Last Updated on 11 September, 2023 by Samuelsson
You may have heard many stories about day trading and probably wondering if it is possible to day-trade successfully.
While day trading is hard to master, some people certainly day-trade successfully and make a living from day trading. However, do not be carried survivorship bias; most day traders end up losing everything.
In this post, we’ll explain day trading and look at why most day traders fail. We’ll discuss how to succeed in day trading.
What is day trading?
Day trading is a style of trading where the trader opens and closes his positions within the same trading day. Generally, day traders don’t keep their positions open overnight, so the risk of overnight or weekend gaps is not there.
However, day traders can still trade the pre-market and after-hours markets when day-trading stocks. For Forex and futures markets that are often open 24 hours a day, a day trader can trade all through the day but doesn’t allow the trade to cross into the open of the next trading day.
Why day traders fail
The truth is that only a few day traders make profits. Most day traders become prey for predatory smart money. While no one knows the exact numbers, it is estimated that no less than 90% of day traders lose money, whereas only 1% are likely to make money. But why do most day traders fail?
There are many reasons, but these are the most common ones:
- Lack of knowledge: Many new traders jump into day trading without taking time to learn the art of trading. They are often impatient and in a hurry to make money. In fact, most of them trade, not out of passion, but to make quick money.
- No trading edge: Most day traders don’t have quantified strategies with a proven edge in the market. There is literarily no way to succeed in the market without an edge.
- No trading plan: Even with a trading edge, without a trading plan, failure is inevitable. Your trading plan tells you what to do in any market situation so that you don’t start making emotional decisions in the heat of the moment.
- Use of too much leverage: Many day traders are often in a hurry to make money, so they end up using too much leverage and blowing their trading accounts.
- Paying lip service to risk management: Most day traders don’t use stop loss to control their risks. They end up with catastrophic losses.
How to succeed in day trading
Find an edge: To ever think of being successful in day trading, you need to have a trading edge. So do your research and find a good edge in the market you want to trade. Develop that edge into a trading strategy and then backtest it and perform a walk-forward analysis to be sure that it is robust enough to work in the real market.
Create a plan: You must develop a plan around that your strategy, specifying the entry and exit criteria, as well as your risk and money management parameters. You should also state how often you review your trades.
Don’t risk more than 1% per trade: You can have streaks of losses, which can lead to massive drawdowns. The only way to reduce the size of your drawdown when you’re in a losing streak is to risk a small portion of your capital in each trade. Keep it at 1% per trade.
Always use a stop loss: Be sure to always use a stop loss when you have an open position. Anything can happen in the market at any time, so protect your position on the downside.