What Day Trading is Not?

Before we start, allow me to shatter a few day trading myths so that we can proceed with justified courage.

1.1.1  – Day trading is not a way to get rich quick.

Sit in front of the computer and click a few buttons. Spend just two hours a day and you can go home with a few hundred dollars each day. Anyone can do it. Why not you? Why not everyone in world? Seriously?

If you start day trading with the intention of getting rich in two weeks, you will end up getting broke in less than one.

People have asked me for day trading advice. Often, they were in financial difficulties and needed some quick cash to get by.

My answer to them is always the same. “Day trading is the last thing you want to dabble in when you have financial woes.”

You need years of practice to hone your day trading skills and knowledge. This book will accelerate your learning, but results vary. Thus, you cannot expect to get rich quick with day trading.

To survive the learning curve, you must start with the minimum trading size. If you are trading with sound risk management techniques, you will never get rich trading the minimum size. You need to increase your trading size steadily. Your mental ability to deal with larger positions is the key. You need actual trading experience to develop your mental fortitude so that you can increase your position size while preserving your trading edge.

1.1.2  – Day trading is not investing.

By investing, I refer to the conventional idea of holding a capital asset like real estate, stocks, and bonds, with the hope that your portfolio performance will outpace inflation.

Although day trading deals with the same financial markets that your pension fund managers swim in, day trading is nothing like investing.

Investments are diversified to reduce idiosyncratic risks. Investments are held over long time horizons. Macro-economic trends, over the next decade or so, drive the performance of your investments. The returns of your investment portfolio depend largely on the returns of your chosen asset classes (i.e. stocks, bonds, commodities, forex, etc).

On the other hand, day trading concentrates our financial interest on a single position, magnified by the use of leverage (borrowed money). At most, we are only interested in what will happen in the next few hours. Ongoing market demand and supply determines our day trading results. Our day trading profits are generally independent of the long-term returns of the asset class we choose to trade.

A well-diversified long-term investment portfolio has a negligible chance of becoming worthless. However, you can easily lose your entire day trading capital if you do not know what you are doing.

Never use your retirement savings for day trading. It is suicide. I am not exaggerating.

1.1.3  – Day trading is not a hobby.

My hobbies include reading, watching historical epic movies, and learning martial arts. I spend money on them.

That’s what hobbies are. We spend money on them for entertainment. But we want to make money from day trading. Remember?

Day trading is not a hobby. It is not what we do when we are free or bored. Day trading is what we commit to do well and persist in improving despite difficulties.

You either do it well. Or not do it at all.

If you want to try day trading as a hobby, I recommend going to the casino. You will lose money in both cases, but at least the food is better.

1.1.4  – Day trading is not easy.

You might have heard of this statistic stating that 90% of (day) traders are not profitable. I am not sure if this 90% statistic is exactly right. However, I am convinced that most day traders fail.

Day trading is tough. You need to acquire trading skills and develop real trading experience. If you get over-confident, you lose. If you get frustrated and overtrade, you lose.

The price action trading framework in this series will show you that trading is simple and need not be complicated by “quantum indicators” and “genetic data-mining”. But it is not easy.

I truly believe that for most people, there are easier ways of making money. If you choose to day trade for a living, you must enjoy the process of day trading.

1.1.5  – Day trading is not glamorous.

You sit in front of a computer terminal watching price charts. You have no stories to tell. (Traders who behave like gamblers are more likely to have stories to tell. Consistently profitable traders are more likely to bore people.)

You do not get any long service award. You are the only employee so don’t expect to get the “Employee of the Month” award. (Alright, let’s be positive. You are always the “Employee of the Month”.)

Most people around you fall into two groups. One group thinks that you make tons of money easily without hard work. You will feel frustrated because they do not understand the effort you put into day trading. The other group just sees you as a gambler. You earn money by luck. You get frustrated just by listening to them.

It goes back to the same point. Day trading at home is not glamorous. Retail day trading is not the cushy Wall Street investment banking job.