Day Trading for a Living

"Is it possible to do day trading for a living?"  Many traders eventually ask this question.  You want to know if your new-found passion could translate into a sustainable income.  Or, you may be struggling and your spouse is wondering "how practical is this whole trading thing?".

First the facts:  most day traders fail.  I'm going to discuss part of the reason for this in this article.  But, my basic advice is "don't quit your day job until you've established consistent trading success and you have enough in the bank to cover your expenses for several months".

Day Trading for a Living Requires Discipline

The above headline seems simple enough.  We know that trading requires discipline.  But it may surprise you to find out that you are probably your own worst enemy when it comes to day trading for a living.  Let's look at why this is true.

Imagine that you are looking at a chart.  You've done your analysis.  You've determined that the price of this stock or this currency pair is going to go up.  So you buy it long.

Let's say the price goes up a little bit.  You think it will continue to go up, so you continue to hold.  But, without warning, the price changes and starts to go down. 

What is going on inside your head when this occurs?

Your eyes probably open because you are startled.  You become a little bit worried.  But something else is going on also.  You are becoming more convinced than ever that your decision was the right one.  Why is that?  Because we hate to be wrong.  We hate to lose money.  And if our long pick is moving against us, then there is a possibility that we are both wrong and we're going to lose money. 

We cannot accept that.  So, we dig in, hold our losing position, and our trade eventually results in a larger loss, both psychologically and materially.

This scenario plays out everyday in the lives of thousands of traders, impacting their ability to embrace day trading for a living.  So, let's shed a little light on the subject.


Recent studies, on cognitive bias, say that our experience is all too common.  It's called anchoring.  I'll let Wikipedia define it for us:

(You can read the full article via this link.)

My interpretation:  once we've made up our minds that the stock or currency pair is going to go up, then we interpret all subsequent information in light of that initial decision.  Otherwise, we would lose our confidence, we would be wrong, we might question our rationalization for the trade, etc.

But, being the creative little-brained people that we are, we don't stop there.  We dig in a little deeper and convince ourselves that our initial assessment was correct!  The winning phrase for this behavior is called...

Confirmation Bias

Once again, I'll let the Wikipedia text describe this.

(You can read the full article via this link.)

So, what's a trader to do?  We've done our best to analyze the market.  We've wrestled up the courage to make a trading decision.  And now the whole thing blows up in our face!

Well, the good news is that now you are more aware of what you're doing.  Traders tend to throw out every strategy that isn't 100% fool-proof.  If we have a bad trade using a certain strategy, then we tend to blame the strategy.  But it could be simply that we anchored ourselves in that initial analysis and trade decision.  Then, when things moved against us, we used confirmation bias to rationalize our decisions, looking at other time frames to justify our decisions, rather than admitting a simple thing:  charts change.

Our strategy may have been fine.  Our analysis may have been superb.  Our decision to take the trade may have been absolutely correct based on the information we had at that time.  But, charts change.

There's a great quote that goes like this...

"Be neither a bull nor a bear."

The moral of the story is trading for a living is possible.  But you must learn to be nimble and open-minded.  Beware of your anchored images of price direction.  Be conscious of your tendency toward confirmation bias.  And don't throw out your whole strategy just because of a few bad trades.

Charts change.

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