Searching for day trading statistics online, you’ll find reference to studies stating that 90% of all day traders fail. In this article, I’m not going to refute those studies. Rather, I will provide a way to use day trading statistics to your favor. Applying these ideas will help you from becoming part of that 90% group.
In other articles, I’ve covered the importance of having a day trading strategy. There are many details to any strategy. It includes, among other things, specific rules on the technical basis for entering and exiting the trade, specific rules on when to exit a losing trade, how much equity to place on each position, and many other rules as well.
But part of developing a day trading strategy is understanding day trading statistics. Let me give you an example.
Let’s say you’ve developed a strategy that “wins” 75% of the time. The odds are 3:1 that a trade will make money if you enter it based on the specific rules laid out in your strategy. That is a very high win rate. So you’re off to a good start. But how do you define “win”? If price goes up at all, then is that a win? Does price have to go up by 1% and then you exit the full position for you to consider it a win? You can’t fool around with these issues. I know you just want to go out there and trade stocks. But a good day trading strategy needs to be very specific about these things.
For starters, let’s say you’re defining a winning trade as any day trade that makes 1% profit. Let’s say you are going to exit your full position at the 1% target. So the next question we need to ask is “What is your stop loss for each entered position?” Is your rule that you will exit any trade that goes against you by 1%?” Is this stop wide enough to account for natural volatility in the market? Would your day trading statistics improve if you changed it to a 2% stop loss? Would your percentage of wins go up to 80% and would that account for the 20% that hit the 2% larger stop?
The key question here is “Do the rules of your day trading strategy favor the natural day trading statistics that you find in the market?? Are your rules arbitrary and based on your comfort levels? Do you have the discipline to actually execute the trades as laid out in your strategy?
One of the things we look at, whether consciously or not, is the probability of something occurring on our charts. For example, in the chart below, CYOU gapped down. What is the probability that it will "fill the gap" on the same day as the gap down? The answer: it has a low probability. Therefore, we don't expect it. If we don't expect it, then we are more likely to take our profit at some point before the gap fill occurs. In this example, we would have exited too soon. But, playing the rules of probability, we would have been correct to exit the trade with a profit before it filled the gap.
Now, you may think that such trading by the numbers is too difficult to measure and back-test. There are some highly technical chart platforms that will allow you to do this. Amibroker is one of those. But you can also use this idea of day trading statistics to measure your actual trades. To do this, you can go back into your trading log for the week and measure your winning trades versus your losing trades. Then measure your average percentage gain on the winning trades and your average percentage loss on the losing trades. You can develop Excel spread sheets to help with this or you can just do it by hand. Either way, you’ll find it educational.
If you’re like most traders, then you take your profits too early and
you wait too long to take your losses. Because of this, even an 80%
winning strategy can be a losing strategy. If you take profit at less
than 1% on four winning trades and let one losing trade go to a 5% loss,
then you are going to lose money. It’s simple math. But most traders
don’t want to face up to the reality of what they’re actually doing in
their trading. They want to focus on the ones they win, not the ones
they lose. There is a positive adrenaline rush when we execute a
winning trade. And our ability to deny our losses can keep us from
becoming one of the 10% of successful day traders.
To read other articles about day trading strategies, then click here: day trading statistics.
You might also enjoy this scientific article about your probabilities for success as a day trader: day trading statistics.