Author: Daniel Major

Probably not.  Day trading is extremely hard and computer generated algorithmic trades are making it tougher by the day.  Does that mean it can’t be done?  Absolutely not.  There are day traders today who make a good enough living to support themselves comfortably, and some do much better.  You may even consider some day traders to be rich.

The problem is that most people are not able to attain that level of success through trading.Over 90% of people who try to day trade for a living ultimately fail.  In fact, as the markets have become more electronic, and more computer algorithm driven, fewer traders have been able to trade for a living.  That doesn’t mean that they aren’t profitable, or that they don’t manage to have some big trades along the way.  The simple fact is that to do it for a living, over a long period of time, a trader needs to experience a lot of success month in and month out.

If you know that obstacles, you may be able to overcome them.  Read on to learn the biggest obstacles to day trading successfully enough to live off of, and learn how to give yourself the highest chance to succeed.

Obstacles To Making A Living

• The lack of discipline applying a strategy.  This is the number one cause of failure in the trading world.  People are often able to develop strategies that are profitable, or would be profitable if they were applied strictly without the trader straying from the system.  Unfortunately for a variety of reasons traders can rarely stick to a strategy.  Probably the biggest reason why traders are unable to adhere to a strategy involves a lack of patience.  Day trading is not as exciting all the time as some people would like it to be.  That doesn’t mean that it isn’t very exciting sometimes, but a lot of trading involves sitting around and looking for the right trade setup.  Depending upon your strategy, the right trade setups may come few and far between.  New traders have a very hard time sitting idle, waiting for the setups to come.  New traders think that to become successful, they need to make money every single day.  This is simply not the case.  Being highly successful on a low number of trades can make a trader rich.
• Developing a strategy that isn’t successful enough.  It turns out that it isn’t extremely difficult to create a strategy that is slightly profitable, but to create a highly profitable strategy takes some work/know-how.  New and experience traders often fall into a trap where they are making money, so they don’t want to change their strategy, but they are not really making enough money to live on.  A clearly defined successful strategy is the most important tool a trader needs to systematically make money over a long period of time.  Unless you are perfectly disciplined, you need a strategy with a big upside or a high winning percentage (or ideally both).
• Pressure to make money quickly.  If you want to become a successful day trader who can live off day trading profits alone, the one thing you can’t have enough of before you start trading is money.  This is not because you will necessarily lose a lot of money when you start trading (though you may), but because it can take time to get good enough at trading that you can pay yourself regularly.  If you are under pressure with low savings and lots of bills or a family to support, you will have a hard time trading successfully.  You almost certainly will struggle to maintain any discipline, and you will have a hard time sticking with trading long enough to get any good at it.  You need to be able to survive for quite some time without income if trading is your only source of income.  Even professional day traders go through a month here and there where they don’t make any money.
• The stock market is extremely competitive.  I would love to be able to tell you that anyone can become a day trader with a little hard work, but that is not reality.  The truth is that the stock market is very, very, very competitive.  Wildly competitive.  As a day trader, you will be fighting investment banks, hedge funds, trading algorithms, and all sorts of very smart people, institutions, and machines for the same profits.  If one person makes money, it means that someone else is losing money or giving up an opportunity to make money (opportunity cost).  People who consistently lose money do not survive for very long in the stock market.  To be successful as a trader you need to develop a niche, and become very good at what you do.  Equity markets are so competitive that they are very efficient at reflecting the “right” prices.  There is still opportunity, but there isn’t any “free money”.  Being profitable takes intelligence and hard work.
• Being unable or unwilling to adapt.  The stock market is always changing.  A strategy that has worked for a year or longer may suddenly stop being profitable.  Laws are changing, and the market has seen the invention of electronic markets, dark pools, and electronic market makers.  The way that the market moves will continue to change.  For a trader to make a living day trading, an ability to adapt is crucial.  Unless you can make a lifetimes worth of income before the market changes, you will need to adapt with the times.

The Keys To Succeeding At Day Trading

After hearing all the obstacles, you may be scared to try day trading.  Not day trading may even be the best decision you ever make.  Far more traders will lose time, money, and their sanity than than experience riches and success.  Even so, day trading is exciting and potentially very lucrative.  While fewer traders have been able to make a living in today’s fast moving electronic market, those who are able to make a living tend to do do very well.  The odds are against you succeeding at day trading, but if you are able to succeed you will probably be well compensated.

The biggest key to success in day trading is to avoid habits that lead to big losses.  Here are the important points to master if you want to earn your living as a trader.

• Develop a (winning) strategy in a demo account.  It is very important that you don’t waste money trying to figure out your strategy.  Keep a demo account that simulates real trading as closely as possible and test your strategy as thoroughly as possible there.  Only after you have confidence that it will make money systematically should you move to “live money”.  For help developing a strategy read our article about it.
• Adhere to your strategy perfectly.  By far, the biggest mistake that new traders make is that they are unable to stick to their strategy.  Trading has narrow enough margins without wasting money on imperfect trades.  Keep yourself profitable by keeping yourself disciplined.  A good way to do this is by tracking and reviewing every trade with a trading journal, and by reviewing your trade blotter every day.
• Manage your emotions.  Negative emotions lead to reckless trading, an inability to properly manage trade size, and make it easier to miss good trades.  To master trading you need to master your emotions.
• Adapt.  If your strategy no longer works, you need to go back to your demo account and either tweak it or develop a new strategy that will work.  The market is certain to change, it is up to you to change with it.

Ultimately if you are going to succeed at day trading enough to make a living you are going to have to go through a big learning curve.  Their are many resources, and many people willing to help you.  You will have to learn to develop your strategies, and learn to control your trading so you adhere to them without wavering.  You will need to spot opportunities, and be willing to act quickly and decisively to take advantage while they present themselves.  The best day traders are willing to aggressively pursue any opportunity.  Any day trader will tell you that the trade setup will not last for long, and if you wait, you will lose your chance.

If you want to make a living day trading you need to be aware that you have a long road ahead of you, but the rewards can be very sweet.

Key Factors for Success in Day Trading

While day trading can be a challenging endeavor there are several key factors that can increase your chances of success.

First and foremost it is essential to develop a winning strategy and thoroughly test it in a demo account before risking real money.

Adhering strictly to your strategy is crucial as straying from it can lead to losses.

Additionally managing your emotions is paramount as negative emotions can result in reckless trading and missed opportunities.

It is also important to adapt to changes in the market and be willing to tweak or develop new strategies when necessary.

Finally it is vital to have the dedication and determination to continually learn and improve your skills as a day trader.

By focusing on these key factors you can increase your likelihood of making a sustainable living through day trading.

Software is extremely important when you trade.  There is not necessarily one software that is “best” but there certainly are software programs that are better than others.  There are a few points to keep in mind when a trader chooses a software program to trade with, or chooses a brokerage based upon their trading platform.

Low Latency

Every trader wants a trading software or a trading platform that is “low latency”.  This is a fancy way of saying that all of the quotes and information displayed by the software is extremely up to date, calculated to the microsecond.  This is crucial for traders because the markets move so quickly.  A trader needs the most up to date information possible, if they are to trade effectively.  This is more true every day, as more and more computer algorithms make up a bigger and bigger percentage of the total trades.  Computers act fast, and if a trader has a software that is not up to date, they will struggle, especially on short term trades, where pennies can make the difference between a profit and a loss.

At How We Trade we also recommend that you use the lowest latency software possible.  We would not want a trader to have any disadvantage, as trading is hard enough by itself.

Simple Design

It usually makes a trader more effective if the software has a simple user interface.  This is not to say that the software should be unsophisticated, or be lacking in formation or features.  The key here is that the design of the software allows a trader to navigate intuitively.  Not only does this allow a trader to move more quickly with less thought about how to interact with the software, but it also goes a long way to prevent user errors, popularly termed mistakes like “fat finger” trades.

At How We Trade we prefer a simple design.  Good software programs for day traders include platforms like Tradestation, Thinkorswim, or Sterling.  We also trade with Tradorax when we trade binary options, because they have a clean professional interface with their software.

Whatever choice you make regarding your preferred software, remember that it needs to be something that you are comfortable with, that you can navigate with ease and that you will not make order entry mistakes with.  Remember, accurate orders are a trader’s best friend.

Your Software Should Have Advanced Charting Features

Depending upon your strategy, you may use advanced charting features when you trade.  If your strategy depends upon charting moving averages, MACD indicators, Fibonacci signals, stochastic indicators, or something similar, you need to make sure that your software includes this.  Software and online platforms from many companies do include these indicators today, but if you use one or more of these in your trading, or you think you may incorporate them into your trading at some point, you should have software with advanced charting elements included.

Alternately, you could also use a third party trade indicator software if this is more effective for you.  There are a few of them out there.  Most do require you to pay a separate fee, which may be worthwhile if they are profitable.  As with any indicator, the key is in learning when it is effective and when it is not effective, because not all signals will be profitable and you will have to develop additional rules to using the indicators in most cases.

Eye Pleasing

This may sound a little silly, but trading is very emotional. When you trade, you want to be focused and in an upbeat mood.  Using a software with eye pleasing colors, layout, or a good looking scheme can help keep you in the right frame of mind for trading.  When emotions play such a big role in determining your ultimate success or failure, every edge counts, just like every edge in your trading strategy counts.  In fact we consider superior mastery of your emotions an edge when it comes to making profits.  Remember, when you think successful thoughts you have a higher chance of achieving your goals.  Software can play an important role in this area.

Most Software Packages Are Sufficient From A Mechanical Perspective

Today, most trading software and trading platforms are technologically advanced enough to provide trader with sufficient features and reliability to access the markets efficiently.  What this means is that most software can “get the job done”.  The best software packages do more than this though.  To succeed, you want your software to be lightening fast, eye catching, have elegance in its sophisticated yet simple design, and to have the tools you need to consistently profit from the markets!

Emotions play perhaps the biggest role in determining whether a day trader ultimately succeeds or fails.  Developing a working system is an ability that most traders ultimately develop.  Some people even develop or find excellent trading systems that only need to be followed exactly as the system is intended to be followed, and the trader will make enormous profits.  Unfortunately, most traders do not follow their systems exactly because their emotions get in the way.  This leads to regret, anger, frustration, and ultimately failure.  Trading is hard enough without bringing emotions into it.  If you can learn to master your emotions, you will begin to master trading itself.

The Slimmest Margins Between Success and Failure

What many people may not realize is that the difference between success and failure in day trading is extremely narrow.  Look at this chart showing the net profit a trader of a binary security will make depending upon the percentage of time that their trade is a winning trade.

If a trader is correct on less than 56% of his trades (assuming a binary payout of either 80% or 0 depending upon if the trade is a “win” or a “loss”) he will not make money.  If he is correct on 65% of his trades, he will have a net return of 17%, and if he is correct on 75% of his trades, he will have a net return of 35%.  A difference of 10% trade accuracy is the difference between losing money and making 17% return!

Because the margins between great success and failure are so slim, a trader can not let emotions cost him even a small amount.  Put another way, a trader who masters his emotions has the ability to make a lot of money day trading!

Identify How Emotions “Hurt” Your Trading

The first step to overcoming emotions during trading is to identify the ways in which emotions are harming your trading.  These are the most common ways that emotions hurt a trader, and cost him money, and steps to overcome them:

Being Reluctant to Enter A Position When the System Calls For It

This is one of the worst things that a trader can do, and unfortunately it is also one of the most common.  Not entering a position when the system calls for it for any reason (burned previously on a similar setup, down on the day, up on the day and protecting gains, not recognizing the opportunity, ect) begets feelings of intense remorse most of the time, especially when the position would have been a big win.  It also messes with the winning percentage of a system.  If you are not taking positions every time your system calls for you to, then you are missing out on more money over time if your system works.  You never want to miss a huge trade because your emotions made you too reluctant to enter into the position.

How To Overcome This

What traders need to realize is that no system works 100% of the time.  Even when you do everything correctly, even if you feel like all signs are pointing to a winning trade, a certain percentage of time it will not work.  Getting “burned” on a previous trade is a common reason that traders do not take a subsequent position.  The problem is that a system is not a system if you do not follow it every time.  If your system works, you need to follow it precisely, if your system doesn’t work, you need to shut your trading down and make adjustments in a demo or “sandbox” arena until you can systematically make money again.

A trader needs a short memory.  Always stay in the moment.  Do not pay attention to your profits/losses for the day, and forget about any prior trades.  Treat each opportunity as an individual entity, as a part of a systematic way to make money.

Taking Too Large A Position After A Win(s)

This is the flip side of being reluctant to enter a position.  Positive emotions can make you enter a position with much more size that your system dictates, because you are “feeling lucky”.  This can lead to big losses, and can lead to reluctance to enter future positions at all, or it can lead you to enter future positions with too small of a size.  Using too large of a position can lead to a loss that is nearly impossible to return from, or at best a loss that will ruin your profitability for a period of time.

How To Overcome This

The solution is similar to being reluctant to enter a trade.  Remember that your system is in place because statistically over time, it works.  If you feel that positive emotions are causing you to enter positions much larger than normal, stop yourself, and realize that you have to stay true to what has been proven to work.

 Not Cutting Loses Quickly Enough

Amateur traders almost always make the mistake of being overly optimistic about a trade that goes “out of the money”.  They think that if they hold their losses long enough, eventually the trade will become a winner.  The problem is that oftentimes, the trader becomes a larger and larger loss.  This leads to feelings of hopelessness and dejection.  If the loss is large enough, it can also ruin your account balance, and make it very difficult to regain a profitable enterprise.

The Solution

Always have a pre-determined “out point” or “stop loss“.  If the trade reaches a loss of a certain size, cut your position or exit your position all together.  You must stick to this religiously.  If you have the point pre-determined before you enter the trade, it does not leave wiggle room for you to rationalize holding a loss and letting it turn into a bigger loss.  There will be more trade setups in the future, endless opportunity is ahead of you.  Cut your losses quickly and move on to the next one.

 Letting Anxiety Take You Out Of Winning Positions Too Quickly

This is another very common mistake of new traders.  They find themselves in a profitable position, but they become very anxious that it will turn around on them.  They exit way to quickly, and take what would have been a big gain and make it a very small gain.

Overcoming This

The best way to overcome this is to resist the urge to exit positions completely.  Instead, exit a smaller percentage of your position (maybe 25%) and let the rest run.  This locks in some of the profits and takes away a lot of the anxiety around holding the trade.  Over time, you will train yourself to hold your winning positions longer.  There is nothing wrong with taking profits, but you have to make sure that you are holding your winning positions for a long enough period of time.

Letting Any Feelings Surrounding Other Aspects of Your Life Prevent You From Following Your Trading System

Day traders are all people (except the algorithmic traders).  People have good days, bad days, fight with spouses, have health issues, have other victories in life, and can have any number of things happen in their lives outside of trading affect their emotions.  The problem arises when these emotions influence a trader’s ability to follow their system.  If you are not following your system, you probably will fail to systematically be profitable.

The Solution

If you feel like you have emotions (negative or positive) that could prevent you from following your system you need to identify them, and you need to clear yourself of the emotions.  Some traders actually meditate, some sit quietly for a few minutes, others may take a walk.  Find what works for you, but it is very important to clear yourself of any strong emotions prior to trading.

Dejection

This is the emotion that no day trader wants to experience, but every trader on their journey to becoming a professional day trader experiences at some point.  If you feel like you can’t make money, you probably are not going to follow your system very well (or do anything very well).

Solving This

Dejection stems from a lack of trust of your system.  Sometimes this lack of trust is not displaced, and your system is not working.  Sometimes the lack of trust is simply a product of the up and down cycles of systematic profitability.  The key is to regain faith that you can systematically earn money from the markets.  Take a step back, and use your system in a demo account or with very small positions.  If you need to change the system, change your system.  Once you regain faith that your system will make money over time, resume trading as normal.  You need to have faith in your system to follow it!

Controlling Your Emotions Leads to Success

Only with a clear mind, and a willingness to jump on opportunities quickly will you succeed as a trader.  Ask any professional trader and they will tell you that the most important way that they grew as a day trader was by learning to control their emotions.  Control in trading correlates strongly with success.

Mastering Emotional Control: Overcoming Emotions as a Day Trader

Emotions can be the downfall of many day traders making it crucial to learn how to overcome them for successful trading.

While developing a working system is important it is equally essential to master emotions to follow the system consistently.

One common emotional hurdle is being reluctant to enter a position when the system calls for it which can lead to missed opportunities and regret.

To overcome this traders should treat each opportunity as an individual entity and follow the system precisely.

On the other hand positive emotions can lead to taking too large a position causing big losses and reluctance to enter future positions.

Traders need to stay true to their system and avoid getting carried away by positive emotions.

Additionally not cutting losses quickly enough and letting anxiety take you out of winning positions too quickly are common traps.

Having a pre-determined stop loss and exiting a smaller percentage of the position can help address these issues.

Finally it’s crucial to clear yourself of any strong emotions from other aspects of life before trading.

By identifying and managing emotions day traders can gain control over their trading and increase their chances of success.

You don’t need the stock market to go up to make money.  There are a number of ways that you can bet on an individual stock or the stock market as a whole to go down.  While this is a speculative strategy (as opposed to an investment strategy) it can provide a useful hedge if you have other long positions, or it can be a great way to make money when conditions are not favorable for a bull market.

When you are betting on an asset to decline in value, your position is known as a “short position“.  You may also see a trader who has a “short position” referred to as “being short” or “shorting”.  The most common ways to do this are by selling a stock short, by purchasing Put Options, by writing Call options, or by purchasing a Put binary option.

Ways To Profit From Short Positions

Purchasing A Put Binary Option

This is perhaps the easiest way for the average trader to take a short position.  A binary option is extremely simple (it pays out a pre-set amount if the trade is in the money, or expires worthless if the trade is out of the money).  Binary option accounts are easy to open, can be funded with a credit card, and do not require any special “margin privileges” like a traditional brokerage account that is option eligible.

High Risk High Reward

The trader takes a short position by purchasing a Put option contract and entering the dollar amount that they want to risk on the trade.  The “strike price” is determined by the price of the security at the moment the trade is entered.  The trade has a pre-set payout amount (usually between 60% and 90% of the amount risked).  If the option expires in the money, the trader wins their money back plus the payout percentage designated for the trade.  It does not matter how far in the money the option contract expires, the payout is always the same.  If the trade expires out of the money, the trader loses 100% of the amount that they risked.  In this way a trader can potentially make a lot of money from their short position, but they also will lose their entire position if it expires out of the money.

By using binary options, a trader can purchase put options for different time frames to place a bet that will pay if an asset declines in value.  This is a viable way for an average trader to profit from a stock, a market, or other assets falling in price.  There are various lengths of time available for binary option trades, usually ranging from 1 minute up to a period of a month or months.

Selling a Stock Short

This is the most common way that traders and investors, and especially day traders, can profit from a decline in prices.  A short sale involves selling a quantity of an asset (usually a stock) that the trader does not actually own.  The trader will sell at the current market price to the open market, and their brokerage will provide the shares to the purchasing party.  The trader is effectively being loaned the shares from the brokerage.

The trader’s account is credited with the value of the sale.  The trader is usually charged interest from the brokerage daily for the shares that are loaned to the trader.

When the trader decides to close the position, they purchase the shares back from the open market.  If the price of the security has fallen, the trader will purchase the shares back (to payback the loaned shares to the brokerage) for less than what they were sold for.  The trader can then keep the difference between the price it was sold for and the price it was bought back for.

Limitation On Profits And High Potential Risk

The highest amount of money that a trader can make from selling a security short is 100%.  A 100% profit would be realized if a security becomes completely worthless (the trader would not need to pay back the loaned shares to the brokerage because they have no value). Most assets which are shorted do not go to a price of 0 though.  In fact a decline in price of 20% for the most commonly traded securities would be considered significant.

It is important to note that if a position is out of the money when it is closed, the trader does not need to necessarily lose a lot of money.  A position which is closed out for a slightly higher purchase price than the sale price, for instance, will result in a very small percentage loss.

That being said, there is no maximum to the amount of risk that a trader is exposed to.  While their maximum return is 100%, the price of a security may double, triple, quadruple, or even go up higher in price.  While brokerages have risk controls in place in the form of “margin calls”, this is not a perfect system and it does not necessarily limit the risk effectively.  If for instance a security closed one day below a level which would result in a margin call, and opened the next day significantly above the price which would incur a margin call, the trader is responsible for paying the brokerage any losses, without limit.

Selling Short Takes More Capital

Because a short sale of a security typically provides the lowest expected return compared to the other ways discussed here to profit from price declines, it takes the most capital on the trader’s part to make money.  Short selling can also only happen in a margin approved account, which has minimum balance requirements.  While many day traders do engage in short selling, and some are very profitable from it, there are limitations and benefits unique to this form of short position.  It is important for every trader to understand this completely before choosing their method of taking a short position.

Purchasing A Put Option (or Writing a Call Option) Using Traditional Options

A traditional stock option works by giving the owner the right to either buy (a Call option) or sell (a Put option) a security at a future date, for a specified price.  The option has a value because it provides this right to the owner at a future date (and prices may change between the purchase time and that future date), and it may have a value because it is either above or below the strike price when the option contract is purchased.

Purchasing a Put Option

If a trader owns a Put option, it gives that trader the right to sell shares of that particular stock to the option writer for a specific price on a specific date.  If the price is below the strike price, the trader will execute the option.  This means that they will buy shares at the market price, and sell them for the higher agreed upon strike price.  By owning a Put option the trader is making a bet that the price will decline, and that they will be able to purchase the shares on the open market for below the strike price (which the option writer is obligated to pay).

Returns are Potentially High and Risk is Capped

The benefit of a Put stock option is that they rewards are potentially very high, the highest of each of these methods.  A trader has the ability to make multiple times the money that they purchase the option for.  If the option expires out of the money, the option expires worthless, capping the risk to the trader at the amount they spend on the option contract(s).  Some view purchasing traditional stock options as the most beneficial risk/reward profile of any type of position, for trading purposes.  The caveat is that while the risk is capped, an option that expires even slightly out of the money has no value.  An option that expires slightly in the money will have a small value, so while the upside has a lot of potential, the expected return may not be high enough to compensate a trader for the risk of losing the entire trade amount.

Option Decay

Every option has a time value, otherwise known as Theta.  This is the value in the amount of time left between when an option is purchased, and when it will expire.  Time has value because the price of a stock can move over time.  The more time remaining, the more potential a stock has to move further into a profitable position for the option.  Even if the price of a stock or underlying security doesn’t move, the time until the option expires is constantly reducing.  As time passes, the time value of the option lessens.  This reducing time value is known as option decay.

Writing a Call Option

A trader can also profit from a decline in an assets value by writing Call options.  The trader sells the call options that they write on the open market, and if the price drops below the strike price, the trader will keep 100% of the money he earned by selling the options. If the option is executed in the money, the writer will be obligated to sell shares to the option owner at below market value prices, potentially resulting in a loss on the position.

No Cap On Risk

Because the price of a stock hypothetically has no limit to how high it can rise, the potential exists for very large losses when writing Call options.  As an example of how writing a Call option can turn out especially poorly, let’s say a trader writes a Call option (100 shares) for stock XYZ at a strike of $50.  Let’s say that the trader sells this option for $2 (taking in $200 of revenue).  If the price of the stock rises to $60 when the option is exercised, the trader must sell the owner of the option 100 shares at $50.  Because it costs $60 per share to acquire the shares, the trader will lose $8 per share ($10 a share on the price difference minus the $2 a share in revenues from writing the option).  This position loses $800, and it only had a maximum potential gain of $200.  Writing options can result in unfavorable risk/reward profiles in some circumstances, and traders should have extensive option knowledge before writing any options of their own.

The Best Method Depends Upon the Trader

There is no “best” method for profiting on a decline in prices.  There are unique benefits and risks to each style.  We use Binary Options because there is a high payout no matter how far in the money the option contract expires.  This allows us to precisely control our risk/reward profile.  It is also well suited to traders who do not want to put up substantial amounts of capital (as the other methods require).

The highest potential payout is using traditional Put options, but there is option decay, and an option that is executed a little bit in the money will only provide a small return to the owner (who also took a significant risk by purchasing the option and possibly losing 100%).

It is important for every trader to understand the workings of each type of short position, and to thoroughly understand their chosen method.  For simplicity and for the predictable payouts on all winning trades, we use binary options.  If you would like to become a binary options trader and you need to open a binary option account of your own please sign up for an account today.