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What Makes Day Trading Successful?
It’s been an amazing month in my chat room. Trader after trader put up double digit returns this month, during some of the worst volatility in years. Even I, who trades with all the risk tolerance of an old lady from Pasadena, managed to bank a 10.14% gain beating my own target of 4%.
So what did we do at the start of 2016 that made so many traders profitable in the room?
I would love to say that the profit came from my ideas, but the truth is that everyone has bastardized my strategies so much, that sometimes I don’t even recognize what they are doing. Indeed even I went off into my own corner for the past two weeks and traded my own variation of my strategy that actually worked very well.
The truth is that there is no uniform way of trading. Everyone adds their own touches to even the “best” trading strategies that you devise and pretty soon the trading room looks like a Middle Eastern bazaar with everyone hawking their unique wares.
And that’s exactly the way it should be. Trading is very much an exercise in personal expression as opposed to investing which can reduced to one simple formula (Dollar cost average into an index every month of your life and never look at the statement until 30 years have passed). And its it precisely because trading is personal that it is such a pleasure and a challenge at the same time.
Yet despite all the differences, despite all the little personal quirks and analytic flourishes, there were several inviolable rules that every successful trader followed which were responsible for their amazing performance.
1. NO LEVERAGE.
This is pretty much the only rule you ever need to follow yet it is the most commonly broken rule in trading. I can talk til I am blue in the face why trading more than 2X equity is pretty much a guarantee of ruin -- but it wouldn’t matter one bit. I’ve finally figured out that the NO LEVERAGE rule should actually be called the NO GREED rule, because ultimately it’s greed that makes everyone fail in this business. Why trade for nickels and dimes when you can turn $10,000 into a $1 million in 1 year! The siren call of that idiotic fantasy is what built both Wall Street and Vegas on the oldest con in the book.
The irony of our business is that we spend all our days chasing money, but it’s only when we stop paying attention to dollars and start focusing on risk that real money comes your way. No one in my room who made money this month traded with any kind of leverage. For most FX traders who consider 10X lever a light position that will probably come as a shock. But most of the traders in my room will be here next year and the year beyond whereas anyone on 10X lever factor will be long gone from the game.
Every trader who made money this month was a great loser. They lost money on various currencies. They lost money on various strategies. They lost money for several trades, several days, even weeks in a row. One trader made more than 300 trades this week alone racking up massive consecutive wins on Monday only to bleed everything out midweek as the gyrations of the oil market wreaked havoc with his CAD trades. Did he stop and cry like a little baby? Did he throw up his hands and scream that the game was rigged? Did he blame my strategy for being so inconsistent this week? No. He just made 300+ trades and when the dust settled he was up more than 2% for the week.
Mike Tyson once said that everyone has a plan until you get punched in the face. That’s doubly true with trading. Most people can’t take 3 losers in a row. But we lose every day. If you don’t like losing -- don’t day trade -- but if you learn how to cope with the vicissitudes of the market that skill will be far more valuable to you than any strategy you ever develop.
3. STAND DOWN.
“I got the horse right here. His name is Paul Revere. Can do…”
Every time I watch new traders in room, I always think about that song from Guys and Dolls. The itch for action is the single biggest destroyer of wealth. Everyone wants to bet the big event -- but that’s exactly when most traders will lose the most money. The guy in my room who banked more than 30% this month did something remarkable this week. On FOMC day he simply stopped trading 7 hours before the event and didn’t resume until 2 hours post the release. While everyone else was trying to feverishly bank every last pip before Ms. Yellen and company released their statement, he sat on his hands and watched. This kept him from being whipsawed in EUR/USD and USD/JPY and kept his day green while many other accounts quickly turned red.
Taking a page from his book, I went dark on all my positions ahead of the BOJ the day following. The BOJ meeting was expected to be snoozer, but instead they became the second G-3 central bank to go negative rates and USD/JPY would have decimated even the biggest stops on my strategy. Instead I kept all my money and cleaned up in the aftermath of the release.
Most traders think that day trading involves taking risk. Like the glorious ALL IN bets in poker. The reality couldn’t be less exciting. Successful day trading is the art of avoiding risk as much as possible. We make all our money during the boring times and leave the cowboy bets to the amateurs.