“[A] successful trader really is a social psychologist armed with a computer and trading software.” —Andrew Aziz
Like the base jumper, you daringly take grand risks for the transient thrills of great returns. Andrew Aziz’s “How to Day Trade for a Living” claims successful traders can make over $120K a year with skill, discipline and emotional control. Winds uncertain and timing limited, you study the lines of the valley as the trader measures price charts. Leap!
Day traders quickly realize they are betting against university endowments and Wall Street pros who have the best motivation, training and tools, and that AI has entered the game with algorithms savvier than laptop programs. So traders often try finding their niche away from the biggest companies, but they still need sufficient trading volume to move quickly. The night renders day-trader trends discontinuous, so only “swing traders” brave multi-day technical trends. Traders buy long expecting small inter-day price increases or sell short to profit from little dips.
Successful traders frequently risk less than 2% of their holdings with stop-loss orders and walk away from bad days. “Pattern day traders” who make four or more day trades a week often must maintain $25K reserves with brokers. But traders can increase rewards and risks dramatically with credit purchases of derivatives. Ignoring underlying securities, they can trade puts and calls to get the rights to buy or sell assets at set prices within specified times. Swaps let them trade cash flows like fixed and variable interest while Futures oblige traders to accept assets (e.g. oil, corn, crypto or bundles of stocks) if they don’t sell before pork bellies crowd backyards.
Consider the following strategies based on pricing patterns:
- After the volatile opening minutes of trade, Volume Weighted Average Price trading may suggest set institutional sales, which can drive your little transactions in their wake.
- Following trends, momentum scalpers buy in, scalp and get out. This works best midday and leaves traders exposed longer to reversals.
- Candlestick patterns arise when securities open and close at similar prices, measured by many timelines, suggesting buyers driving prices up to a “resistance” line that may be marked by a “Doji candle” showing flat indecision, then sellers lowering prices, then buyers driving prices up again. The first upward swing seemingly increases probability that a low “Doji candle” purchase will make money.
- Range Traders see stock prices sputtering between two levels of resistance and they buy or short within these ranges, while Breakout Traders buy when upper resistance lines break.
- News traders bet quickly on how stocks react to international events or industry specific changes (earnings reports, new regulations, patent approvals, government contracts).
Emotional control is critical in day trading because the overconfident take too many risks while fear makes others sell winners or hold losers too long, writes Investopedia. Skill, discipline and practice distinguish day trading from outright gambling but its “Technical Analysis” of short-term trends opposes the “Fundamental Analysis” of stocks and markets and long-term investing I strongly advocate alongside Warren Buffett, and John Templeton.
If people have free will, the only chart patterns of resistance or momentum would be random and traders can read moods into patterns, which would form randomly like rolling three sixes. If choice is merely convoluted, computers pick up temporarily-persistent patterns but they fail omniscience. Risks of day trading include bad judgement, but costs are margin calls, investment fees from high volume and profits taxed fully at short-term gains rates.
Investopedia writes about studies of day trading showing average negative returns and “According to a study by the Brazilian Securities and Exchange Commission, approximately 97% of 1,600 day traders who persisted for more than 300 days lost money.” Even Andrew Aziz admits: “A 90% (or 84%) failure rate is scary and disappointing,” I wrote this article after preparing hundreds of sorry trader tax returns.
Is the comparison fair to base jumpers? Wikipedia “…estimated that the overall annual fatality risk in 2002 was one fatality per 60 participants.”
Robert Arne, EA, CFP, MS, of Carpe Diem Financial Life Planning, gives holistic financial advice as his client’s fee-only fiduciary. He serves mostly Santa Cruz Mountain dwellers. These articles must not be read as personal financial, mortgage, tax or investment advice; consult appropriate professionals. Learn more at www.carpediem.financial.
