Sunday, March 28, 2010

Keys to Daytrading Success and Why So Few Traders Get There

Thanks to several alert readers for sending me this insightful New York Times article on daytrading and the challenge of daytraders.

A while back, I posted on the topic of research concerning individual daytraders and how many of them are truly successful. That is worth reading or re-reading: it clearly indicates that most active trading is hazardous to traders' wealth, but that a small group of participants are able to sustain success.

This is not like most career fields, where an average teacher, middle manager, or sales person can sustain a living. An average performance in trading is one in which the trader does not make money at all. The Times article cites research suggesting support for the often-cited statistic that 80% of daytraders lose money.

I'm in an interesting position, because--as a trading coach--I see the actual trading of actual traders, not the performance claims of wannabee gurus. I also see which traders have been able to sustain meaningful livings from their trading and which have not.

Here is a post outlining what I see among the consistently successful traders. The links at the bottom of the post will also help you focus on what helps traders sustain solid performance.

Ultimately, the most important contributors to trading success are twofold:

1) The development of concrete trading skills: pattern recognition, ability to execute sound trade ideas to create a positive expectancy, sound risk management;

2) The cultivation of the mental toughness, continuous learning, and discipline that enable you to adapt to new, challenging market conditions.

Sitting at a computer each day, not having a concrete strategy for the day, and relying on a vague sense of intuition to get you through is not going to cut it.

Success is something the great traders do, not just something they have. They work on building skills, they work on building themselves, and they have routines in place for accomplishing both.

Do you?


CBS said...

To quote Jim Carey (Dumb and Dumber)
"So your sayin there's a chance"..:)

Y.W said...

Hi Dr,

Do you have experience with swing traders trying to make a living from that?
Maybe the whole concept of DAY trading is prone to failure?

david said...

From the article: "Brokerage firms track the activity and demographics of their customers, but they have been reluctant to share that data."

From that we could infer that the data is probably not pretty. I can't think of any better sales pitch for the brokerage industry than to advertise how much money their customers are making. The fact that they won't disclose the results of their customers seems to suggest that most are not doing well.

Michele said...

Teo things stand out right away in this study. Consider first their point 2, below. They assume that a $1000 roundtrip will cost 3% in commissions. That's $30 to buy and sell a round lot of a $10 stock.

I don't think anyone is paying $15 a side today. Interactive Brokers charges $1 for that. The more you trade, the bigger this differential becomes. If you can lower your trading costs by an order of magnitude, that starts to add up.

And just to drive home the point, note the second excerpt below - it's the *cost of trading*, not what you trade, that drove the results they saw:

"2. Trading costs are high. The average round-trip trade in excess of $1,000
costs three percent in commissions and one percent in bid-ask spread.
It is the cost of trading and the frequency of trading, not portfolio selections,
that explain the poor investment performance of households during our sample

The moral seems to be, 1. find the lowest cost broker you can, and 2. make sure your profits exceed your costs.

Disclaimer: I'm a swing trader, not a day trader. I tried day trading... and lost money doing it.

beeba said...

wow, that's disturbing: "hunches", "intuition", and blaming your poor results on "robots" and "algorithm boogies". that is no systematic way of approaching markets.

now, don't get me wrong. i'm not knocking intuition borne from hard-won experience, but i would never use a trading plan whose primary element was intuition.

i'm surprised these guys have made it as long as they have, but that's the bell curve for you. there's always that +2 sigma out there somewhere.

is anyone else wondering how much money they're making providing their "live feed" services versus their actual trading results?


WSJ said...

The fact is plain and simple, day traders are making the brokers rich and nothing else. As the saying goes "You cant go broke taking profits but you wont become rich by taking 4 point profit". I have done all sorts of trading and found swing trading to be the best as its the perfect balance of both. For those who haven't read I highly recommend "Reminiscence of a stock operator", this book was an eye opener for me :-)

cmescalper said...

Hi Dr B
intuition is vauge?
arent us scalpers rely on intuition which is build upon years of screen time? i mean intuition -experience and ability to execute at the right time and wait for it.
i know that intuition doesnt cut it if you try to get somone to succeed in any endevour but wouldnt you preffer an intuitive trader than a non intuitive?

Please clarify.