Day trading is quite simple, as I often tell folks. The difficult part is turning a profit; maintaining that profit is even more difficult.
Only a few percent (>5%) consistently turn a profit, and the majority will lose money. There is nothing new to hear about this.
It's critical to realize that losses can be quantified in two ways: in terms of cash lost and frequency (win to loss ratio).
Even in the beginning, a lot of traders will lose one out of every three or four deals (65% to 75% win rate). You would assume that person is successful since that sounds fantastic. But the one defeat destroys them and takes away all of the earnings from the three or four victors.
People frequently do this, which is why they continue to play the game. They are unaware that they are victims of their own prosperity. They don't know why they are winning yet losing money. While some people win little and lose money, the majority lose money and fail at least half the time.
I believe it took me more than two years to begin making sense of things. I won't disclose the exact amount I lost, but I view it as an investment in my education. I believe I've read or heard that the most of people lose between $20 and $30k before giving up, with others losing up to $6 figures.
Errors are inevitable, even in prosperous endeavors. The distinction is that instead of a losing position, your errors are usually lost earnings. I rarely make mistakes (fat finger, closing out deal too soon, etc.) for more than a week at a time. We take those errors to heart.
Failure on the part of traders is not due to mistakes. They fail and often lose all of their money as a result of not knowing how to handle deals. They are unaware that they are doing things backwards. They are exchanging how they might participate in a competition or play a game.
You play to win in a typical game or competitive setting. Football coaches keep things from their players.
Let's head out there and attempt to win the game, or at least not lose by a significant amount. Winning is everything, he tells his players, so find a way to win. It is not an option to lose. That's the way we're trained. Teams go unbeaten for entire seasons. In trading, you can never win.
The trade coach does not encourage his players, "Let's find a way to win; losing is not an option." Instead, he says, "We must win at all costs." Rather, he argues, let us endeavor not to lose with this attitude, but in the event that we do, let us not lose excessively.
This is the reason why so many people fail—it is the exact opposite of how we have been trained to think. Success is far more closely associated with winning than with losing.
The head coach of the football team is winning the match. Every choice is based on the desire to succeed. The trading coach is running the team with the intention of winning. Every choice is predicated on the idea of losing and minimizing the loss. His judgments are not driven by the need to win at any costs.
You will either win or lose roughly 50% of your trades when trading. If you are a very skilled stock picker, your win rate may be closer to 75%. Win percentage is meaningless unless you limit your losses.
However, if your win percentage is higher, you will take a smaller win amount, thus your losses will be greater than your wins. That's why win rate as a percentage is so deceptive.
After you come to terms with the fact that your trading season will be a.500 one, the next step is to find out how to profit more from the winners than the losers. Recall that you have no influence over how much you win or lose. A trading coach is unable to predict that their team would win $2000 today. However, he can state, "My team will lose today by no more than $1,000."
You are in charge of the losses, which are what force everyone to go out of business. The lack of winners does not mean that we failed. Our average losses outweigh our average wins, which is why we fail. A football coach doesn't give a damn if his team loses by 20 points or just by one. A loss is a loss, period. However, a trading coach gives a damn.
You are on the correct track to success if you realize that trading is really all about managing money rather than about being "right" or winning in and of itself.
At first, anticipate losing every penny you have. so don't start off with all of your money.
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