"Is it possible to do day trading for living?" "Can you really day trade for a living...you know, make a living out of this thing...pay all your bills?" People come to day trading from many different points in their lives. Day traders are retirees looking to earn extra income while also having some fun. Day traders are stay-at-home parents who earn enough trading the first few hours of the morning market to take the rest fo the day off. Some day traders are young entrepreneurs who approach day trading as another online game. But these questions come from a common desire to be self-employed, not have a boss, and create income without limitations.
Most of the people I help become traders are wanting this very thing: to do day trading for living. For some traders, this is how they keep score. If they earn enough from their trading so they do not have to work another job, then that's a win. But, winning wears many faces, so I wanted to discuss some of that here.
Part of the fun of playing a game is winning. You do this by keeping score. In the day trading game, we keep score so that we can make sure we're making money.
But keeping score means that you look at the trades that work and the ones that don't work also. Some traders are guilty of bragging to friends and family about the huge profit on the one trade they made while ignoring the several trades on which they lost money. We tend to hide from the reality of the losses. We don't want to admit those because its sounds too much like failure. But, if you're going to do day trading for living, then you've got to be honest and keep an accurate score card. Face up to your wins and your losses because the day trading losses are the ones that will get you into trouble.
Here's a quote that I like. My dad used to say it, but I don't know the original author:
Many new day traders don't keep score. Might seem odd to you. But a lot of newbie traders just start trading. They see the money come and go. But they don't really analyze their wins and losses. They don't review their trades to see if they traded according to strategy. They move in and out of stocks too quickly, without plan and purpose. When one trade is done, they jump to the next play and do not evaluate the success or failure of the last trade. This is not how you learn to do day trading for a living.
Taking a naive approach to trading would be like the football coach who dismissed the game films from the previous game. The score tells you the end result. It keeps you accountable. But, if you fail to analyze your trades against your stated strategy, then you don't really know how well you're playing the game. Because this is the real way to keep score - not just whether or not you made money, but by how well you executed the trading strategy you've chosen. Yes, the two are related. The dollar gain or loss is a very real measure of your success in day trading. It will definitely tell you whether or not you can make a living day trading. But by examining your victories and your defeats, you will become more successful at trading. The more successful you become at trading, the more you have a chance of day trading for a living.
The less money you lose, the more money you keep. Check out my new course "Trading the Afternoon Market" if you want a solid education in trading stocks. Click Here for more information.
Most traders consider the money in their account to be their scorecard. And it is one measure of your success. But it is not the only one. If a trader wants to day trade for living, then he/she can keep score by asking a few questions.
1) What is your win/loss ratio? To figure the answer, simply divide your number of wins by your number of losses and get an objective answer.
2) What is your average loss and your average gain? To figure the answer, take the difference between your entry price and exit price and divide this amount by your entry price. This will give you a net percentage gain or loss.
When you examine this, you may discover that your losing trades are a higher percentage than your winning trades. If this is the case, then it highlights the weakness of your trading strategy. Your strategy is not giving you a signal for selling the losers quickly enough. The end result is that your losses are wiping out your gains. And, obviously, if that continues then you won't be day trading for living very long.
3) Are you using the same amount of equity on each trade? I cover these topics more thoroughly under trading strategy, but let me mention the importance of it here.
Some traders "double down" after a losing trade. It's the poker mentality that says "the odds are that after a losing trade, your odds of hitting a winning trade are higher." The reason I don't like this mindset is because it feeds upon the idea that trading is a game of chance. It is not. It is a highly defined skill-set game involving lots of money.
The best strategy places the same amount of equity on each trade. Why? It keeps you focused on playing a good game and keeping score fairly. A good trader is one who, using the same amount of equity on each trade, has more wins than losses and whose wins earn a higher percentage gain than the losses end up losing. Using the same amount of equity per trade helps you keep an objective scorecard.
4) Do any of the above numbers change depending upon the time of day you're trading? For example, is your scorecard better in the morning than it is after lunch? I've had students tell me they lose everything in the afternoon that they gained in the morning. Well, the obvious choice is to quit trading in the afternoon. No one said a day trading for living has to take all day! One of the reasons I like to trade gap down stocks is because I am often done by noon, leaving the rest of the afternoon free.
5) Is money the only way you keep score? For me, day trading for living creates income which allows me time freedom and independence. And it is difficult to put a dollar amount on the value of those things to me. The question is not "Can I become rich day trading?" Rather, "Can day trading for living provide me with enough income so that I am financially free and independent?"
Okay, to wrap up this session on keeping score and day trading for a living, let me tell you why the numbers you just figured are important. If your win/loss ratio is 60%, then you're executing more winning trades than losing trades. That's good. But, let's say your average loss is 5% and your average gain is 2%. This means you are still losing money, even though your wins outweigh your losses. If I were coaching such a person, then I would take a look at their tendency to let losers run too far and their tendency to cut the winners too short. So, figuring these numbers is not just busy math work. It creates an objective scorecard to help you know how you're doing. You can track these numbers over time. See where you need to improve. Track your progress.
Want to know more about keeping tight control over your day trading losses? Click here for more information about day trading for living and losses. Knowing your real trading score is much better than hiding your head in the sand, or reporting only the good trades to your spouse or friend. But, hey, I know you've never done that.
In the free report (available when you sign up for our mailing list), there's a ready-to-print form you can use to keep score on the items mentioned on this page.
Here's the link to another article on day trading for living that you might enjoy reading if you are giving this topic some serious consideration: click here.