As with everything, in trading there is a bright side and a dark side. The bright side requires patience, diligence, foresight, but it can offer traders a successful long-term career. The dark side is seductive: it’s based on impulse & emotion. Unfortunately most new traders, and even traders that become frustrated from their lack of headway, stumble onto the dark side.
The dark side, of course, is represented by the allure of “multiple, intraday trades” or in any case a focus on the short-term. All long-standing market professionals I have been in touch with actively discourage this, and for good reason. The successful trader makes his trading decisions based on knowledge of market behaviour, historical and current trends, fundamentals, market dynamics.
Do any of the above apply to short-term trading?
The Gambling Time Frames
The shorter the time frame traded, the less any semblance of rational trading can be applied. Where does market analysis come into play on a 5-minute chart? What is known about the fundamentals? What is known about seasonality, historical and current trends? As opposed to having a strategy and waiting for certain setups, the day trader is almost completely reactive to the price action in the marketplace.
This is not to say that it is not possible to make money by day trading, but there are a fair amount of requirements:
- having a good understanding of current trends and momentum
- having a good understanding of short-term drivers
- having a viable, time-tested setup
- having a robust trade-management vehicle
- an appreciation for the “luck” component, given the incredible amount of algo-trading that happens on the lower time frames (i.e. the gambling frames)
..and basically this is why only experienced traders should ever venture down this route. But my question is: what is the real benefit of day trading?
Would You Watch TV for 8 Hours Each Day?
It is common knowledge that sitting in front of a television set all day long eventually produces atrophy of the mental processes. Someone addicted to television eventually loses much of the ability to think.
And yet, “day traders” spend just as much time in front of their screen – seated there in the hope of winning money. What knowledge is gained from watching a squiggly line move up and down on the screen all day long? Day trading is addictive, and those who sit in front of the screen throughout the day are surely growing brain-dead over a period of time.
Furthermore, day traders are subject to almost constant stress in the hopes of monetary gain. And since their method is (usually) based on nothing more than some magic technical indicator along with their gut feel, the anxiety factor is always elevated. It has also been demonstrated that the more decisions a person takes as the day progresses, the less effective the decisions become: the mind loses energy, loses focus and requires rest.
It has been said by more than one Market Wizard that “less is more” on the retail side of things. The more you trade in and out, the less effective you will be.
Poor Decision Making
To prove how easy it is for any of us to make poor decisions, here are a few questions based on the common mental biases that affect traders. Go through the questions first, then check your answers and get a full explanation here.
- Review the following table of data and answer this question: What is the relationship between the people that believe there’s no gain without pain?
- Write down the last two digits of your social security number. Do you think the average temperature in Saskatoon, Saskatchewan, is higher or lower than this number, in degrees Fahrenheit? Now tell me what you believe the average annual temperature is in Saskatoon.
- You flip a coin ten times and the outcome is ten heads in a row. If the coin is fair, is the outcome of next flip more likely to be heads or tails?
Check out how rational and objective your decision making process is here.
The “Dream” of Day Trading for a Living
Many people are attracted to trading because they will be independent, won’t have to put up with a boss, and can spend their days doing something they enjoy…and then they end up glued to charts 8-10 hours a day. They are willing to give up their job and all of its perks. They are willing to give up their retirement program, paid vacations, health benefits, etc. However, few indeed ever count the costs. Certainly day trading occupies your time, but what is produced from this activity? Is there ever a consideration for the opportunity cost of trading?
For most aspiring day traders, the product is money lost. For most, it is defeat in the markets. Day trading, even for those very few who succeed at it, provides a hollow victory. The result is most often the opposite of the reasons for which a person enters the trading business. Most day trading results in long tedious hours sitting in front of a computer screen — and then even more hours backtesting and fiddling with historical charts trying to tweak things.
Over To You
Sam & I are committed to helping traders achieve consistency – whether through our flagship Forex System Development Workshop or through private Coaching. The most effecient way to tackle the markets, especially from a retail angle, is to drop any fantasy regarding short-term forays into the market and instead practice a disciplined top-down trend-trading approach, and legging into it via evident pullbacks.
Trading isn’t mysterious and is certainly not rocket science. So stop complicating your life, stay away from the dark side and pursue the path of the consistent trader.
About the Author
Justin Paolini is a Forex trader and Coach. He is co-owner of www.fxrenew.com, a provider of Forex signals from ex-bank and hedge fund traders (get a free trial), or get FREE access to the Advanced Forex Course for Smart Traders. If you like his writing you can subscribe to the newsletter for free.