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Day Trading Losers

  1. Whenever someone asks me what I do for a living, and I say I daytrade stock index futures, their first response is always, "My God, isn't that incredibly dangerous?" And then they go on to tell me about how a friend of theirs lost a ton of money daytrading (I've heard amounts up to a million). But something puzzles me about all this. Various surveys show that between 80-95% of daytraders lose money ----- one study involving 68 traders found that every one of them lost, and 70% lost their entire trading capital. And these facts have been used to bolster the dubious rationale behind the new 25K rules on trading accounts. Yet assuming random long and short entries and random long and short exits, over time a trader's expectancy should approach 50-50, minus commissions and the spread (both pretty small these days). Given those odds, how can so many people lose so much money? The answer has to lie in money management ----- they cannot cut their losses properly and let their winners run sufficiently, and/or they trade far too big size for their account and skill level, so a bad run blows them out, and/or they make the terrible (nearly always) mistake of adding to losing positions. But are virtually everyone's money management skills really *that* wretched? Are most traders so overcome with hope and fear that they almost invariably make hideous mistakes handling their account? I have my own psychological trading issues to work through, but they certainly don't include any kamikaze-style actions. I find it a strange and amusing experience that most people look at me as if I'm crazy and then go on to smugly imply that total disaster is just about to strike, and it's a nothing short of a miracle that my head hasn't alreadsy been handed to me! Any thoughts on the subject?
     
  2. armaniman,

    i totally agree with you - i started day-trading in may this year (nasdaq stocks with IB) - i'm not yet profitable - but i learn a lot - and i cutted all my losses right from the start. it's a hard BUSINESS (and it IS nothing else than a business) - but those guys who just blow their whole account in the first few weeks or months i just can't understand. either they can afford to lose, or they consider it as a game - vegas would be better.

    i'm engaged in trading stocks for more than 3 years now - tried many different styles and time frames. i realized for myself, that "classic" day-trading (exit flat every day) is just the best way for me to do this. i mean - everybody (of the so called "experts") keeps on talking about buy and hold and stuff like that. "stocks are best" - just have to hold them long enough. maybe that's true, if you hold 'em for 50 years or so. the dow jones for example made a zero performance from '68 to '82. pretty long time, hu?

    but i'm a little off topic. what i wanted to say, is: i think, strictly cutting every loss is maybe the only "holy grail" - this alone won't make you rich - but it surely can protect you from getting blown, before you can really think about making money. the reason, why people talk that way you described about trading are: 1. they got no clue about all that and just adopted someone elses opinion. 2. they tried it - and lost. 3. thei're just envious. 4. ...??

    so let's just ignore them - and do our business. i also plan to start trading the nq-mini - maybe it's dangerous - but discipline and cutting the losses will bring success to me.

    by the way - please be generous with my "austrian" english ...
     
  3. Interesting thread. Basically about the psychology of trading, which could probably fill a whole website.

    Anyway, I do NOT believe that cutting losses is the major key to success. The problem with me is - I think - that I cut my losses too soon. A stop loss of $0.20 under my entry with QQQ (not the wildest animal out there) has stopped me out too often. And once you're losing, you (at least I) tend to get out the next time even sooner, and also take profits too early.
    I read a book that stressed these two over and over: "cut your losses, cash your profits" Maybe I've taken that too litterally. Some stocpicking sites recommend a 5% stop loss, which I would feel extremely uncomfortable with, as long as a 5% gain is a pretty rare thing.

    So:
    What would you consider a reasonable stop loss for a $10, $25, $50, $100 stock? A percentage? a fixed amount?
    And do you close your trailing stop slowly in, or do you keep it at roughly the same distance all the time?
     
  4. With QQQ, a 10 to 20 cent stop loss seems about right.
     
  5. What indicators do you use?
    MACD is unreliable. I'm trying to concentrate a bit on Bollinger Bands, they sometimes work, but many false signals too, bouncing several times on the lower band happens quite often.

    Any other suggestions for indicators and how to use them?

    (It's getting off topic, but the topic more or less asks for it)
     
  6. Intresting theme armaniman.

    Well I think stops are an art.
    I personaly use the Bollinger Bands for my stoploss. My Stop loss always depends on the market and how nervous my stock or future is. Standarddeviation or volatility indicators helps me with them.

    Why so many trader loos money? I think there are many things out there. Transaction cost, money management, risk management, entry- and the more important exitstrategy, the discepline, your state of mind, how you handle your ego and they all have to act together good, near perfectly.
    I think if you miss out one part of this things you fail, maybe not right now but over the time.

    But let's think about a fact. If the future markets are a minus null sum game and 90% are loosing, how much money earn the guys how win? :)

    I'am from Austria as well so be generous with me too ;-)

    "EDUCATION IS OUR PASSPORT TO THE FUTURE.
    THE FUTURE BELONGS TO THOSE WHO PREPARE
    FOR IT TODAY." - Malcom X
     
  7. Your psychological makeup and your trading style are closely related. I have no problem taking small losses, but I often struggle to let my winners run. So if I were to try and trade like this, I would slowly bleed to death.

    Because I am much better at picking entries than exits, I take profits as quickly as losses and make money by being right more than wrong. Like Marty Schwartz said in Pit Bull - "I need to hear the cash register ring". I feel more comfortable with an equity curve of slow consistent gains rather than choppy periods followed by home runs.
     
  8. I don't have a set figure for a percentage or amount for a stop loss, but it needs to be tight at first, while giving the stock room once it goes your way. I would suggest looking at the chart and finding a good risk:reward scenario. I'll use an example. I can't post the chart here because I don't know how...maybe someone else can.

    With CLRS, the yearly chart from late January til late July forms a nice fishbowl. Since June thru July looks to be clearly upward trending, I look to get long. Using the 60 min chart, on Jul 10 the stock gaps up on good volume with news of a deal with Microsoft. I know this is supposed to be technical trading but the legitimate news gives me reinforcement that the gap should hold so I get in at 6.73 and set a stop at 6.49. The reason for this is that it gives me a 1:4 risk/reward. With .24 to the downside, I don't think the stock would have a hard time ascending another $1. I also favor stops just below major buy/sell points, even dollars, halves etc...

    The stock tested and held 6.50 twice later that day. As the stock bases above 7.60 on the 17th and 18th, I move the stop to 7.24. After holding the low 8's and appearing to move upward again on the 23rd and 24th, I move the stop up to 7.99. I get stopped out the next day. The net was 1.26 or about 1:5 in this case.

    Looking to get long again since the daily was still uptrending...on 8-2, I notice 6.50 gets tested twice successfully again over the prior few days. Since there's low volume, not many traders are selling here and the support looks good. I get in at 6.62, again with a stop at 6.48 this time...since it has traded at 6.49 a few days before, I like to be 1 cent below that. .14 is a very tight stop but if it doesn't hold and move up, I don't want the stock. My point is that this situation on the 60 min chart (and given the past few weeks of trading and techinical indicators) is the kind of setup I specifically look for. Very low risk downside, at least 4:1 or 5:1 and trail the stops sensibly. Today I move the stop to 6.74 since it has based over 7 for the past few days. Hope this helps.

    Good Luck!


     
  9. Capitalisation (or lack thereof) is a major cause of failure.

    Assume two equally successful traders, Trader A with $10k and Trader B with $50k.

    Each risks 1% of their account per trade and employ the same strategy with the same results (hypothetically).

    So Trader A risks $100 per trade and Trader B risks $500 per trade.

    Assume each hits a multiple of 2 times their 1% risk, 60% of the time.

    So Trader A can expect to make: 0.6(200) - 0.4(100) = $80 per trade on average

    Trader B can expect to make: 0.6(1000) - 0.4(500) = $400 per trade

    So far, so good... BUT now look what happens with commissions... (which is an argument for undercapitalised traders to ONLY use IB):

    Trader A nets $80 - $30 = $50 per trade, assuming 'standard' direct access commissions

    Trader B nets $400 - $30 = $370 per trade

    Trader A's commissions are 38% of gross profitability
    Trader B's commissions are 8% of gross profitability

    Conclusion: The larger the account size the less is the proportionate impact of commissions and slippage on profitability. Small accounts (say accounts less than $20k) are at a BIG disadvantage because of this fact.
     
  10. candletrader is right, capitalization is the number one cause of failure. Most of trading is just common sense. You need the ability to loose a large chunck of your portfolio while still staying in the game.
     
  11. well said.
     
  12. Grabbit, save yourself some time and stop trying with the indicators you learned from a book :) The only way to make money with THOSE indicators is to write another book about them.

    If any of them actually works, the institutions with an army of computer geeks would have program-traded the indicator and killed it.

    Look at some charts and some charts and some more charts, and figure out something not taught in a book. I doubt anything would work in this market though, wait till volatility comes back to the equity market, or look at some trendy stuff, like commodities or currencies. Under extremely trendy conditions, those 'canned' indicators may actually make you a buck, but the performance will lag far behind anything you work out on your own. Good luck.

     
  13. Well thanks dozu888, but the indicator I'm using right now seems to work. But will it work tomorrow?
    I'll see. It's always a very personal thing, you have to find the right trading style that suits you, and the right stocks that suit that style... and so on.
    Trial and error and a bit of advice here and there will get me there in the end I'm sure. :)
    Thanks!

    BTW it wasn't a book but a website, http://stockcharts.com/education/index.html ,that I can recommend to anyone who wants to know the basics - nothing less, nothing more - of T/A. (I'm too lazy to study any more books anyway :) that's probably why I'm trading...)
     
  14. I agree. I think that cutting losses is only part of the puzzle. I also feel that assigning 90% of success in trading to psychology is a bit overstated. Knowing how and when to let profits run is a major obstacle for new traders. Well, it was for me. :)

    As EnterLong mentioned, I have found that stops based on some measure of volatility combined with an area of support or resistance that will likely change the short term bias if violated have proven best for the futures. I don’t think I’d work off a fixed dollar amount.

    I use a very short-term tool to partially scale out of a winning trade if it begins to appear weak while allowing the remainder of the position to adhere to a trailing stop defined by volatility or S/R. The same applies to trades running against me.

    I have seen “canned” indicators work for some traders if they had learned how the market operated in relation to them. They had become familiar with their strengths and weakness.
     
  15. I've found indicators alone to be inconsistent. They often quit working and by the time I figure it out I've whipsawed away my profits, especially in a non-volitile market like we've had lately. I've come up with many, many holy grail indicator formulas on certain stocks, only to see them quit working after a few days. In my experience they're only good for timing entrys and exits.
    Rgds
    Rigel
     
  16. cutting losses is a piece of the puzzle but its an important one. One of the major secrets is to be able to come back to play the next day. If you don't have good stops and disciplined to execute them you won't come back to play the next day.

    as for indicators: I don't care what kind of indicator you are using, it lags. I only watch price and key off it and volume. Simplicity is bliss.

    getting back to the main topic of this thread, I also get really weird stares when I tell people that I trade for a living. Its really funny, they look at me as if I'm an anachronism. "Didnt that whole thing die out last year?"

    :)

    I'm seriously considering telling people that I'm an actor or something. Probably much better when trolling for babes.
     
  17. Babak,

    I don't care what kind of indicator you are using, it lags. I only watch price and key off it and volume.

    Depends what you mean by price and volume. If you mean a chart with price and volume bars, then it also lags as the "minute" is forming. If you mean the T&S tape then it's as immediate as you can get, for practical purposes.

    For trading equities one indicator that doesn't lag is the futures, in fact they often lead (depending on the synergy of the particular stock and it's relation to them). In the strict sense they're not an indicator like MACD, Stochastics, Bollinger Bands, Moving Averages, etc. but they can be a very useful tool along with price and volume.
     
  18. The capitalization (aka account size) argument is less relevant than an earlier poster made it out to be.

    The only things that matter are trading costs (commissions/slippage) as a percent of trade size (in $), and trading instrument size as a percent of account size.

    Slippage increases along with trade size (it's much harder to get a good fill for large size), so if you ignore the very low end where someone trading a ~1 share on E*Trade is going to wind up just working for their broker, that makes trading costs linearly or semi-exponentially related to trade size.

    The granularity of the available sizes of the trading instrument matters because without it you may not be able to adequately match the risk to the account size. Stocks don't have this problem (unless you are trading BRK.A for some strange reason ;-) but in futures a very small (<$10k) trader may have to devote most of their buying power to a position of a single contract.

    I've probably missed something else that matters.
     
  19. That probably means that they work on some days very well, and on other days not at all. During yesterday's glide probably any indicator would have worked (I didn't check, but it seems probable).
     
  20. OK I know very little about the futures. Where do I find their quotes, how do I follow them, do they have symbols like stocks? Is there a future for every stock or is it something for the whole market?
    All I know is that they are a bit like options, where do I find more about them?
    As for trading them, are they as risky as options?

    Stuff like that.
    Tnx.
     
  21. Armaniman-

    I'd suggest that next time someone asks you what you do for a living don't say daytrader, say something more respectable... like a drug dealer or pimp. :D

    Fletch
     
  22. I wonder if part of it is "How you reply what you do for a living" I never hear anything bad when I say that I am a daytrader or a stock trader.

    is the tone in your voice weak when you say that, avoiding eye contact??

    rtharp
     
  23. Good question, RTharp. I don't think my tone is weak, in fact, I just laugh it off. I don't really care very much about how others react beyond finding it curious and interesting. Everyone is so eager to tell me about people they know who got slaughtered (presumably novices who jumped in at the end of the bull) and the general impression among most is, as someone pointed out, that daytraders are anachronistic gamblers who either go broke or go crazy. But of course, that's just their perception from a distance, and has little to do with my own reality.
     
  24. hehe.. or my personal favorite -

    "I market hot dogs and condoms to convienience stores.."

    =)

    -qwik
     
  25. Your data provider may or may not provide futures data depending on the your setup. The leading indicators Magna and others refer to are the S&P 500 (SP) and the Nasdaq 100 (ND) large futures contracts. These are based, of course, on the indexes of the same name, also referred to as "the cash" indexes. There is an open-outcry pit where the large contract is traded and an electronic session (Globex), which runs concurrently and overnight. The electronic market trades a much smaller version of the larger contract. These symbols are ES and NQ. All four are traded at the Chicago Mercantile Exchange. The Merc is a good place to start looking for info.

    http://www.cme.com/market/equity/index.html

    Futures use a letter to identify each month. You need only be concerned with H=March, M=June, U=Sept., Z=Dec. Thus, each contract is identified in this manner: SPU01 where U is the month and 01 is the last two digits of the year. Not all providers use the same order, so you may find that it is SP01U.

    Contracts have a limited lifespan. At any given time more than one contract is available to trade. Generally, the front or spot month is the most active month. This is the one you would trade, as it is the most liquid. The front month is the closest to expiration. Contracts expire on the third Friday of the month indicated in the contracts symbol. Prior to expiration, the next month behind the front month becomes the most active as traders abandon the old contract a week or so before the official date.

    Sometime, in the near future, Single Stock Futures will be available. The margin and contract specifications have yet to be completely sorted out. But I'm working on it... :)
     
  26. I sometimes answer that question by telling people that I'm a "critical liquidity provider". It's always funny to see people get really confused while pretending to know what that is.

    Dave
     
  27. Thanks a lot, tymjr, that will get me going on the futures.

    Just two more questions:
    As far as predictive value (of the front month contracts) is concerned, what time span should I think of? I mean, if you laid a Nas100 futures chart upon a QQQ chart, what time shift could you expect to notice (theoretically)? 5 mins? A day? A week?

    As to trading them: Is it like with options that you can be "assigned" if you keep them till the expiration date? If so, how long before that date would you certainly have to get rid of them (if keeping them overnight at all)?
     
  28. When people ask me what I do, I say I am "a modern day Robin Hood with a twist". I extract from the super-rich (the MMs and specialists) and transfer to the proletariat (me).
     

  29. I’m not real sold on the futures “predictive” power. I did use them to help trade stocks a while back but I found it frustrating. My trading partner has found that he prefers focusing on the stock rather than trying to filter its movements through the futures. I have no doubt that there are stock traders who profit immensely from watching the futures, but not me. I was just better at trading the futures.

    I trade off of the 5min. As far as the Q’s are concerned, I tried trading them recently with the intention of holding for longer time periods to avoid some of the chop. I just ended up trading the way I normally do and I found the Q’s offered poor fills and an all around frustrating experience. They appeared to be quite liquid, except every time I wanted to get into a position. Maybe I just suck at stocks.

    I’m not sure exactly what you mean by “time shift”. They track each other pretty closely except that the Q’s tend to exhibit more noise on the 1 min than the futures, IMHO.

    The Equity Futures are cash settled. I have never carried a position to “first notice” but I seem to remember it being a few days before the expiration.
     
  30. tymjr,

    OK, I'll just see what the futures can mean to me then. Thanks a lot!

    I've given up on the Q's. For long I have thought they were perfect for beginners. Well, they are NOT! They are so shaky that it's almost impossible not to get stopped out. And they never make a really big move (which would compensate for that). By its nature it's a pretty average thing.
    I now only use its chart to see what the market is doing. It's fine for that, but trading it is just not very rewarding on an intraday basis, unless you're very good at pinpointing your entries and exits. For swings I suppose it's quite OK though. (I even came upon a swing stock picker that did only QQQ, forgot to bookmark it though.)

    «They track each other pretty closely»

    That's what I mean by timeshift yeah, if they follow pretty closely, I would say there's indeed little predictive power in it.
     
  31. As for what I do, my grandma still thinks I'm a gambler, and she always tells me the story of how my uncle lost his savings on the ponnies.
     
  32. I'm actually to the point where i try not to mention to people that i'm a trader. They all seem to look at it in such a negative light, where as I've found it to be completly fascinating and profitable. They tell me its unhealthy to sit in front of a computer all day watching prices . My boss tells me it simply can't be done . Even my plumber came up to me the other day when I was at my computer . As soon as he found out I was a trader his first question was : Have you gotten hurt yet?
     
  33. Tell them that you are "engaged in probabilistic net excess return generation via the real-time analysis of intraday valuation evolution". That will either win em over or send em to sleep. Either way, you'll get em off your case.
     
  34. I think I'll use this euphemism next time and watch their eyes glaze over: "My job is to create positive alpha in a short term environment"
     
  35. I am not a gambler-casinos,cards,ponies whatever. Therefore upon studying and finally entering the daytrading arena I knew I would not do it if I felt like I was gambling. Over the past weeks, perhaps months, I have cut down my trading considerably because I believe the present absurd/directionless market just may be a gambling situation. I have decided to put more time into study so that when things do right themselves I will be ready. But right now,IMO, we're gambling.
     
  36. armaniman
    don't be ashamed to trade index futures at least you are
    not a stock trader ;)
    as to why people lose ? its not only money managment but
    pressures you have when trade full time. the idea of trading and must make rent this months or at least make
    it up for the next month double, is something not easy to
    handle. one stock trader I knew at ETG (he is now a manager in CT office), he had ice-water in his veins, so keep it cool under immense presure will help you with money management. this is why I uderstand vendors and those who turn into software dev or vendoring systems. I disdain them but I have some a soft spot and I am human too. I would never give a dime to a vendor again...I have spent $1000 on the stupid turtle system as I (prior) have met Richard Dennis at the CBOT. So MM won't bail you out altogether, I posted once about the four items you must have to be a success the last was psychology - "having no feelings" as it was put in the movie "Wall Street" equals to the "right phychology !!!!!! Actually the first 3 bullets
    were BS - just a filler !
     
  37. Right !
    And the funny [sad] thing is, it takes a lot of loosing before you realize what it means 'it's only psychology'.

    I know, newbies reading my comment might think 'c'mon not another warning about psychology! give us the sure way to trade instead !'.

    And that's why you are newbies.. sorry. I've been there so nothing mean or ill intended in my comment. It's just a simple fact. let me give you a pointer :

    Trading is EASY !
    YOU make it difficult and a loosing proposition !
    Consider this, if you are constantly loosing, you should just do the exact opposite of what you are doing now and you would make money [systematically wrong is great, it can turn into systematically right !]. Only psychology makes it difficult [try to reverse your way, and you will see what I mean hehehe!].

    Trading is DIFFICULT when you break even. This come after a while if you are not wiped out. Then it sucks ! you worked hard to reach that state and it is difficult to become consistently profitable [you can't reverse things when you are break even!].

    I was stuck in the break even state for quite a while. All this because I was trading stocks. It might be because being systematic with stocks is not that easy, and if you are not systematic you are screwed !
    It's only when I switched to futures that I understood the simplicity of it all. Probably because it's possible to focus and work on the systematic way instead of jumping from stocks to stocks.
    I am not saying you can't make a lot of money with stocks. Some on these board do [very very few I am sure, but they do]. For me, choosing one market was the breakthrough because it helped focusing on the only 2 ingredients you need :
    - Systematic approach with positive expectancy [risk management which insures you make money on the long run].
    - The psychology to follow it.
    Some call this : plan the trade and trade the plan. But I mean more. have a plan for all the trades you will make. trade precisely this plan, always, always, always.

    There is a trap though : markets do change. So you must be willing to have several plans depending on the conditions [please don't change everyday]. or a plan which adapt itself [it's possible]. If it was not for this changing aspect I would stand by my comment 'Trading is EASY'. Detecting changing conditions and adapting is very challenging. However, the idea is to go back to a point where trading is easy again. I believe you should keep it simple [easy] otherwise, possibly you are not on the right track and you might be asking for trouble.

    well.. I am too long already. But if a few pointers made sense to you it's good, it will save you some time or trouble. More likely, you will continue your bad habit until these comments make sense to you :)

    neo
     
  38. The above post is right on the mark. Be sensitive to your psychology, and to the psychology of the market. The rest is worthless drivel.
     
  39. bro59,

    I fully agree with you. The biggest enemy to successful trading is not a bad trading strategy, but a bad trading psychology. The often cited 80-90% failure rate could be considerably diminished if traders had the discipline to work on even one major axiom of good trading e.g. cut losses short and run profits.
     
  40. Think I'll tell them ; I get up everyday and fight for money
     
  41. A modern day Gladiator - kill or get killed.
     
  42. Are you suggesting day traders are dishonest and unethical by the nature of, or the perception of, their chosen profession?