Does Day Trading Work And Can I Make Money Trading?
I have been training traders for a very long time now and one question I get asked daily for the last decade is “does day trading work and can I make money trading”. Over the last several years my answer has slowly changed when traders ask me this question and I will explain to you in this tutorial why that is. Most traders want a simple yes or no answer but unfortunately as most good questions the answer is not that simple.
Two Factors That Determine Your Trading Success Or Failure
As most things in life trading can be a very simple process, all you have to do is enter position and leave it alone if it goes your way or liquidate your position if it doesn’t.
At the same time trading can be an unimaginable difficult process where average people are forced to learn advanced computer algorithms and understand the inner workings of network servers and lastly master neural networks so they can predict the price of the futures contract 3 seconds ahead of time. You may also have to learn bet sizing techniques that require a PH.D in statistics if your method calls for that type of technique.
What I just presented was two extreme examples of achieving the exact same result which is profitability. Ultimately this is why people get interested in trading and this is why people continue trading, to make money. So before you begin your journey to learn how to trade profitably, I want to give you the two of the most important factors that determine your success or failure. If you master these two factors alone you can be an extremely profitable trader without knowing anything else. However, if you don’t learn and focus your attention on these two factors your career as a trader will be very short lived.
Trading is based on simple math. Your winners have to be either bigger than your losers or your percentage of winners has to be much higher than your losers. There is no other way you can be profitable if you do not fall into one of these two categories. The way traders express these two categories is positive expectancy. Your trading method must have a positive expectation of profit in order for you to make more money than you lose. The formula to test your expectancy is very simple and it should be the first and last thing on your mind when you pick and choose different trading methods and more so when your actually trading them.
Once you gather all of your data you simply plug the numbers into this simple formula (Average Winner x Win Rate) – (Average Loser x Loss Rate) This will tell you exactly what your average expectation of profit should be over the long term based on your trading method. For example let’s say your method wins 50 percent and you make $2.00 every time you win and the other 50% you lose $1.00. You would multiply $2.00*.50% and that would produce $1.00 and then we would multiple the losing side which would be $1.00*50% and that would produce $.50. You would then subtract $.50 from your dollar and your expectancy would be positive $.50. This means for every dollar you risk you get your dollar back plus $.50 cents. The higher your number will be assuming it’s a positive number the higher your expectancy will be and the better your method will be.
Take your past trades and plug them into this formula. This way you will know sooner than later exactly what your expectancy is and how you can make adjustments to your method so that your expectancy is constantly going up. This is what professional traders spend their time doing and there’s no reason why you shouldn’t do the same.
I hate to say it but the biggest reason aside from methods that don’t produce positive expectancy that traders don’t succeed is because of how they interpret and react to financial markets. Psychology is absolutely on par with Expectancy as being the biggest cause of traders failing. Most people starting out have problems holding on to winners and cutting losers quickly.
When beginners see their position profitable they fear the position will go against them and the profits will disappear and when positions go against them they hope that the position will come back to their entry price so that they can liquidate it. Professional traders do the opposite when positions go their way they hope that it will continue moving further and when positions go against them they fear that the position will continue going against them and liquidate it quickly. Notice the difference in the thought process between the beginner and the professional trader. In case you missed it the beginner thinks completely opposite of the professional trader. This occurs because people are naturally wired to lose money because of how our mind works and professional traders have to reprogram that part of their mind so that their naturally wired thought process that works outside of trading doesn’t affect their trading. This is a process and something that anyone can develop with proper training and is something we teach students in our training programs.
I hope you understand that successful trading is about mastering two fundamental skills that can develop and can be improved with time. How much time you devote to developing positive expectancy and proper trading psychology will directly influence your bottom line. I hope this tutorial provides you with enough guidance to take steps to improve these two areas in your trading.
P.S. next time someone asks you “does day trading work or can you make money trading” just point them to this page! For more on this topic, please go to: Learn To Day Trade Like A Pro and Best Day Trading Strategies – Momentum Breakouts
Wishing you the best,