Discretionary day trading is not only one of the hardest methods when it comes to finding a trading strategy. It’s also one of the hardest trading forms to execute. Among seasoned traders, it’s widely known that emotions need to be held in check, so that precipitate and unwise decisions can be avoided.
Keeping yourself calm even when suffering losses is hard regardless of the trading form you choose. However, what can be said is that the more time you spend executing the trading signals yourself, the bigger the chance that you will make stupid mistakes in the heat of the moment.
Considering that edges are becoming weaker with more efficient markets, it’s crucial to limit mistakes that cost you money. Make too many mistakes, and soon you’ve wiped out the profits that you struggled to amass for a long time.
Daytrading is constantly leaving less and less room for errors, as the edges are becoming weaker with more efficient markets.
A Better Alternative to Discretionary Day Trading
When people ask us about how they should go about to become successful day traders, we recommend that they go with something else. Of all successful traders we know, no one is day trading the markets discretionarily.
We know a couple who did in the past, but they have resorted to other methods since it has become too hard to find a profitable day trading strategy. As we’ve already mentioned, the markets are becoming more random, which makes it harder to see the real edge.
The profitable traders we know today all use some sort of algorithmic approach. Either their trading is fully automated, or they execute the signals manually but make us of a trading strategy that’s been developed through a systematic approach.
What Is a Systematic Approach?
Having a systematic approach means that you use technical analysis to define the buy and sell rules, and simulate the performance on historical data. Doing so, you get a better idea of how the trading strategy has worked in the past and can sift through a lot of strategies to only use those that work.
Having the ability to see what has worked and not is crucial in today’s efficient markets. We would go as far as saying that you can’t do without out it.
However, we would love if somebody proved us wrong!
Going One Step Further – Automating the Strategy Execution.
Here at The Robust Trader, all our day trading is not only systematic but also automated. That means that our trading process consists of:
- Creating the strategy
- Validating it
- Letting the computer trade the system for us.
As we just told you, one of the biggest hurdles traders face is to execute their trading strategy properly. You could lose money even with a winning day trading strategy if you don’t follow it properly.
Now, if the strategy already is defined with clear rules, as is the case if you’re using a systematic approach, then there is no need for you to sit by the computer to take those trades. With the right trading software, you could easily automate the process.
And if you don’t have to place every single trade, you unload a substantial part of the emotional pressure from yourself and will be less likely to make big mistakes.
Another benefit is that the execution of the trade goes much faster, and could spare you some money in slippage costs. Day trades usually generate quite little profit on every trade, which means that cutting expenses related to the execution of the trading strategy is crucial!
If you’re interested in learning more about algorithmic trading and its benefits, be sure to check out our complete guide to algorithmic trading!
Swing Trading – the Best Trading Form for Beginners!
We know that the content of this article could be much to take in if you’re new to systematic or algorithmic trading.
In fact, most of our students don’t start out with algorithmic trading, but with swing trading instead. Being an easier trading form to master than algorithmic trading, swing trading is the perfect way to test out trading to see if it’s for you!
Of course, we recommend that swing traders go with a systematic approach as well. Discretionary swing trading is very hard to master as well, albeit not as challenging as day trading.
If you want to learn more about swing trading, be sure to check out our complete guide to swing trading!
Discretionary day trading isn’t profitable for most traders and is something we recommend that you stay away from.
However, it’s still possible to make money from day trading, but in our experience, it requires a systematic approach to be a viable alternative.