You won't get rich daytrading - my story

I just found elitetrader and have looked through it the past few days. Really like it. I like silicon investor(post there as tradermike1999), but here the focus is really on trading and not trying to hype up stocks and personality conflicts. There are some real ego maniacs on there.

Enjoyed the thread someone started called "my story." Thought I'd throw my few cents in about this industry.

First. Trading is tough. Stastics show that 1/2 the people who try it lose money. 1/4 just match the market and only a tiny percentage make most of the profits. Most of the gains go to less than 5% of the traders.

The good news is that most people use flawed strategies or don't have any at all and that fact makes it easier to get into the "elite trader" category.

After ups and downs and blowouts I've managed to get into that category and have stayed in it the past few years - in fact the Nasdaq bear market collapse was my best time ever because I was net short and stocks drop faster than they go up. All rallies were times to pyramid shorts until this past April, but more on that later...

I first started to make money in the market when the Internut mania just started to heat up. Nasdaq stocks went up so fast that just about anyone could make money.

When I first got into trading I put all of my money in one stock. It then doubled and I thought I had found a new way to get rich. Over the next few weeks I tripled my money and then before I knew it I lost almost all of it.

You can tell what I did wrong. Not too complicated. Absolutely no risk management. Throw all of the money into one position. Don't use stops. If it goes up make a lot, but if it drops you lose your ass. And it was only inevitable that it wouldn't last. But the money I lost wasn't money that I depended on so I wasn't distraut. I remained confident that I would learn how to do better.

I spent the next 6 months obsessed with two ideas. Trying to find a strategy that would make me money and trying to break even!

I did what I guess a lot of people do. Get the idea that if I can find just the right strategy or guru than I can make money. Most gurus are frauds that don't even trade themselves and finding the right strategy is only 1/2 the equation.

I actually had the right strategy. I knew what to do to make money all along. Before I put my first trade in I read about 2 dozen books on investing and trading. The one that stood out the most though was Stan Weinstein's Secrets for Profiting in Bull and Bear Markets.

When I read it I felt that he was talking right to me about the market. And I just knew that if I applied his rules and tried his strategies I would make money.

He advocates using simple charts and technical analysis to buy stocks that are in strong sectors and are trending up. You sell for profits once the moving averages flatten out and the stocks break down or you sell for a loss if the stock drops through your initial stop. You hold for days, months, even years if you get a real long term winner.

But something happened. I took his basic concenpts and turned it into a short term daytrading method. I took the basic ideas of support and resistance and applied it to short term chart patterns. Buying technology momentum stocks when they broke out of short term resistance in the afternoon and selling them for a profit the next day. I also ignored the idea of using stops to cut losses.

What was going on here? I knew what I should do, but I did everything one shouldn't. Why did I want to try to make quick profits in momentum stocks(which were mostly garbage companies that would go up because they issued a hyped press release) instead of trading the type of stocks and strategy that Weinstein talked about which would provide higher risk to reward ratios and actually make more money in the long run?

One could say greed, but it is more complicated than that. I got the idea that I had to make money instantly. As fast as possible. I couldn't buy a stock and see if I'd have a profit a week later. I wanted to have the results in hours or at most a day. It didn't really matter if I made or lost money. I just wanted the action. This is the classic gambler's syndrome.

Unfortunately, most daytraders engage in this sort of self destructive behavior. Yes there are a small minority of successful daytraders, but you could say that daytrading - for most people - is a form of mental illness. It is a craving for control. Even if a daytrader loses money there is always the promise of the next trade. Even if they lose money on each trade the more trades they do the more in control they feel. But how many daytraders have stories that end in success and how many have stories that end with psychological suffering and financial distress?

And part of it is the siron song of money. People promise that you can easily make money daytrading and make it look like you can. Websites and daytrading gurus show you example after example of successful trades, but don't make any trades themselves. They're too busy collecting dues. But I'm digressing from my story.

I got to the point where I had to do something or else my account would go to zero. I stopped and thought things out. I incorporated a stop loss strategy and managed my risk by buying more positions and placing limits on how much money I could place in any single one. I also learned how to short stocks so that I could profit on down days - something that came in handy later.

I stuck to my short term 1-2 day horizon and thanks to my risk management made money. Made a lot of money. Over the course of two years I had over 10X what I started with.

But I looked back and saw that if I had held my positions in a longer time frame instead of taking quick profits I would have actually made more money. Looking back I see that I was still in a manic daytrading mode that demanded instant results. My next challenge was to learn to get away from that. I got to the point where I really had to anyway in order to continue to make large profits.

The secret no one tells you is that no one gets rich daytrading stocks. The problem is that you can only put so much money into short term positions. To do that you need to diversify in a large group of stocks and use a longer time frame. That is why people who are good daytraders - such as Jea Yu(I'm guessing he really trades, know him from his book) - tell you to keep 50k or 100k in your daytrading account and take any profits that take your account over those limits into your bank account as a paycheck. But then there is no useful way to use the extra profit/savings.

That's why hardly any of the real big players in the stock market are daytraders. George Soros, Warren Buffett, etc are not daytraders. Those that are big daytraders usually do it by playing something like the S&P futures or QQQ's - indexes - instead of single stocks.

Over time as I matured I did evolve to the point where instead of manic short term trading I was able to manage 10-30 positions at a time in a portfolio with a holding period from days to months to years. Days if its a dud and I get stopped out. The longer the better. What I do is go long in stocks that are in sectors which are outperforming the market and short sectors that are underperforming. That's how hedge funds operate. And not coincidently it is the hedge funds that are outperforming the market now and not the daytraders or the Janus funds.

My longs don't come from the popular stocks. Right now they are stuff like medical companies, railroads, parts stores, medical product companies. You could never get me to buy into a JNPR, JDSU bubble now....lol. That is where I short. But I'm out of shorts now. That time will come in the next few weeks.

The funny thing about this is - and maybe this is the real lesson - since I've gone from daytrading to holding for a longer time frame my profits have been larger and more consident. But not only that - I have a peace of mind. I have no worries about the positions in my portfolio. One single position means nothing. Its the workability of my strategy and commitment to cutting loses that make me money. Not individual stocks or what the market is doing. And as for the market is doing that doesn't matter because even my long positions tend to go up a little even when the market drops. When I daytraded I always felt that I was at the mercy of the Nasdaq. Watching the Nasdaq chart and always worrying. Now I don't worry about that and being like that makes it a lot easier to be more objective about things. And lets you devote your energy to more fun and useful things. It's nice when the market stops being something that your life centers around and becomes something that helps you live your life more fully.

This is the trading aspect of my business. And I consider it a business now instead of a roulette wheel. The other side is a newsletter I run and I don't want to talk about that here on this board. But I'll talk about my experiences in that industry and with journalists, and other websites and so called gurus in print and the net if interested. Maybe that is another topic.

 

tradermike, you make some interesting points and I honestly like your style (I watched you trade on SI and on your original/first web site swingtradingonline.com)

To say that daytrading is not profitable is a dangerously absolute statement. I, obviously, disagree with you.

It is a matter of fit. If your personality is one where you can not control your emotions enough and need to trade for trading sake, then ofcourse that is harmful. Psychology is 99% of trading.

However, daytrading is extremely advantageous over longer time horizons because of the simple fact that you can turnover your capital faster.

If you make even 0.25% every day (lets just say!) that is a hell of a lot of money long term and I would take it over say, 40% a year.

Finally, you claim that George Soros, or other big players did not 'daytrade' etc. Again, this is a matter of style. Soros is a macro + fundamental player. So obviously he didn't daytrade.

Others, like Steve Cohen, however, do with great success. SAC Capital has been one of the brightest stars in the hedge fund universe with 50% returns over many years (after 50% that Steve takes off the top). Recently his best traders have started their own funds using the techniques they learned at SAC.

If you have found your style and it is profitable, I am truly happy for you. However, do not mistake that your path is the only path.

 

Interesting how people always assume various strategies don't work because they don't work for them personally.

On the other hand I doubt any trader could succeed with all strategies.

So perhaps the variable is the trader - not the strategy.

 

You won't get rich from web sites either.

 

Jea Yu doesn't trade, and his site is on of the frauds.

100K with 2x margin will get you 4000 shares of a $50 stock, that's less than a single position of a top tier day trader.

While I agree at the highest tier of the game hedge funds will inevitably need to have overnight positions, I would say if you have more capital than you can work in day trading, you already have all the money you ever need.

You forgot to mention that a day trader who knows what he is doing can control his risk a lot better than swing traders can, simply because he doesn't lose nearly as much percentage wise on a single trade and doesn't carry overnight positions, personally going to bed without any positions gives me a lot of peace of mind.

Not every day trader spends all of his time scalping JNPR's, there are many who trade a huge variety of sectors, like me.

I personally find day trading a lot less stressful than swing trading, because I like instant feedback from the market.

 

Mike-please let's get clear and straight on one thing-- your site is not FREE--you are offering a free trial membership trying to recruit . I resent this nonsense.

 

Babak, Cdntrader, andrasnm, and Hitman.. right on guys..

tradermike.. you know what else you cant get rich at? pro basketball.. i mean, i tried it and wasnt good at it so that means no one else is good at it either.. no, the only sport that can make any money is bingo, and only if you use the strategy personally designed by me..

http://www.bingo-extravaganza-im-one-rich-bingo-machine.com

lol..

seriously, i might not have a snowballs chance in hell going one on one with Shaq on the basketball court, but ill go mouse to mouse with him anytime.. and we'll see who gets dunked =)

i think its important to keep in mind that the majority of ALL businesses fail.. failure is not limited to those with trading businesses.. while those who think the world owes them a million dollars because they had the intellectual foresight to open an Etrade account will surely be disappointed, those who approach trading with discipline, a willingness to learn, persistance and sound money management will enjoy the same ability to succeed as any other type of small business..

good trading

-qwik

 

Babak -

Thanks for your response. I wasn't trying to suggest that all daytraders lose money. But that for the average person daytrading is a losing strategy. Actually any hands on strategy that involves anything more than buying mutual funds is a losing strategy for the average person with an online account. Studies have been done that show that the average account with a discount broker is a consistent loser and I'd venture to say that most of those people consider themselves investors.

But it is also true that the average daytrader performs worse than the average buy and hold type. As a rule the shorter your time frame the more difficult the trade. Everyone knows that.

It is true that if you make .25% a day that can come out to a big sum. Gary Smith of TheStreet.Com is a person who proves that. But he is the exception and not the rule. If it were only that easy.

When I posted my message I was wondering how people would respond to my story - the psychological parts that I talked about. How I found the psychology of daytrading much different than managing 10-30 positions. Do you see any similarities between your own psychological feelings while trading and what I wrote about trading/investing?

As for why I am posting this. I've been thinking about this subject the past few days and thought I'd post it somewhere were I could find people who would disagree and that would make me think about it more deeply. I did that last year at Metamarkets.com when I was convinced that the stock market and economy were going into the toilet. Don Luskin was a true believer in the Internet economy and I had spirited discussions about it with him. He proved to be wrong as the Metamarkets mutual fund collapsed and my short positions made my account expand. Reminded me of a funny Muppets episode.

 

I disagree about the time frame comment. The shorter your timeframe is, the better your odds of success are. There is a sweet spot so to speak. I can't predict the next tick. No one can. I can't predict where it will be 30 or 90 seconds from now. As time goes out, I can say with some certainty where it will be, and where it will move to. As the move continues, I can predict less and less where it will be over the next 30 minute period. As the future gets more blurry, I scale out or exit completely. No one can see many days into the future. There are too many opportunities for news to affect the market. I definately think that the shorter your timeframe, the better your odds are.
The second part is in reference to Gary Smith. I think he has been more influencial to my success in trading than any other person. (If anyone does not have a subscription to thestreet.com/realmoney.com, you are not really interested in trading.) His main points are not to swing for fences. His basic strategy is to make 5% per trade, and not risk more than 5% of his account. You'd be surprised, but all those 2-4% up days really add up fast when it's compounded. I don't think I've had a day where I made more than 10% so far this year, but I'm up almost 150% so far. (the miracle of compounding)
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Tradermike- The reason that soros and buffett aren't daytrading is b/c they are too large. Soros found out the hard way how hard it is to move even a few thousand contracts in the sp's. I think a lot of people can be successful at daytrading if they think logically and have experience. I know quite a few guys who make 20-50k a day. (they are all ex-market makers and floor people who now trade for themselves) They have multimillion dollar accounts, and some trade using 5 minute bars scalping quarters still. (unfortunately they are limited to about 5 dozen stocks and the futures). It seems that you have really developed something that works, and I'm definately jealous. When I have more capital, I intend to continuously swipe it into a second account at the end of each month and trade like you do on a longer time frame. But now, I like to know that my risk is under control. I can get out of monster positions down just a few ticks still. It would bug me at this point to have a 2 point stop on even just 5k shares, but I know I can dump an intraday scalp of 10k+ shares down a quarter. I think that is the main advantage of daytrading. Since I almost never have overnights, I don't risk loosing 50%+ on a trade. That's the thing that really scares me. When the market closes, my risk is out of my control.