By Sam Evans, Co-Founder & CEO

When it comes to the world of trading and investing, most people are naturally drawn to the idea of being a “Day Trader”. If you are unfamiliar with the term, then it simply describes someone who attempts to enter and exit the financial markets for short periods of time on a day to day basis. Positions are never held longer than typically a few minutes to hours, sometimes only seconds. The goal is to get in and get out for a profit, then simply walk away. On the surface, it sounds like a wonderful way to potentially make a profit. In reality, it can be one of the most challenging ways to participate in the markets, with many speculators blowing up their trading accounts all too quickly and becoming disheartened early in the game.

Does this mean we should avoid day trading completely? Absolutely not. In fact, some people do very well with this approach but they learned early on what it takes to give yourself a real chance of success. Let’s talk about the good, the bad, and the ugly of day trading.

The good

On a day to day basis, markets tend to move quite a lot. Especially in recent years, we have seen a consistent increase in volatility across the stock market in particular. Indexes like the Dow Jones move hundreds of points a day on a common session. This is a day trader’s dream scenario because, without movement, there is very little opportunity. However, there also needs to be a delicate balance between decent volatility and frenzied volatility, where markets can become too dangerous from a risk control perspective to participate in.

There is also a variety of ways to participate as a day trader now, with a choice ranging from Stocks, to Options and my personal favorite, the Futures market. It used to be the case the you needs tens of thousands of dollars in a trading account to participate but today, things are very different.

Leveraged asset classes like futures make it possible for someone to start with as little as a couple of thousand dollars in their account. We are also able to trade as much or as little as we like each day when using futures. In our IncomeAbilities course, we focus on simplicity and low risk. This is achieved by using futures contracts like the Russell 2000 Index and the Dow Jones Index only. This way we don’t have to find a stock to trade each day. Plus, with the use of E-micro contracts, we can take trades with as little $20 risk per opportunity.

Finally, if you can stick to a process and stay systematic in your trading, then another benefit of day trading the stock indexes in particular, is the rhythm across the day. As someone who likes a simple approach, I like to make use of key widows of the trading day to look for the same repeatable setups, without having to sit in front of a screen for hours on end. In my experience, the more time spent in front of the screen usually results in more frustration.

The bad

We can keep this section short and to the point. Day trading is risky if left unchecked, simply put. Most brokers offer incredible leverage for day trading futures and this gets abused and mishandled by most. Amateur traders often wipe out their accounts as they get greedy, fearful, and outright reckless when they jump in and out of trades across the day. Having an opinion on what you “think” will happen in the markets is dangerous thing to bring to the table. I learned very quickly that the markets do not care about my opinion. Getting stuck on an idea can lead to financial disaster on both short and long periods of time. Short-term market fluctuations can make us emotional and force bad decisions.

The way to overcome this dilemma is to follow a system of logic and probability, ignoring what you think and focusing instead on what you “see” objectively in front of you. Ask yourself:

  • Is the price low or high?
  • What is the market doing, is it trending up, down, or sideways?
  • Is there room for profit and if so, is it worth the risk exposure?

These questions are always more important than your gut feelings. I tell my students to let the market makes the choices for you. When they scratch their heads at this statement, I simply remind them that nobody knows what is going to happen next, but everyone can choose to follow a set of rules that stack the odds in their favor. All trading and investing should be built around consistency, planning and risk management enforcement. Treat it like a business and you are halfway there.

The ugly

So, you know your rules for managing risk. You have become proficient at recognizing your entries and you set your targets accordingly. Now the hardest part begins: You have the plan, but do you have the patience to allow the plan to play out? Then when it does or does not play out, do you start changing the rules on the fly? These are the most important factors in day trading success. It is not just about having a plan and strategy…it is about actually following it no matter what the outcome.

The ugly truth is accepting that the markets will not do what we want them to do most of the time and that is just fine. A good trader knows that they only need to be right 30-40% of the time to be profitable, as long as they use a solid risk to reward ratio (more on this in upcoming articles). The problem always stems back to the same realization that most of us are unwilling to accept what the market has to offer and act accordingly. You will never get every drop from your trades and that is ok to accept. Set your buddies your system and let things play out as they should.

Here at StockAbility™, we trade by the principles of playing the markets as we find them. Some days there’s plenty on the table, others not so much. It is your choice to decide if you will try and grab what’s on offer, albeit maybe if it is only as little, or if you will wait for the bigger moves which come less often. Case in point, let us take a look at a recent morning Guided Trade Session (GTS) at the market open. We were looking for a setup to buy the Russell 2000 futures in the first hours of trading. Here is a screenshot of the live session with us setting up the area of interest:

day trading Russell 2000 futures

The opportunity needed a risk of about $150 on 8 contracts (about $20 for 1 contract) to buy around 1634.80. The first target was around 1645, the previous day’s highs, with further targets higher. The reward was only about 2.5 times the risk to target 1 with much more if it traveled higher. Let it be clear that this was an aggressive trade by our standards but an opportunity none the less. We were expecting the market to move beyond 1645 to potentially 1650 and beyond. However, it was simply not meant to be on that day, as we see below:

day trading

As you see by the end of the day, we had a choppy non-eventful outcome, with the Russell only just managing our first target. Not an ideal day but slightly profitable, nevertheless. The markets can be ugly like this, but we accept it and take it as we find it. The question is, did we follow the plan? If the answer is yes, then we can walk away happy.

One of the ugly challenges of day trading is accepting that sometimes you have a great plan, but the market just does not agree with it. Get in, follow your rules, and take what the markets are offering you is the logic we follow. Sometimes it will be good and sometimes a little bad. Plenty of the time it will get ugly but if you are good with that, then maybe you may just have the makings of a day trader.

Thank you and be well,

Sam Evans

[email protected]