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Even with the volatility and major bear markets we have seen in the last decade in the stock market, many people want to try their hand at day trading for a living. Why? Because if successful, it allows them to work from home and become completely independent financially.
Unfortunately, it still remains true that the vast majority of all who people who attempt to day trade for a living, fail. The reason for this is that most people do not grasp exactly how difficult it is to actually trade profitably. There are a number of reasons why people fail, and these are as follows:
1. They start out under-capitalized. If you want to day trade stocks, you only need $25,000 to start. If you want to day trade forex, most brokers allow you to start out with an account as low as $5,000. In either case, it is simply not enough money. Assuming your expenses are $5,000 per month, you would need to make a 100% return EVERY month on your forex account and 20% per month on your stock account. In either case, that is simply too much to expect.
2. Most people do not have a full understanding of the competition they face in the markets. Let’s just use Goldman Sachs as an example. Goldman is the most powerful business on Wall Street. Every year, they hire the best and brightest minds out of the Ivy League and other top schools to train as traders, and help develop new trading models. Goldman and other such Wall Street firms know all about the trading strategies peddled to the masses and the develop models to take advantage of that knowledge.
3. Trading is a very difficult business from a psychological perspective. There is a lot of stress involved in trading when you are relying on your trading income to pay your bills. Remember that scene in “Trading Places” when Eddie Murphy and Dan Aykroyd are in the bathroom? One gent asks his friend about his ulcer and the other guy asks about his hypertension. Both are stress related ailments, and trading is very stressful. People make mistakes when under stress, and will often deviate away from their strategy.
4. Most people really have no clue of what to expect from their trading strategy in the heat of battle. They purchase a trading strategy or system that is hyped as 80% or even 90% accurate. No trading strategy will allow you to win 90% of your trades, and if there was such a strategy, the developer would not bother selling it! Even some of the best strategies will generate fewer than 50% winners. Most successful traders know this, and that is why the focus more on risk control rather than on entries and exits.
5. Most people don’t know how to control risk. They often over trade, and then they also put on position sizes that are too big. When they do this, it only takes a short losing streak to wipe out their account.
With all that said, is it still possible to day trade for a living? Absolutely! But, like any other business, you need to educate yourself and gain as much experience as possible. As is the case with most any other occupation, only the best become wealthy at this game, but there are plenty of other people who can make a nice living. Just keep the pitfalls mentioned above in mind before you decide to try your hand at day trading for a living. You will be far better off, and have a greater chance at success in the long run.
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Scott Cole is a former execution trader for a hedge fund, and continues to be a student of the financial markets. For more information about day trading, visit http://www.bestdaytradingstocks.com
