Over the course of recent history, the popularity of day trading as a legitimate profession has exploded. Financial markets around the world have experienced robust growth in participation, largely attributable to the surging ranks of independent retail traders.
In the world's largest market, the forex, average daily retail volume measured 20% of total daily volume in 2014, up from 10% four years earlier. And in the forex market alone, there are more than 4 million retail traders active around the globe, with Europe and Asia being primary locales of operation.
The reasons for the spike in interest include advances in technology, flourishing individual prosperity and increasing financial literacy. People from all walks of life seem to be attracted by the promise of professional autonomy and the potential for large capital gains.
Perhaps the largest reason for the growing ranks of day traders is the perception of opportunity. Recent studies show that 84% of current and aspiring forex traders believe that they can make money every month short-term trading. Unfortunately, the same study reports actual returns from equivalent demographics to be a dismal 30%.
So, why the discrepancy? How do 80+% of traders believe they can make money, with only 30% actually producing consistent results? The answer lies in creating an environment conducive to success through engaging the marketplace on favorable terms.
Becoming an actual day trader is not difficult. All one needs is a personal computer, some capital and an internet connection. However, becoming a successful day trader is a bit more nuanced. In order to have the best shot at success, there are several facets of the endeavour that must be examined in-depth before ever executing the first trade.
The ancient proverb "know thyself" may not be more applicable to any other discipline than it is to day trading. The frequent buying and selling of securities with the hopes of sustaining profit can be an all-consuming undertaking. As the days, weeks and months fly by, many personal truths and hidden attributes reveal themselves.
A great way to understand as much as possible about one's own psyche is to share in a simple personality test. An in-depth psychoanalysis is not necessary, but taking an inventory of personal strengths and weaknesses can aid in avoiding the many pitfalls active trading presents. The following is a list of critical questions that an aspiring day trader must ask before entering the marketplace:
- Do I have strong analytical skills?
- Am I a motivated self-starter, driven to succeed?
- Is my self-esteem related to the balance in my bank account?
- Do I take "losing" personally?
- Can I be truly honest with myself on a frequent basis?
Conceptually, day trading can sometimes be abstract. One is not building or selling a physical item or punching a time clock; one is exchanging money with the hopes of quickly getting more money in return. Any self-esteem issues, lack of drive or high degree of attachment to money are inevitably going to surface, and they can all have a substantial physical or mental impact upon the individual.
Inventory Of Resources
Aside from a firm psychological component, there are a few inputs that are absolutely essential to becoming a day trader. Just as a football player needs cleats and shorts to play the game, a day trader must secure the following items to enter the arena:
- Equipment: Computing power, a preferred trading platform and internet connectivity are absolutes when it comes to day trading. As a general rule, faster is better.
- Risk Capital: Obtaining adequate risk capital is a prerequisite for day trading. The optimal amount is highly debatable and largely depends upon trading style, market and product.
- Time: Day trading is a full-time (and then some) job. Ample time must be set aside for pre- and post-market analysis, as well as for dedicated trading hours.
- Market Access: Selecting a means of accessing the market is a must. It's necessary to commission the services of either a full service or discount brokerage firm.
Developing A Comprehensive Trading Plan
As mentioned, it is very possible to secure a few inputs and begin placing trades. It has been done by many, rarely to any benefit. Of course, actually achieving success in the marketplace is an involved process requiring a few attributes that are a bit more difficult to come by.
To put it mildly, achieving success in the day trading arena is a formidable challenge. Washout rates for individuals new to short-term trading are estimated to be upwards of 80%. As a comparison, only 20% of general surgery residents gave up the pursuit in favour of another discipline.
One way to improve the daunting odds presented by the statistical data is to develop and implement a comprehensive trading plan. A clearly defined strategy acts as a conduit for consistent and precise behaviour within the marketplace. A comprehensive trading plan includes defined methodology addressing each component of active trading:
- Market Entry: Predefined rules governing what constitutes a trade setup in addition to guidelines for entering the marketplace are important aspects of a trading plan.
- Trade Management: Actively managing an open position within the market is a major part of successful trading. Knowing when and how to consistently exit the marketplace is a crucial driver of profitability.
- Money Management: Proper alignment of risk vs reward, in addition to managing account risk on a trade-by-trade basis, make a trading plan complete. Without a thorough understanding and definition of a given trade's risk, reckless loss of capital is much more probable.
Having a rock-solid gameplan is a huge part of becoming a day trader. The digital markets of the world are constantly evolving arenas that often move with lightning-fast speeds. Implementing a comprehensive trading plan provides structure to the trader, creating an environment of consistency and control.
There is no denying that day trading is a controversial occupation. Advocates cite the abundance of opportunities present in the marketplace as evidence of its viability, while detractors refer to the high failure rates as evidence that short-term trading is nothing more than "gambling."
Perhaps both points of view are valid. While there are certainly tremendous opportunities to be had, undisciplined trading does resemble a game of dice. Aspiring day traders must accept both as possibilities and take action to capitalise upon opportunity while mitigating haphazard behaviour.
Simply becoming a day trader is relatively elementary; becoming a successful day trader is an ongoing pursuit that requires passion, commitment and dedication. For those that have these attributes, it may be a worthwhile venture.
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- Day Trading Equipment For Beginners
- <strong>What Is Forex Day Trading?</strong>
Any opinions, news, research, analyses, prices, other information, or links to third-party sites are provided as general market commentary and do not constitute investment advice. FXCM will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information.
Senior Market Specialist
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…