Although day trading has become somewhat of a controversial phenomenon, it can be a viable way to earn profit. Day traders, both institutional and individual, play an important role in the marketplace by keeping the markets efficient and liquid. While popular among inexperienced traders, it should be left primarily to those with the skills and resources needed to succeed.
Although day trading might seem simple it is far from easy. If it was easy everyone would be a millionaire. Day trading is therefore not for everyone and involves significant risks. Moreover, it requires an in-depth understanding of how the markets work and various strategies for profiting in the short term. While it’s hard to forget the success stories of those who got rich in a day, remember that there is a 95% failure rate and many day traders burn out. This article will touch on some of the skills and resources needed to succeed as well as pros and cons of pursuing day trading as a career.
Can Day Trading Be My Primary Source of Income?
Day Trading is extremely risky and can cause you to lose your entire capital. Therefore, you should not rely on it as your steady source of income because you cannot make consistent income through day trading. Day trading is more about creating a second source of income through trading or investing in the stock market.
Most (new) Traders Do Not Underestimate the Emotional Aspect of Day Trading
If you want to day trade for living, understand that you are bringing your family into this too. If you let your losses bother their emotional and financial well being, day trading is not for you. Moreover, day trading is a lonely profession and the only one responsible for your losses is you. For most, day trading is more of an emotional and psychological hurdle to overcome. When you lose money, self doubt starts kicking in, your account balance is low and you have to choose: fight or flight, push forward or quit.
Why Does Trading Have Such a High Attrition Rate?
Attrition is the action or process of gradually reducing the strength or effectiveness of someone or something through sustained attack or pressure.
Massive trader attrition exists for multiple reasons. The most common reason why people leave the business is simply because they shouldn’t have joined in the first place. Some individuals are just not suited for the trials and tribulations of life on a trading floor. Certain raw capabilities and dispositions, like the ability to tolerate stress, are difficult to gauge until the trader hits the floor. Some skills simply don’t translate well into trading. A recruit may have excelled at calculus in school and believed this was an indication that he or she would do well in the role. Though, when the person arrived at the trading floor, he or she had difficulty applying this knowledge. Moving from the theoretical academic world to the practical world of finance is hard for some people.
Another strong factor contributing to the possibility of attrition is the tremendous toll trading takes on one’s physical well-being. On trading floors, there are no hour-long lunch breaks, and you’re sitting down for the majority of the day. Bad performance is another cause for early exits. In an industry where a person’s function is to generate trading profits, it becomes apparent, sooner rather than later, whether the person is performing or not. The feedback is immediate and indisputable as the numbers don’t lie. Trading performance is the primary driver of one’s ability to stay and advance at a firm. While certain qualitative metrics are also evaluated, like whether the person is a team player, is reliable, and brings a good attitude to the desk, the ultimate measure of success is numerical. Confidence as well as knowing what you know and don’t know is key to becoming a successful trader and avoiding attrition.
What Type of Personality is Best for Day Trading?
Some reasons for the high level of attrition are beyond one’s control. Still, a good portion of the attrition is because people make the wrong choice and enter an industry that isn’t the right fit for their personalities. This is a career that has biases toward certain character traits. Those who have trouble accepting and incorporating feedback or have difficulty regrouping after setbacks will not excel on a trading desk. Gaining a clear picture of your personality and examining it through clear and honest eyes, will enable you to speculate whether your disposition is right for the trading industry. Therefore, an honest self-assessment is critical in deciding to go into trading as a career.
Conducting a proper self-assessment starts with gaining an accurate understanding of what the job entails and then seeing if your skills align with the basic requirements of the job. If you are someone who says they want to do or learn something, but then always leaves or quit the process trading is not for you. If you have a hard time coming out from loss or lack of discipline and patience, trading is not for you. On the flip side, if you are willing to devote time, money, and a lot of dedication in the study of markets then trading may be for you.
Day traders who trade for a living rather than a hobby are typically well established in the field and have in-depth knowledge of the marketplace. Prerequisites required to be a successful day trader start with knowledge and experience in the marketplace. Individuals who attempt day trading without an understanding of market fundamentals often suffer big losses. Furthermore, technical analysis and chart reading is a good skill for a day trader to have. Day traders often only use risk capital which they can afford to lose which protects them from both financial ruin and limits the emotion involved in trading. Moreover, a large amount of capital is often necessary to capitalize effectively on intraday price movements.
While every trader needs a strategy, no matter how profitable the strategy is, it is useless without discipline. Many day traders end up losing a lot of money because they fail to make trades that meet their own criteria.
What are the Advantages and Disadvantages of Being a Day Trading for a Living?
One significant advantage of being a day trader is that you are your own boss. There is no need to report to anyone and you have the freedom to work as much or as little as you’d like. By setting your own hours you can work whenever and from wherever you’d like allowing you to fit in other commitments. That being said, you have the ability to work from home and save on transportation costs which you might need considering day trading can produce some nasty losses.
Some prevalent drawbacks and disadvantages include lonely work life, so if you enjoy a social work experience think twice before you make day trading your career. Another big disadvantage is the inconsistent income. Your income will fluctuate tremendously, making it hard to rely on it as a steady salary. On top of that there are no paid vacation days.
These are some of the basic things to be aware of if you are going to try to make a living trading. To be blunt, the odds are against your success, but diligence, discipline, and capital can tilt the odds a little more in your favor. Is it realistic? The answer is it depends on your ambition and commitment. It won’t be an easy ride, but if it suits your working style, you choose the right market and you utilize the tips mentioned, then you could be one of the few that triumph.