TEN GOOD REASONS TO DAY TRADE
Day trading is a great career option for the right person in the right circumstances. It requires a strong, decisive personality who wants to be running the show every step of the way, from backing up the PCs to collecting all the profits. And good day traders have some financial cushion and good personal support systems to get them through the tough times.
Think you have what it takes? Are you ready to go into business for yourself as a day trader? See how many of these characteristics fit your life right now.
You Love Being Independent
Day trading is like owning any small business. You’re the boss and you call the shots. Each day’s successes — and failures — are due to you and you alone. Most likely, you’re working by yourself all day, so you’re responsible for everything from the temperature in the office, to the functioning of the computers, to the accounting for trades.
Good day traders are independent. They don’t want someone to tell them what to do; they want to figure it out for themselves. They love that challenge, whether it’s finding a good bargain on office supplies or developing a profitable way to arbitrage currency prices.
If you would like to work for yourself and control your own destiny, keep reading. Day trading might be for you. And if not, go to see some alternative careers that involve the markets but do not put all of the onus on you for success.
You Want to Work Anywhere You Like
All you need to day trade is a computer, an account with an online brokerage firm, and high-speed Internet access. Nowadays you can find these tools almost anywhere: at home, at the library, in a bar; in a big city, in a small town, in the mountains, or in another country. Day trading offers a lot of geographic flexibility, which few other businesses do. You can trade while traveling as easily as you would trade at home. You have the luxury of setting up shop wherever you please, and if you decide to move, you can pack up your laptop and move your trading activities to your new destination.
You Are Comfortable with Technology
NASDAQ is the precursor to the Internet. Long before everyone and her grandmother were online, securities traders were using complex electronic communications networks to buy and sell securities. The financial services industry was one of the first to embrace computer technology in a big way in the 1960s, and it is still a technology-intensive industry. For all the images of people in colored cotton jackets running around the exchange floor, waving their hands and yelling at each other, most trading takes place over computer networks via machines.
Day traders use software to develop and refine their trading strategies. They trade online, using software to monitor and automate their trades. They track their trades in spreadsheets and other software. They spend their days in front of a screen, communicating online with other traders all over the world. They don’t interact much with human beings during the trading day. It’s all about the hardware boxes and the software interface between the trader and the market data.
Day traders are also self-employed, and many work from home. That means that if their software crashes, they have to fix it. They have to handle the upgrades, install the firewalls, back up the data. Sure, it may be possible to pay someone to do it, but that cost is probably prohibitive — and the tech consultant probably won’t be able to drop everything to get you up and trading again immediately.
If you spill Diet Coke on your keyboard, don’t even bother trying to fix it. It’s ruined. Get in the car and go to the office supply store and get a new one. Better yet, keep a spare keyboard on hand. Don’t ask me how I know this. Just trust me.
Good day traders are comfortable with technology. If you like to mess around with programs, don’t mind maintaining your computer, and understand how to set up your hardware for maximum efficiency, you’re in good shape for daytrading.
Day trading is like any other entrepreneurial business. You, the entrepreneur, are responsible for everything! Some days, it’s wonderful, but some days, it’s a real drag.
You Want to Eat What You Kill
You don’t have to be a self-employed day trader to trade securities. Brokerage firms, hedge funds, and exchange traders employ people to trade for them, and in fact most securities trading takes place through such larger organizations. But maybe you don’t want to share your profits with someone else. Maybe you don’t want someone dictating your strategy, placing limits on your trades, or determining your bonus based as much on factors such as teamwork and firm profitability as on what you brought in. You want to eat what you kill, as they say, and day trading is one way you can do that.
When you day trade, you’re responsible for your profits and your losses. That means that you reap the rewards and you don’t have to share them with anyone else. That’s a powerful incentive for independent people.
You Love the Markets
Good day traders have always been fascinated with the markets and how they move. If you watch CNBC for fun and have been following the securities business for years, no matter what your day jobs have been, then you might be a good candidate for day trading. Of course, I hope you’ve picked up more than “some people make a lot of money doing this!” A lengthy immersion in the cycles and systems that drive securities prices will give you a good foundation for developing your own trading strategies and knowing what you are up against.
And the markets are amazing, aren’t they? All these buyers and sellers, with all their different needs, come together and find the price that gets the deal done. The prices assimilate all kinds of information about the state of the world, the desires of the people trading, and the future expectations for the economy. It’s capitalism in its purest form, and it’s almost magical to watch how it works. If you love how the markets work and want to learn first-hand what they tell you about making money, then by all means keep reading.
The market isn’t your opponent, because the market doesn’t know that you are out there. The market is simply a playing field for your trading strategies and execution style.
You Have Investing Experience
If you have never opened an account with a brokerage firm, purchased a stock, or invested in a mutual fund, you might not be suited for day trading. It’s not that those activities are adequate preparation for day trading — they aren’t — but they can help you understand what all can happen that can cause you to make or lose money. If you’ve made some trades in the past, you know some of the language and some of the limitations of the markets. And that will give you a base to work from.
If you have not made any trades before, don’t quit your day job to day trade. Some ideas on how you can use short-term trading in an investment portfolio. That way, you can learn more and build up your savings before taking the plunge.
You Have Studied Trading Systems and Know What Works for You
Much of the work of day trading takes place long before entering the buy or sell order. You have to define your trading system, see how it would have worked in the past, and tested it to see how it works now. It’s not as exciting as actually doing the day trading, because you won’t be making real money — but you won’t be losing money, either.
Short-term trading has a huge potential for loss, and many traders are chasing the exact same ideas. The more you know about how your strategy works in different market conditions, the better prepared you will be to act appropriately and profitably.
Backtesting a strategy, which means checking it against historic securities prices to see what would have happened if you had used the strategy in the past, can give you a sense of how realistic and effective your strategy is. Maybe you find that it’s profitable, but the conditions to make it work don’t happen enough for you to make good money. Maybe you find that it’s too complex to remember. Maybe you find that it worked when most of the security’s trading took place in open-outcry pits on the exchange floor, but now that more of the trading is electronic, it no longer works well. Such information is power, because it can help you be a better trader.
It can take a long time to find a strategy that works enough of the time to make it worth your while. Many day traders spend months developing, testing, and refining their day trading strategy. If you’ve taken the time to create and test a good strategy, then you’re ready to go.
Because backtesting uses historic prices, you can do much of the work on the side, at night and on weekends, before you start day trading full time. It’s a good way to get prepared for your trading business while you save your money and make other preparations for your new day trading venture.
You Are Decisive and Persistent
Can you make a decision and act on it? Can you assimilate information quickly into a good strategy? If you screw up, do you figure out what you did wrong so that it doesn’t happen again and then move on? If so, you have the basic personality of a good day trader. Traders see a lot of information come at them quickly, and they have to be able to discern what the market is saying so that they can find their entry points and then exit at a good time.
Short-term traders don’t have the luxury of thinking too much about what they are doing. Trading has to become intuitive. They have to be able to act on what they see when they see it. There’s no room for second guessing, for hesitation, for choking or panic attacks.
Good day traders are also persistent. Once they find a strategy that they trust, they stick with it no matter how things are going. That’s how they’re able to buy low and sell high.
Even great traders go through bad periods, but if they trust their system and continue to stick with it, they usually pull out of it, often with money ahead. If you’ve been able to stick things out other times in your life when things went wrong, you know what to expect when day trading.
You Can Afford to Lose Money
Obviously, you want to be a day trader to make money. That’s the whole idea. But day trading is difficult. Most traders quit in the first year. Some can’t take the stress, some lose all their money, and some simply don’t make enough money to make it worth their time.
Like any small business, you’re taking a risk when you set up shop as a day trader. That risk is easier if you can afford to lose money. I’m not saying you need to have so much money that you won’t miss it when it’s gone, but you shouldn’t be day trading with money you need to live on, any more than you would open a store or start a law practice with money you need to buy groceries and pay the mortgage.
If your household does not have a second source of income, be sure to set aside enough money to cover your living expenses while you get started. And you should keep a second pot of money, your walk-away fund, so that you are free to quit day trading and move on to your next adventure if you decide it’s not for you.
It’s especially important to have a financial cushion when you are day trading so that you can ride your winners, stay in the market when things get bad, and better handle the stress.
You can afford to commit to your trading
Having your living expenses covered, at least at first, isn’t just about dealing with losses. It’s also about being able to stick with your trading. If you have a constant need for cash to pay your bills, you may be tempted to take money out of the market whenever you are doing well. This may keep you from reinvesting your profits. You won’t be sticking to your strategy, and your trading capital will not grow as fast. Think of this as building a long-term asset, not as generating a steady stream of current income.
You can stay in the market through the rough times
You know the old saw that the best way to make money is to buy low and sell high, right? Well, this means that the best time to buy is usually when securities prices have been beaten up and you’ve lost a lot of money. If you can afford to lose some money, it will be easier for you to stay in the game and stick to your strategy so that you can profit big when the market finally turns.
You can better handle the stress of losses
Not all your trades are going to work out. You are going to lose money. That’s a given. If you have enough money that you do not fear loss, you’ll be able to make better decisions. You’re less likely to panic if you know that you’ll still be able to eat, that your lights are still going to turn on when you flip the switch, and that you’ll have a roof to sleep under at night. You’ll be better able to view the markets clearly and follow a winning strategy. Trading is very much a game of psychology. Give yourself an edge by waiting until you can afford to do it.
You Have a Support System
Trading is stressful. The markets gyrate with news events that no one can foresee. Things just happen, and no one else who’s trading that day cares how these events affect you. It’s enough to make you crazy some days — and unfortunately, some traders do get crazy. Alcoholism, depression, divorce, and suicide seem to be occupational hazards, often because day traders have trouble separating what’s happening to them in the market with who they are as people.
The securities markets are wonderful mechanisms for bringing together diverse buyers and sellers. They are not wonderful for propping up your ego, helping you through a rough time in your life, or slipping you a little extra money when you most need it. The markets are not human. They are ruthless machines designed to generate the best price for the aggregate of the buyers and sellers participating that day, and some days, you’re going to suffer.
Good day traders are psychologically strong. They understand how their weaknesses come out when they are stressed. They have people and activities in their lives who help give their brains a break from trading, ranging from regular exercise routines to good friends to hobbies.
If you are going to be a day trader, you need to have some support in your life for when things go wrong. Because some days, they will go wrong, and real money will be lost, and it will feel terrible.