Most traders who enter the world of trading based on technical analysis have previously day traded and many no doubt still do. The fascination of trading during a working day and walking away with lots of money sounds glamorous and easy. The truth is at least 90% of traders lose money and most non-professional day traders are within that percentage.
Day trading involves opening and closing the same position within a day or sometimes two days. The purpose is to try and make fast profits with tight stops and without overnight risks.
Like with any other profession, to understand how to trade properly requires education, experience and the right trading tools. Most traders who start out in this business seem to think successful trading can be achieved by anyone and never invest in the education or trading tools required. Instead they opt for free trading software and look on the internet for free advice or tips on what to trade and, as a result, the only experience they gain is that of being an uneducated and unsuccessful trader.
While day trading can provide profits for those who have the funds to move the market, for the individual private trader it is often nothing more than a poor man’s pipe dream.
A day trader is a brokers best friend
Many brokers love day traders because it brings in greater revenue for them. The more trades taken means more money from spreads or commissions and, in some cases, trading losses. Brokers will provide free trading software, webinars and tweets during the day to try and encourage frequent trading.
Not all brokers encourage frequent trading, some actually provide information on how to trade long term and profit from the trends which is actually where the money is as you will see from the chart below.
Quantity over quality
Day trading focusses on quantity over quality. As Dynamic Traders we are looking for high probability set ups that put the odds in our favour. In other words we are looking for good quality trades.
With day trading the quality aspect is almost forgotten and the focus is on taking the trade. This is one of the main reasons why day trading simply does not work for private individuals.
High probability set ups have irregular timing and are not present everyday. Successful trading requires patience and a trend. Once a trade is triggered based on a good set up, a trend is needed for a profit. The longer a trader can stay within the trend, the more profit is made.
A big downside with day trading is the use of small time frames. Day trading is often applied on very small time frames ranging from 5 minutes to 4 hours. Larger time frames like daily and weekly have the advantage of less noise while intra-day time frames incorporate much more noise and make it difficult to understand price behaviour.
Look at the EURUSD charts below. The top chart is based on a 5 minute time frame. The lower chart shows a daily time frame and the arrows represent the trend extent. The 5 minute chart has a trend that is about 73 pips from bottom to top. The daily chart has a trend that is over 1000 pips in length.
Notice the 5 minute chart has very wide range wicks and smaller bodies. This kind of intra-day behaviour often takes out the stops. The daily chart is far less messy and has more body range in the candle making it simpler to trade the trend.
Many of our traders have come from a day trading background and now having experienced trend trading would never go back. Trend trading is a far smoother ride and far less stressful while still providing the time to enjoy each day. Trend trading is like driving a Rolls Royce on a clear road during a sunny afternoon while day trading is a Daihatsu frustratingly sat in heavy traffic on a rainy day.
Good trend trading…