So You Want to Be a Day Trader

First Things First

One thing that I think that I would like folks to know is that while I consider myself a professional trader and investor as well as a competent economist, that I have absolutely no problem with either speculative investment, nor the concept of day trading. Often you will hear some of the pros refer to day trading as gambling, and it certainly can be. That said, just as we do with investing, there are ways to “day trade” that can at least reduce some of the danger. Like the rules based approach that we have often discussed with investing, one can take a rules based approach to trading extremely short-term.

There are three problems that I have seen in the past when an individual takes the plunge and becomes a day trader. One… Most new day traders are individuals that end up entering this particular discipline without first honing some of their own discipline ahead of entering as perhaps these individuals may have recently lost a job and are now trying to supplement lost income. These individuals often feel a certain pressure to earn a certain minimum every day. Everyone has “up” days, and everyone has “down” days. This kind of trader feels more pressure after a “down” day that only compounds with “down” weeks or months. This kind of trader feels more pressure to produce when holidays shorten the number of daily trading sessions over a given time period. Ever hear the old Wall Street adage “Short weeks are always long”? This is where that comes from. Secondly, I have noticed that experience in finance does not necessarily correlate to success in short-term trading. Lastly, initial success has gotten more day traders hurt than maybe anything else I have ever seen. A great first day seems like a gift. A great first month breeds undeserved confidence. Nothing is more dangerous than overconfidence.

Next

Entering into a day trading position requires knowing ahead of time what one is trying to accomplish. Are you trying to support a family? Then depending on one’s circumstances, this may not be a reliable way to do that. Trying to supplement already stable income? That can potentially be done, as long as one never makes a panicked decision. Deciding whether or not to jump on trend or go counter-trend in a volatile name is a matter of style. For investors, I think that the trend is your friend, and once one learns the ability to recognize capital flows as well as identify leadership, one can fairly easily camouflage mistakes made in execution. This is different from day trading in that the entire ball game is in the execution. Trend and leadership matter, but to a lesser degree.

Then

This part is essentially the same for long-term investors and for short-term traders. When an investor enters into a long position, that investor always has a target price, certain levels where the investor will add to the position, and finally a panic point. Without those essentials, one is not a professional. When day trading, which I don’t particularly enjoy, but do engage in for sport or to bolster a weak month across my portfolios, a trader already knows where to cover as well as where to panic, as soon as that position is taken. I do not believe in dollar cost averaging for day traders. As a method, this can serve a purpose for an investor who is not in tune with the markets that wants to add capital to a portfolio on a regular basis. For day traders, this is where trading can easily descend into gambling. We do not want to gamble. We want to stick with a plan.

Example

Early this morning, Tesla (TSLA) reported that second quarter deliveries had printed at 90.65K vehicles. This was versus the Wall Street consensus of roughly 83K. Though production of new vehicles had fallen 20% sequentially for the firm to 82.27K, the company made note that the facility in Fremont, California had been shut down for a substantial part of the quarter, and was back up to prior levels.

The shares took off in pre-opening trade. I watched them spike more than 10%. I tried to short the top, which I missed. I did manage to put out a few shares between $1226 and $1227. Do I intend to stay short Tesla over a three day weekend? Heck, no. I don’t even know if I will be short, long or flat this name at lunch. I do know that I will cover at least half of this position at $1200 if I am right, so I can go for the kill with house money, or I will call it a ballgame at $1230 and move on to the next thing.

This is the slow motion version of day trading. Professional day traders will watch for technical changes to the intrad-day MACD and/or in the patterns of one minute candlestick charts, but the key is the same. Flexibility above all else. Less money on the line than one might place into an investment made with conviction. Walk away from headline risk. This game is not easy. I find day trading far more stressful than investment, which is probably why I do it less.

Very new day traders may want to “practice” but not just on paper as that removes pressure. Perhaps with very small odd-lots though, as this will prevent serious injury, but still allow for the thrill of victory as well as the agony of defeat.

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