This video is for people new to trading and those that just aren't getting anywhere.
What is day trading anyway? What is it you have committed to learning and hope to make money from? Is day trading for dummies at all? Have you stopped to consider the nature of trading?
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Most people would love trading to be a problem with a solution. You’d spend time figuring out what the solution is and then you just apply the solution over and over again without any real thought because all the thought went into figuring out the solution.
Some people will be fine with trading being a skill. We’ve all learnt to do new things before and why should trading be any different? You’d learn what to do, spend time practicing and once you are skilled, you can apply those skills to live markets and reap the rewards.
The thought of trading being a competition, a duel, a battle – well that’s probably the least savory option for most people. After all, who wants to battle the markets day in day out?
Regardless of what you’d like trading to be. It is what it is. The markets won’t adapt to you, you need to adapt to the markets. If you find yourself wanting the markets to be something they are not, then this will stand in the way of your success.
It doesn’t matter if we are talking about Forex market, stocks or futures, the basic concepts are the same:
- Money goes into the markets. We want to speculate, we have to put money into the bucket.
- The markets can’t create money, only what goes in can come out.
- From that money that goes in, it goes out to a number of places
- Your broker – either by a direct charge or a spread, your broker takes a little money from the bucket every time you take a trade. In turn that goes to pay for his secretary, his nice car, their advertising, trading platforms and a whole host of other things
- The exchange – for those instruments trading on a centralized exchange, these guys are not charities and they get a per transaction or per size fee.
- Of course, there are fees you pay yourself before you even make a trade, before the money even gets into the bucket. Your trading platform, data feeds, news squawks, web sites, trading journals all need paying for and they, along with the brokers and exchanges help to fund TV Stations like CNBC and Bloomberg that encourage you to trade – it’s a huge business.
- Not forgetting of course there’s the winning traders who get paid from the bucket too after the brokers and exchanges have had their slice.
The bucket isn’t infinite though. What comes out must have gone in. In fact, what comes out to winning traders is a bit less than went in because of the fees.
What traders get out of the market is LESS than they put in because of the fees. Yet, every trader aspires to take out more than they personally put in.
If everyone is trying to take out more than they put in, then some will be successful and some not. Is this not the very nature of a competitive endeavor?
Many, if not most new traders, especially those with an engineering background really want trading to be a problem with a solution. The fact is, there’s a lot of numbers in trading. That’s how price charts get generated – a series of numbers – open, high, low, close, volume that occur over a specified period. The engineer will gravitate towards these numbers, looking for a way to crunch them in order to find a solution to trading. Once that solution is created, the system can be traded manually or even a computer program created to trade it for them.
In terms of the other two, competition and skill, well they sort of go hand in hand. You can’t win a competition unless you are skilled. The very nature of competition and skill is that you won’t be very good at it when you first try it. In fact, you will be really, really bad.
And here is where we get to the point.
If you approach trading as a problem with a solution, then the chances are you will try something for a very short period of time, maybe even ‘backtest it’ and decide it doesn’t work. Then you will go to the next thing or try an adjustment, retest, adjust again, retest.. I have met traders that have been taking this approach for a decade and are still no closer to a solution. Many traders that have committed a huge amount of time to this approach will not stop because of the amount of time they have committed so far.
On the other hand, those traders that take the competition/skill approach have an issue.. If you know you will be bad at something new, then you will be equally as bad with a valid trading approach as an invalid one. So a leap of faith is needed. They need to develop a valid skill and the trading education marketplace is so full of snake oil salesmen that it’s down to pure lick whether they find someone that can actually give them valid information.
Most people are unsure about the markets, they don't know where to buy or sell and once he does, they don't really know where to exit a trade. It doesn’t matter what techniques they have learnt, they feel like they doen’t really have something they can rely on.
In turn, the aspiring trader sees “professional traders” as confident guys who know exactly what is happening and why. After all – they are the “pros”.
This perception could not be further from the truth. Nobody knows where the markets will go next.
Professional traders will work off one of the following:
- The belief that it is more likely to go one way than the other
- The belief that a move in one direction will be more powerful than a move in the other direction. They may be wrong about the direction more than half of the time but they make money from the size of the move
You will not find a professional day trader that tells you they know where the market is going. They can only tell you what is likely. They trade off that suspicion and they get out when then are proven wrong. That is what trading is all about.
Most retail traders spend their time looking for certainty. That’s why so much time is spent by retail traders trying to develop computer models that predict where the market is heading. There is a belief that certainty in trading exists and that this is what they need to find.
And this is one of the reasons that most traders fail.
In fact this is how you should view ALL people day trading your specific market.
The irony is that many traders see themselves as an uncertain trader and they see the market as something rational that can be analyzed mathematically and ‘solved’. The fact is, the market consists of nothing but uncertain traders who are all trying to guess what other traders are about to do.
So what can you do?
- First thing, understand that it is possible to make money trading
- If your goal is certainty you will never get to the point where you place a live trade
- You need to embrace the uncertainty of trading
- Instead of working on the basis of what you WANT the market to be, work on the basis of what it actually is
- With the above in mind, now it’s time to figure out what your approach is and how to hone your trading skills
- This will be the point at which you make dramatic strides forward in your trading
Of course, many people out there are promising mechanical solutions to trading. EAs that will trade for you, magic indicators that tell you when to buy and when to sell. Educators that promise you a 95% Win rate or success for just 5 minutes a day.
Most people buy one or two of these and there’s nothing wrong with that. I know I did. If that’s what it takes to make you understand that the people selling these systems are just lying to you, that’s great.
Just don’t get caught in the trap of repeatedly buying things that go against the very nature of trading.
And if you are wondering – I bought perhaps more than my fair share of these things before I embraced the uncertainty.
But just ask yourself – if what I am saying is true and this is an uncertain game, how would that change the way you approach trading? It doesn’t make it impossible but it would certainly change how you approach trading.
So – let’s say you have embraced the uncertainty and you believe that trading is a skill.
Like all skills, you will improve by repetition.
So you need to consider the horizon.
Swing Traders will hold a trade for multiple days.
Position Day Traders will try to hold a position for hours.
Scalping is very short term trading. Scalpers will be in and out of the markets in seconds
And of course, these aren’t fixed, there’s people holding trades for durations in between the above.
But which is ‘best’?
Well perhaps none is best long term, I certainly don’t claim to have the answer to that. I consider myself somewhere between a scalper and a position day trader.
Instead of thinking of one approach as better, let’s think about it in terms of developing a skill.
As a position day trader, you need to know your market and how days tend to play out. For me, before the market opens I have a few different scenarios I think will play out and these are published publicly for all to see. I then try to understand which scenario is playing out and capitalize on that.
From a skills development viewpoint, learning this skill takes a long time. You need to see many days play out before you can really start to understand how things work. You need to do this over different periods too because the market switches gear at certain times of the year.
There is only one day per day. So the maximum amount of days you can experience per day is one. With focus, about a year should have you confident in the way days play out. That’s 365 days. Not a huge sample.
What if you focused on shorter term trading? Instead of an approach that gives you 1 or 2 opportunities per day, how about one that gives you 1 or 2 opportunities per hour or 1 or 2 opportunities per minute?
This is the reason that most prop shops have their intern traders focus on scalping initially. It’s going to give you the most trading experience over the shortest period of time. It does not mean you stick with scalping forever. It just means it’s a very sensible entry point.
You could scalp the market whilst also getting experience in how days play out. That would be a solid plan in terms of getting profitable quickly whilst also developing longer term trading skills.
Just food for thought – if it’s a skill, you need to figure out how much time it will realistically take to become skilled through practical application.
Practice makes profit.
There is one more thing we need to discuss, something that many traders fall foul to – their own Goals.
Is your aspiration to make a living trading or to become the best trader that ever lived?
Most people would be happy to make a living trading. Yet they set goals that would make them the best trader on earth.
Brokers tell me the average size account opened by retail traders if $5000. There are traders that absolutely believe that once they become skilled traders that they will be able to grow this $5k to the point that they can live off their trading earnings.
This leads to a disease called “Massive Targetitis”. With a $5k account and the need to earn $500 a day on the market I trade, the e-Mini S&P500 futures, you would need to capture 10 points of movement a day AFTER you take out your losing trades. I have never met a trader that could do that. Some days that would be more than the daily range. You would have to take massive risk to get that and the $5k account would be gone in no time.
Of course, you could have a $20k or $30k account and “only” need to make 100% a year.
The problem is your goals are set before you look at what you can take. The goal is defining how good a day trader you need to be. This is backwards. How good a day trader you can be should define your goals.
If you want to succeed, then you should have but a single goal - to become a consistently profitable day trader.
Now – of course you need to live off your trading income. The problem is that most retail traders look at their trading account and could not possibly imagine that someone would give them money to trade. The reality is that if you trade consistently and build a track record, you will most likely be getting a call off your broker asking if you’d be interested in trading their customer funds. You could register as a CTA, you could go to a prop shop with your statements.
The fact is there’s lots of money out there looking for a return and if you can show you made good returns whilst keeping risk in check – getting funded will be relatively straightforward.
So – don’t focus on the money going into your pocket, focus on consistency, low risk and decent returns.
So, is day trading for dummies? Sadly not, but you don't have to be Einstein either.
Focus on becoming a good trader.
