Can I succeed as a day trader? Can I really make a living doing this?
Let’s be honest. All day traders have asked this question at some point in his/her career.
Perhaps it’s a daily doubt for some. Lying on the couch or the floor after a debilitating loss from an undisciplined trade. Trying to short the front side too early. Getting caught in halts, kill candles, offerings. Dejected. We’ve all been there.
The question gets louder the more losing days we suffer in the market, doesn’t it?
We doubt when we lose. We believe when we win. The process ends up being a rollercoaster ride of emotions and PnL swings. All that’s left in the wake of the mess is doubt. We wonder if it is worth it.
How does anyone succeed as a day trader? We think to ourselves.
Is this how it is has to be? Is it a “rite of passage” to traverse this rocky, murky land of market swamps and quicksand only to climb the peaks of profit? Does the journey of a successful trader have to parody the epic of Frodo in The Lord of the Rings?
Certainly, it appears that way, doesn’t it? The constant pursuit of riches in the market drives us forward like the “precious…” ring of power. We feel like we’re going through the tombs of Moria and hoping we get to the other side before the Balrog knows we’ve been there — dodging goblins like losses and shelf offerings and short squeezes and market makers.
It does get a bit hairy at times.
Drama aside, let’s take a deep dive into what it really takes to be a successful day trader. We’ll divulge a few secrets along the way on how to avoid that dreaded 90% failure rate.
Table of Contents
Why Most Traders Fail
To understand how to avoid failure, we must first become aware of what causes it. Ironically, it isn’t failure itself that sets the trap for most day traders. It’s actually success. Early success.
Chartered Market Technician Cory Mitchell describes the problem with early success as random reinforcement. What is random reinforcement?
Random reinforcement is the attribution of arbitrary events to qualify (or disqualify) some hypothesis or idea; giving the illusion of skill or lack of skill to an outcome that is unsystematic in nature.
What this means for the day trader, especially the beginning day trader, is that your success is random. It wasn’t caused by anything you did, per se. It is similar to the Dunning-Kruger effect:
Why is this important to understand?
Early success as a day trader leads to overconfidence. You may have heard of beginners luck? Well, it’s real. And it’s also really destructive.
When we attribute our successes in the market to our own skill or talents without a system, we are setting ourselves up for huge disappointments when that randomness shifts on us.
Instead of taking ownership, we inevitably blame the market for our losses when they come. We like to point the finger at anyone but the guy in the mirror. But if it’s the market’s fault when you lose, is it your skill when you win?
What Random Reinforcement Creates
Bad habits. That’s it in nutshell.
When our actions and emotions are reinforced by random outcomes to make us believe we have some inherent talent, it promotes the continuance of those actions, producing bad habits.
We become reliant on the outcomes of randomness in our trading. And the irony of it all, is that it sets us up for failure.
But why does that matter if we are winning, you might ask?
Because there is nothing systematic about this approach to trading. There is no evidence of a probable outcome with a clear rate of success. You still have no idea what the chance of a successful outcome will be.
And herein lies the secret to overcoming this: having a systematic approach to trading.
Being Systematic to Succeed as a Day Trader
Enter Distinguished Professor of Risk Engineering at NYU Nassim Taleb. Taleb is a mathematician, author, and philosopher who spends most of his time thinking about randomness and probabilities. In his New York Times Bestseller, Fooled by Randomness, Taleb makes the following observation:
At first glance, nothing appears wrong with this. What is so bad about checking stock prices, right? You want to know how your positions are doing, don’t you?
Sure, we’re all curious. Perhaps we don’t trust the market. But what is really impactful about this statement is how it reveals the nakedness of our emotions and their dependence on random activity in the market.
Think about it this way: if we have a systematic, high probability, tested approach to trading, why would we need to constantly monitor our positions? After all, we know where our risk is set. We should know where our targets are set. And we know the probability of success with our particular strategy.
While we’re certainly not advocating for any unnecessary or irresponsible detachment from the market or your positions, we’re strictly pointing out the distinction between random hope and systematic planning and execution.
After all, why would you need to worry about the intangibles? The randomness? Especially if your system works.
Are You a Gambler?
Be honest. Without a systematic approach to trading (even if you are a discretionary trader), you’re a gambler. There is no way around that distinction.
Without an education, without some sort of data driven process, you are gambling in the market every time you put on a trade. Not knowing the probability of outcomes for a trade is like throwing dice, or playing a roulette wheel.
Heck, even professional gamblers know their probabilities, and they tend to succeed as traders, too. That’s why they are called professionals. You can make a living counting cards, if you know what you’re doing.
But knowing what you’re doing is the key.
How to Succeed as a Day Trader
It may sound simple and cliché, but success in trading boils down to four ongoing traits in the character of a trader.
Here they are:
Enhanced self-efficacy beliefs
Building good habits
Relying on a proven system
What? You were expecting something like, “follow a trade alert service?
Or how about, “take stock tips from friends.”
No. Despite popular belief, “stonks” don’t always go up. And following someone blindly into a trade is a recipe for pain.
Pop culture aside, lets do a quick dive into each one of the above qualities with some practical ideas for growth as a day trader.
1. Enhancing Self-Efficacy Beliefs
Successful traders, like professional athletes, must practice daily. Not just the technicals or the fundamentals of their sport, but their mindset as well.
Think about it this way: if Tiger Woods didn’t believe he could win the Master’s, how great would his chances be of doing so? Fortunately for him, he was raised by a father who not only instilled confidence in him, but invested in his training from a very young age.
Bonde builds on the psychology behind self-efficacy, giving four tips to grow your self-efficacy. In order of importance, they are:
Without going into great detail, let’s suffice to focus on one of these: Mastery Experience.
Tiger Woods didn’t become the greatest golfer in the world over night. And for you to assume that you will become an overnight success in the markets is reckless at best.
Mastery experience comes from a deep, very deep understanding of the content knowledge AND the ability to perform the tasks involved to a high degree of accuracy.
You’ve probably heard of Malcolm Gladwell’s 10,000 hours of practice rule of thumb? Well, that heuristic has recently been discredited, but the principal remains.
If you don’t have a task-based system, or an approach to trading that you can define and trust through mastery experience, then you will lack this most important ingredient to your success.
2. Building Good Habits
Now you know you’ll have to become a “Master” of the markets to find success. But what does that really mean on the granular level?
It means your habits are in line with your systematic beliefs.
Let’s return to the sports analogy. If you wake up late on gameday, eat a bucket of fried chicken the night before, and have a few stiff drinks to go to bed, do you think you’re going to perform well?
Likewise, showing up late to practice, not paying attention to your health, and dismissing the menial fundamental tasks of whatever position you are playing is going to limit your ability to win.
Consider the 2020 Heisman Trophy winner, DeVonta Smith, as an example. In a fantastic interview with GQ, we learn the painfully consistent approach to training that “Smitty” takes. He isn’t big, but he has good habits, small things that built him into the record-breaking wide receiver that he is.
Now that’s a serious habit, isn’t it? Not to mention the thousands of catches he practices every week, or the drills, the film he watches, etc.
Imagine the results you’d get, over time, with a repeatable process of building good habits in the market. You may not win the Heisman, but you just might land somewhere near the success and consistency you desire.
3. Relying on a Proven System
First of all, where can you find a proven system? Or better yet, how do you find a proven system.
There are so many ways to skin a cat in the markets, that we won’t go there. Educational resources abound and are available to traders at the click of a button.
From the foundational teachings of Richard Wyckoff, to complex options strategies, to quant-based systems, there is no end to how you can make money in the markets.
What is most important, though, is that you find one. A trading system. And that you test it.
It is through this testing that you come closer and closer to better opportunities. As trading psychologist Brett Steenbarger recounts in an article for Forbes,
Therein lies the key to finding a system. Data, data, and more data.
Perhaps you want to be a discretionary day trader of equities. You spend time exploring different methods, studying different educators’ approaches, and you settle on a handful of setups that you want to test.
That can be the fun part. But what do you do when you have a few strategies that fit your personality style?
Backtesting Strategies and Data
For data-driven traders, there are sites like Spikeet available to backtest your strategies. Or, you can test them yourself over time by logging and journaling your results through Excel or an online service like Chartlog or TraderVue. Here at Tradingsim, we also offer an analytics tool to better understand your simulated trade results.
Here is an example of testing a strategy:
These were live trades of a strategy that had at least 20 samples of the setup to become a stable version. Each version had it’s own criteria.
But this takes time, right? So, how can we speed up that process? The fastest way is market simulation. More so, a simulator that tracks and analyzes your results.
The biggest hurdle that most traders face with achieving mastery is time. The market only opens once per day. And some traders may not be able to trade everyday. Maybe you have another job?
Yet, imagine if you could test your strategy in real-time without the confines of normal market hours — effectively sending your training into overdrive. Train when you are off work, on weekends, whenever!
No matter how you tackle this important piece of your trading journey, it needs to be done. And, it takes effort. But that effort will build the foundation of mastery experience you need before you start throwing money at the market.
Despite achieving mastery, self-belief, good habits, and a sound trading system, at the end of the day we are all human. There comes a time in the life of every trader when he/she is faced with impulses.
Perhaps it is to add to a losing position and average down. Maybe you’re trying to time the top of a stock that is going straight up. Or, you failed to enter the stock on a pullback and now it is going higher without you.
Do you chase it?
Whatever the case may be, there are times when the weakness of our mind gets the best of us.
Knowing this, it behooves us to practice mitigating these moments.
It is what will save you from debilitating losses, and fill your pockets with consistent profits over time.
According to Steenbarger, who mentors countless professional traders at proprietary trading firms and hedge funds around the world, the most frequent word he encounters in traders’ journals is “patience”.
Steenbarger interprets it this way: “that a good, disciplined trader is often not trading.”
All too often, the undisciplined trader’s mind becomes restless through boredom. Trading has become a drug. You begin to trade setups that no longer fit your criteria, thinking falsely that you need to be doing something.
Vice versa, you fear you may lose the unrealized gains you have instead of being patient for the trade to unfold. The big picture is lost by the emotions of loss aversion.
Self-control is the key to measured success and longevity in the markets.
Do You Have What It Takes?
This is the question we all must face. Can you succeed as a day trader? Most will fail, but some will succeed. And there is nothing wrong with choosing a different meaningful path in life.
The realist will imagine the amount of time, effort, and practice it will take to succeed as a trader. The romanticist will fantasize about getting rich quickly, only to lose the “hard-earned,” lucky profits he’s made.
We hope the latter isn’t you. And that is why we are here.