Can You Make A Living As a Day Trader?
The question on everyone’s lips when they become interested in trading financial markets — “is it possible to make a living as a daytrader?”. The short answer is undeniably yes, and a good one at that. The distinction that needs to be made is — can you make a living as a day trader? That, requires a deeper dive into understanding you circumstances, your bank roll, and your knowledge of your own character — here are 5 key questions to ask yourself before you do anything in the markets.
Don’t rush in — research the game
A lot of sh*t gets talked day trading that’s for sure, and to be fair it’s understandable. Tall tales of quick riches continue to attract people to an area of finance that is often poorly understood and viewed with some disdain by certain groups in society.
There are a million ways to make money in the markets, so everyone has an opinion. With the social media noise and the raft of charlatans selling a plethora of trading strategies it’s hard for people generally interested in pursuing trading to know which way is up.
More often than not those new to trading focus on completely the wrong things, typically these things are —
How much money can I make?
What market should I trade?
What course should I buy?
How do I know where to get in and out?
These questions are not the questions you should be asking. They are of course the ones that naturally occur to the human psychology, but if there is one thing you need to know about trading, is that it flies in the face of everthing that the human psychology finds logical, and comfortable.
So here are the questions you most definitely should be asking yourself before you decide to take the plunge and trade the markets.
What are your expectations?
Honestly, no bull — what is it you are looking to get out of trading. It’s fun to dream, but you need to be realistic. If you are looking to try and turn $10k into $1m in a year — you are dreaming. If you are looking to turn $10k into $20k in a year — you’re in for a challenge. If you are looking to turn $10k into $15k in a year — now you’re being somewhat realistic.
Go look this up, put the time in and research the rates of return of the world’s best fund managers. These are people with decades of experience, access to huge infrastructure and massive bankroll — you’d probably be shocked to hear a lot of them are happy with a monthly return of low single digits.
Now, don’t get me wrong — the huge success stories are out there. Stories of talented traders returning crazy numbers, and there are a decent raft of proprietary traders who make a good living of a reasonably small account — but if you go into the game thinking this will be you off the bat, you are going to give yourself stress and dissapointment.
Excess stress is exactly the thing you want to avoid while trading
Oh yeah, before I forget — when I talk about things strictly in financial turns that’s deliberate. Your objective here is to make a return on capital, plain and simple. It’s not about self validation, or excitement. Boring is good. Returns are better.
Do you have the capital? (be honest)
The ads on the financial press will tell you you can get started with tiny sums. Trading educators will tell you the same, the good ones will tell you otherwise.
You don’t need millions, but you do need to be adequately capitalised to be able to take the risk safely. Is the money you are looking to use for trading money you should be spending doing up the house, is it money that really should be going on the mortgage, in the 401K/SIPP or kids college fund?
Trust me, I’ve been there. Trying to start trading on tiny accounts leads to disappointment. Trading simulators and trading for an online firm can help, but thats a whole other article.
I don’t want to labour the point here, or preach — but if you’re even wondering if the money you’re trading with should be elsewhere, it should.
One more thing on this — I don’t really buy into the argument of “only trade with capital you can afford to loose” because, well, we shouldn’t really be looking to loose anything — but you get what they are saying — treat your trading account like you’re firstborn.
Do you have the time?
I actually think this is the most important. Trading takes a huge amount of time and energy to become proficient at. Don’t enter the marketplace unless you are committed, and that you are certain the allocation of that time will not negatively impact your life.
Time watching order-flow, assessing chart patterns or doing whatever else you decide is for you is time away from other things. Don’t underestimate the opportunity cost when it comes to time spent learning to trade. Life is short, spend your time wisely.
There are plenty of other ways to make money in the world, trading is hard for most, easy for some and impossible for a decent amount of people. Be sure that your realistic expectation of your results is, for you, worth the time you are about to allocate to it.
Do you know yourself?
This is something virtually no one considers when attempting day trading. It is really important that you understand yourself and what makes you tick before trying this.
There is now a whole cottage industry on the psychological side of trading, some of which is just marketing, some of it though is very valid.
Trading is hard, it takes discipline, the ability to weather losses, assume risk and importantly the ability to get on with the rest of your life when it isn’t going your way. Knowing that you have the robust temperament and the tenacity to walk this walk is vital.
I’m not suggesting you need to be some sort of super hero, and a decent amount of these issues can be worked on with experience, but I think you do need to have a base understanding of yourself or you’re going to cause yourself some grief at somepoint.
As an upside, trading is the single most endeavour that has taught me about myself, trading will shine a magnifying glass on your personality.
Do you understand markets?
Chances are if you’re reading this and not experienced in day trading — the answer is no. I didn’t either, I’m sure most people don’t at first. I made a big mistake when I started getting into trading — I focused on the specifics of trading, charts and all the other shiny things that capture your attention.
Spent time understanding the basic construct of markets, what causes a market to auction, supply and demand and the basics of how markets move.
This understanding will stand you in good stead then for finding out what trading strategy suits your needs, and how to implement it with a better chance of success.
Markets are just the place where people come together to either buy or sell a commodity given their particular psychological predisposition to risk. The sliding scale of fear and greed, as corny as it sounds — that’s really all a market is. When you understand this it makes things much clearer.
As a trader, your job is to make risk based decisions based on incomplete information swimming in a sea of noise, spend time understanding the landscape before you learn to swim.