Why It Is So Hard to Make Consistent Money Day Trading.
Day trading is tough, here's why.
When you look at a price chart--whether it be a stock, forex or futures chart--it looks pretty easy to make money. Our eyes gravitate to the big moves and we think "If I had gotten in there I could have made a fortune!" Looking at charts in this way leads many people to think day trading will be relatively easy and a quick way to riches. While day trading can provide a great income if you know what to work on, for many want-to-be-traders the path will be unprofitable.
Day Trading Success Averages.
How many people are successful and unsuccessful at day trading won't tell you why most people fail, but it does let you know the odds you're up against. No one starts day trading to lose money; people only do it if they think they can make money. Yet about 95% of people who attempt day trading will lose money. Something is going on here. Why do so many people lose money when it looks so easy?
Lack of "Robust" Day Trading Method.
One primary reason for losing money is lack of a solid trading plan and strategy. Looking at a chart in hindsight and saying "If I got in there. " does not count as creating a robust strategy. A robust strategy is one that can be used in all market conditions, or tells you to stay out when conditions aren't favorable.
A robust strategy tells you what to do before a profitable opportunity, not after. If you view charts in hindsight what would have caused to you get into that nice trading opportunity?
There is no way of knowing an opportunity is coming unless you have researched various factors and found that, more often than not, when those factors align they present a good trading opportunity. Until you have found and researched those factors, and proven their reliability, any trade you take is a pure gamble.
You have no idea what the market will do. If you develop a strategy that tells you when to get in and out of positions (and when to avoid positions)--based on researched factors aligning--then you'll know the probable outcome of your trades. Only then can you start to gain consistency. This is covered more in depth in How to Day Trade Stocks.
Lack of Practice and Time Commitment.
Another obstacle is that want-to-be-day traders don't understand that trading takes time to learn. Marcello, the founder of TheDayTradingAcademy discusses this in a short video on the biggest trading misconceptions.
Putting in a few hours of research isn't going to make someone a successful trader. It takes loads of study and practice, typically while working another job because day trading won't produce any income during this learning phase. For most day traders it will take six months to a year, putting in several hours of practice and study a day , before it starts to pay off in the way of profits.
Other Reasons Trading is Tough - The Market.
There are numerous reasons why trading is tough; here are some of the main ones.
You need to control risk in case you're wrong about the direction of a trade, which means you must put a stop loss on your trade somewhere. That means you not only need to get the direction right, but also need to get the timing right. Enter too early and the price could fluctuate a little causing you to lose money before the move you're expecting even happens. Wait too long and opportunity to trade is gone. As just discussed, trading requires precision--you need to know exactly where to get in and out, and when . You can't always get in at the exact price you want though. Even in heavily traded forex pairs, stocks or futures contracts, we have what is called slippage. When lots of people (or even a few) want into a trade at the same time the price is instantly pushed away from that price. You have two choices: skip the entry and possibly a good trade, or accept the worse price. Both reduce your theoretical profit on the trade. This may also happen when exiting a trade; when you go to get out, there may not be liquidity at the exact price you need it. You're forced to exit at a worse price than anticipated. Therefore, on both sides of the trade you may be forced to accept smaller profits and bigger losses than you originally bargained for. Even if you use limit orders, you may only get filled on part of your order on winning trades (market runs away before filling whole order), but end up with full positions on your losers (price is moving against you so you always get your full order).
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As just discussed, only a few traders can get the best prices when a move is starting. Everyone else is forced to take a worse price. Since a move in one direction doesn't last forever, the later the entry into the move, the less profit potential. Assume the price of a stock moves higher, pulls back and stalls at $9.90. Some trades start to think this is a buying opportunity as the price is likely to rally up to $10 again. Assume at each price level there is only 100 shares. The first trader buys 100 shares at $9.91, now the offer is $9.92. The next trader is forced to buy at $9.92, and the next at $9.93. The further the price rises the less profit potential and more risk for the who are late getting in. Only a few traders (or one, if the first trader(s) bought at multiple levels) can get the great prices, and that is typically going to be the traders with the most experience. Prices can move significantly in seconds, so any hesitation can mean the difference between a great price and a horrible one. New traders with a bit slower reflexes and less skill are always going to get in too late, into trades that have little chance of a producing a profit. This scenario plays out every second of the day on intra-day charts, and also over weeks, months and years on the longer-term price charts. The market is entirely composed of other people trying to make money, or fend off losses (hedgers). People who are very good at trading are looking to take advantage of the orders which are placed by inexperienced traders at prices the experienced trader thinks provide a good entry or exit. Usually they're going to be right, and the money of the inexperienced trader transfers to the more experienced trader.
Final Word On Why Trading Is So Tough.
There are many reasons why trading is hard. This list just scratches the surface of some of the structural (market) reasons why trading is tough. In addition there are psychological issues which can stand in the way of success--such as greed which can cause us to deviate from our trading plan, enter trades too early (eager) or hold onto a profit too long giving back what we made. We also face fear which can cause us to skip great opportunities, or panic out of a position right before it moves in our favor. Trading is tough; the only way to become successful (like any field) is with hard work, lots of research and lots practice. and start in a demo account so you don't go broke.
How to Get Started Trading Options.
An option is a contract that says you have right to buy or sell an asset at a certain price at any time before a certain date, but you're not obligated to do so. Options are separated into "call" and "put". With a call option, you have the right to buy an asset at a certain price before a given dat. You'd buy this option if you expected the value of the asset to rise before that date, so that you could buy it more cheaply. A put option is the opposite. You're purchasing the right to sell an asset, which would be useful if you thought the price of that asset would drop before a given date. That's the basic process for trading options, though in practice it is very complex and extremely risky. If you're interested in this high-risk investment, make sure you take the time to educate yourself and only invest with risk capital.
Choose how you want to learn:
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Preparing to Trade Options.
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Getting Started with Trading Options.
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Moving on to Advanced Options Trading.
Community Q&A.
A trailing stop is a good strategy to prevent losses when trading any security. It gives the trader the ability to profit from a trade until becomes unprofitable to a certain degree, at which point the trade closes. It is superior to a fixed stop loss in that it does not have to be reset each time the stock's movement direction changes. Whether or not it is the best strategy will depend on your position and market conditions.
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Earn Regular Income from Stock Investing Via Dividends.
Invest Small Amounts of Money Wisely.
Analyze Stock Options.
Understand Binary Options.
Calculate an Annual Percentage Growth Rate.
Calculate Yield to Maturity.
Expert Review By:
This version of How to Get Started Trading Options was reviewed by Michael R. Lewis on September 18, 2017.
Why Most People Fail Miserably At Options Trading (And How To Avoid It)
Facts are facts right? They can’t be argued. The truth is that most people who trade options fail miserably and lose money each year. But if you’re reading this blog, I think it’s safe to assume that you could be one of the people who prosper from options trading .
Let’s be honest though, most beginner options traders are not professionals by any stretch. In fact, most of them don’t even have a background in finance and don’t understand why things happen the way they do in the stock market or the economy.
For traders like this, learning to trade options and analyze the markets can be a disastrous attempt at first. But rest assured, if you practice and learn you CAN become very successful trading – don’t let anyone convince you otherwise!
Below, I list the top five reasons why most people fail when trading options.
Assuming That Options Trading Is “Simple”
Have you ever attended an options seminar, learned from some guy how “simple” it is to make a high income from options trading, yet when you went home and started trading you failed to make any consistent income?
What a classic story that is told over and over. I have been to those seminars as well and have the scars to prove it.
Realizing right now that options trading is NOT a “get rich quick” industry will save you thousands over the course of your life – maybe even millions. You have to establish a strong trading mentality which comes not by nature but is something that can be learned/trained.
Options trading is like running a marathon. There is no short cut and no easy way to make money or else everyone would be doing it, right?
You have to make a conscious effort each day to learn and get better.
Not Creating a Non-Emotional Trading Plan.
This is where a lot of beginners quite frankly fail. In order for beginners to become consistent in options trading, a robust and objective trading system should be created so that all you need to do is follow your own rules and make very limited emotional decisions. We are all human and thus our EQ (Emotional IQ) leads our decision making .
With a proven system and framework for trading like a business (and not a hobby) I can teach any person to trade options successfully. Because at this point it’s not about how “smart” you are. Rather, it’s about following the system and making non-emotional trades that generate consistent returns.
It’s Always Lack of Knowledge That Kills.
Of all the things we do in life, it’s always a lack of knowledge that hurts us the most. I always use the mechanic example when coaching students each week. It goes a little something like this…
My father was a mechanic for Nissan for many years, so he knows specifically how to tear down a car and rebuild it from the ground up. I do not know how to do this and would fail miserably if I tried.
It’s not that I don’t have a lack of ability – I can absolutely do the hard labor. And if anything, since he’s older it should be much easier for me to do the work. So the only real difference between us is that he has the KNOWLEDGE and I don’t.
As with anything, people who are wildly successful trading options continue to learn and grow each and every month. They put together a great trading plan , have solid risk management and learn about new strategies .
Watch Me Place REAL Money, LIVE Option Trades: Here at Option Alpha we "walk the walk" and "talk the talk" when it comes to options trading on a serious, professional level. In this new module you'll find an insane resource of live, real-money, real-time options trading examples.
We recorded our screen in real-time so you can watch over our shoulder as we scan for, enter, adjust and exit options trades. Click here to view 50+ live trades ?
Not Having a Coach.
Every great athlete knows the immense value of having a coach. The same applies in options trading.
Yes, you might do reasonably well on your own. However, if you want to avoid pointless mistakes and advance faster while getting higher returns, you certainly need a coach.
It’s not uncommon to hear failed investors make remarks as these: “I should have seen that coming,” or “If only I stayed focused, I would have made it.” In such instances, a coach would have provided valuable, impartial insight to help you avoid such disappointments. Such a coach would have to be an experienced trader with proven expertise.
Most of all, if you want to move to the highest levels, you might need not just one but a whole bunch of coaches. Just look at the great investors of our time; they have teams of highly qualified professionals guiding every aspect of their portfolios.
This is particularly valuable since no single person possesses every skill and insight in this world. You might easily overlook new opportunities that arise outside your initial plans. Alternatively, you might not be aware of external threats that may affect your plans. At the very least, it’s always wise to have a second set of eyes to assess your progress.
Additionally, always have an eye out for what other option traders are doing. Although you should remain focused on your specific plans, finding out about others can help you tweak a few things here and there.
Not Understanding Risks and Rewards.
Not understanding the underlying concept of risk and reward will ultimately lead to disaster. Some who experience major financial losses early on in their trading careers might end up fearing risk. This makes them less open to legitimately good opportunities. Instead, they hold on to options with minimal returns just because they are less risky to trade. Eventually, such people wouldn’t achieve much financially because reward is often closely tied to risks.
On the other hand, some traders focus too much on rewards and end up giving little concern to risk. It may actually go well for some time but the good run is bound to come to an end at some point.
Understanding the concepts of risks and rewards will save you from the downfall of pushing your position until you lose.
It’s always wise to know when to stop taking trades. If you’re up 40K and think you could be up 80K, stop yourself and look at the risk too. Thinking only of the 80K reward would only make you blind to the risk involved in getting there. As you very well know (at least you should), every reward has some risks attached to it. And often, higher rewards have higher risks.
Can you relate to some of the mistakes described on today’s blog? Feel free to share in the comments how you deal with them.
About The Author.
Kirk Du Plessis.
Kirk founded Option Alpha in early 2007 and currently serves as the Head Trader. Formerly an Investment Banker in the Mergers and Acquisitions Group for Deutsche Bank in New York and REIT Analyst for BB&T Capital Markets in Washington D. C., he’s a Full-time Options Trader and Real Estate Investor.
He’s been interviewed on dozens of investing websites/podcasts and he’s been seen in Barron’s Magazine, SmartMoney, and various other financial publications. Kirk currently lives in Pennsylvania (USA) with his beautiful wife and two daughters.
I'm sure today's wild market ride has tested some emotions out there? Mine included some some crude oil trades are that are tying up way too much margin.
Just curious, how does becoming an options trader make one an entrepreneur, if that’s possible?
Can you elaborate?
I kept coming across the idea through books to treat trading like a business.
I’m just trying to find the connection between being a trader and an entrepreneur…
Gotcha – I think there are many things that we could cover but the key for me is that you are committed long-term. For example, if you opened a new business (store, consulting practice, etc.) you wouldn’t open the doors for 2 months then suddenly close right? You’d work at it each day and be committed. That’s how you have to treat trading – it’s a long-term commitment that you need to work at if you really want to be successful.
An entrepreneur is some who starts businesses and a options trader is someone who buys and sells option contacts.
Why It Is So Hard to Make Consistent Money Day Trading.
Day trading is tough, here's why.
When you look at a price chart--whether it be a stock, forex or futures chart--it looks pretty easy to make money. Our eyes gravitate to the big moves and we think "If I had gotten in there I could have made a fortune!" Looking at charts in this way leads many people to think day trading will be relatively easy and a quick way to riches. While day trading can provide a great income if you know what to work on, for many want-to-be-traders the path will be unprofitable.
Day Trading Success Averages.
How many people are successful and unsuccessful at day trading won't tell you why most people fail, but it does let you know the odds you're up against. No one starts day trading to lose money; people only do it if they think they can make money. Yet about 95% of people who attempt day trading will lose money. Something is going on here. Why do so many people lose money when it looks so easy?
Lack of "Robust" Day Trading Method.
One primary reason for losing money is lack of a solid trading plan and strategy. Looking at a chart in hindsight and saying "If I got in there. " does not count as creating a robust strategy. A robust strategy is one that can be used in all market conditions, or tells you to stay out when conditions aren't favorable.
A robust strategy tells you what to do before a profitable opportunity, not after. If you view charts in hindsight what would have caused to you get into that nice trading opportunity?
There is no way of knowing an opportunity is coming unless you have researched various factors and found that, more often than not, when those factors align they present a good trading opportunity. Until you have found and researched those factors, and proven their reliability, any trade you take is a pure gamble.
You have no idea what the market will do. If you develop a strategy that tells you when to get in and out of positions (and when to avoid positions)--based on researched factors aligning--then you'll know the probable outcome of your trades. Only then can you start to gain consistency. This is covered more in depth in How to Day Trade Stocks.
Lack of Practice and Time Commitment.
Another obstacle is that want-to-be-day traders don't understand that trading takes time to learn. Marcello, the founder of TheDayTradingAcademy discusses this in a short video on the biggest trading misconceptions.
Putting in a few hours of research isn't going to make someone a successful trader. It takes loads of study and practice, typically while working another job because day trading won't produce any income during this learning phase. For most day traders it will take six months to a year, putting in several hours of practice and study a day , before it starts to pay off in the way of profits.
Other Reasons Trading is Tough - The Market.
There are numerous reasons why trading is tough; here are some of the main ones.
You need to control risk in case you're wrong about the direction of a trade, which means you must put a stop loss on your trade somewhere. That means you not only need to get the direction right, but also need to get the timing right. Enter too early and the price could fluctuate a little causing you to lose money before the move you're expecting even happens. Wait too long and opportunity to trade is gone. As just discussed, trading requires precision--you need to know exactly where to get in and out, and when . You can't always get in at the exact price you want though. Even in heavily traded forex pairs, stocks or futures contracts, we have what is called slippage. When lots of people (or even a few) want into a trade at the same time the price is instantly pushed away from that price. You have two choices: skip the entry and possibly a good trade, or accept the worse price. Both reduce your theoretical profit on the trade. This may also happen when exiting a trade; when you go to get out, there may not be liquidity at the exact price you need it. You're forced to exit at a worse price than anticipated. Therefore, on both sides of the trade you may be forced to accept smaller profits and bigger losses than you originally bargained for. Even if you use limit orders, you may only get filled on part of your order on winning trades (market runs away before filling whole order), but end up with full positions on your losers (price is moving against you so you always get your full order).
Ready to start building wealth? Sign up today to learn how to save for an early retirement, tackle your debt, and grow your net worth.
As just discussed, only a few traders can get the best prices when a move is starting. Everyone else is forced to take a worse price. Since a move in one direction doesn't last forever, the later the entry into the move, the less profit potential. Assume the price of a stock moves higher, pulls back and stalls at $9.90. Some trades start to think this is a buying opportunity as the price is likely to rally up to $10 again. Assume at each price level there is only 100 shares. The first trader buys 100 shares at $9.91, now the offer is $9.92. The next trader is forced to buy at $9.92, and the next at $9.93. The further the price rises the less profit potential and more risk for the who are late getting in. Only a few traders (or one, if the first trader(s) bought at multiple levels) can get the great prices, and that is typically going to be the traders with the most experience. Prices can move significantly in seconds, so any hesitation can mean the difference between a great price and a horrible one. New traders with a bit slower reflexes and less skill are always going to get in too late, into trades that have little chance of a producing a profit. This scenario plays out every second of the day on intra-day charts, and also over weeks, months and years on the longer-term price charts. The market is entirely composed of other people trying to make money, or fend off losses (hedgers). People who are very good at trading are looking to take advantage of the orders which are placed by inexperienced traders at prices the experienced trader thinks provide a good entry or exit. Usually they're going to be right, and the money of the inexperienced trader transfers to the more experienced trader.
Final Word On Why Trading Is So Tough.
There are many reasons why trading is hard. This list just scratches the surface of some of the structural (market) reasons why trading is tough. In addition there are psychological issues which can stand in the way of success--such as greed which can cause us to deviate from our trading plan, enter trades too early (eager) or hold onto a profit too long giving back what we made. We also face fear which can cause us to skip great opportunities, or panic out of a position right before it moves in our favor. Trading is tough; the only way to become successful (like any field) is with hard work, lots of research and lots practice. and start in a demo account so you don't go broke.
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