There are still a number of expert traders out there who claim that it is impossible to make money day trading. As a person who relies on day trading for my income, this claim always surprises and saddens me. Make no mistake, day trading is no soft option. It is tough, competitive and unforgiving of mistakes. But, if day trading is your dream, it can be made to work for you.
Most successful traders find a niche which suits their temperament and which they become good at. In the process of doing this they may try different vehicles and strategies which are unsuccessful. However, because they fail in a particular area, it does not mean that it is impossible to make money in that area. All it means is that the trader was not good enough when (s)he tried it.
For example, there is not much that you could teach me about various option strategies. Theoretically, I know how to make a lot of money with options, but in practice it never worked out for me. Buying out-of-the-money options does not have enough winners for my temperament. Selling way-out-of-the-money options has plenty of winners, but really high stress levels on those few occasions when the options flirt with the strike price as the expiry date approaches. Multiple option strategies look good, but trading costs always seemed to kill my trades.
That said, I do know traders who do well with options, so obviously money can be made if you have the right strategy and temperament.
Fortunately for me, I found my niche day trading grain futures contracts, and I love it. What I like about it is that it is short and sharp, and the risk is tightly controlled. By short and sharp I mean that I only have to trade for about thirty minutes each day, but I have to really concentrate during that period to make sure that I execute my strategy with no mistakes. As for risk, I am usually in the market for a matter of minutes, a few hours at the most, and never have positions open overnight or at weekends.
This suits me perfectly. I enjoy the quick feedback from my trades, and I sleep easily at night knowing I am not in the market exposed to freak events that can be very painful when you are in a leveraged position.
Authors criticizing day trading are usually trading Forex. The day traders enemy is trading costs, and despite the commission free trading generally offered by forex brokers, trading costs are high because of the spread. If I were to try day trading forex, I would use futures contracts at the CME (Chicago Mercantile Exchange) during high volume periods.
However, I prefer markets with enough volume to ensure a tight spread, but not such a huge volume that the market becomes hard to read. The grains (soybeans, wheat and corn) fill the bill exactly for me. Equity indices (Russell 2000, S&P 500, Nasdaq eminis and the Dow $5 contract) are also good at times, but I find them more difficult. I dislike the very high volume bond market. I am not saying you can not make money there, all I am saying is that I have not succeeded!
Share traders often find a similar effect whereby very high volume shares like Microsoft are harder to day trade than a middle of the pack S&P 500 company. Usually successful share traders watch a group of stocks which they like and feel confident with.
The point is you do have to make the effort to find the best markets for the kind of trading you like to do. I think it is putting the cart before the horse to decide on a particular market before you decide on your trading style. My advice is to find the style that suits you, then find the markets that respond best to that trading style. Of course, markets are not static, so you will always be monitoring them, and be prepared to change if another market comes to the fore.
I have discussed the keys to successful day-trading in other articles, but briefly they are as follows:
- Understand how support and resistance works in the market.
- Build a trading method utilizing support and resistance levels. (The tactics you can apply near these levels are almost limitless.)
- Back-test your method on independent data (not the same data you used to design it). Ensure it has a positive Expectancy and good frequency of trading opportunity.
- Plan your money management strategy so that you know how much to invest in each trade without exposing yourself to too much risk.
- Practice, practice, practice, so that you can execute your trading plan flawlessly every time the opportunity occurs. This is harder than it sounds when day trading. Things happen fast and there are a lot of things to think about.
The trader who does these things, and has the discipline to stick to the trading plan during winning and losing spells, will be successful. As many, many authors have written, trading is 90% psychology. The main enemies are your own lack of discipline and self-honesty. Of course, the majority of day trading is done from the trading rooms of large investment banks and brokerages, and the professional traders involved are using bank funds and are not subject to the same levels of stress. You have to learn to perform as well as they do despite the additional anxiety of having your own money at risk.
