Last Updated on May 20, 2022 by Quantified Trading
How to make money day trading doesn’t have an absolute answer. However, How I made money day trading might offer some clues on how you can go about it.
Day trading is fast-paced and gives an adrenaline rush. It offers the possibility of making a lot of money in a short amount of time if you are good. Unfortunately, most who try day trading fail.
How do day traders make money? Can you really make money day trading? In this article, I give some valuable day trading tips and explain how I made money day trading (enough to retire early). I don’t provide you with a day trading strategy, but the correct mindset required to succeed, which is the best day trading tip I can give you. However, day trading is unlikely to make you rich. Only a few succeed.
Day trading is popular:
Articles about day trading get about twice as many hits as other articles on this website.
What’s so appealing with day trading? Is it that most people think it’s easy money? It’s not, rather the opposite.
Is it the adrenaline rush? It shouldn’t. The more “boring and dull” you make day trading, the better you should perform. Boring is good in day trading.
Is it the dream of not working for the man and be completely independent? For a lot of people, day trading can be very isolating.
Is it the dream of being “left to your own devices”? Left on your own you suddenly have to take full responsibility for your actions. For many, this is very hard.
Statistics indicate most day traders lose money, and for those profitable, it took years to become consistently profitable. But if you have the right mindset, you can improve dramatically.
Before you start – day trading is hard:
If you are a swing trader or long-term investor you have an overnight tailwind to boost your returns. If you look at the total returns in the S&P 500 over the last 30 years, you’ll see that all the gains have come from owning stocks from the close until the next day’s open:
The gain intraday from the open to the close is zero! You are thus saying no to an overnight tailwind!
Can you really make money day trading? How did I make money day trading?
Yes, there are a lot of positives with day trading, but as with other endeavors, it requires hard work and discipline. And let’s face it: most day traders lose money, and very few make it worthwhile considering time, effort, and risk. Please read why day traders fail.
There are many investors and gurus warning against day trading. In the media, day trading is often described as a casino. For some it probably is, but for the rational and agnostic quantified trader, day trading can reap good returns.
I think the naysayers completely miss the point. Day trading is not very different than for example swing trading. The principles are the same. On the contrary, good day traders can make a lot of money if you find a method that exploits the law of big numbers. It’s highly scalable for most individual traders.
You have a lot of asset classes to choose from, like forex, bonds, options, and stocks. This website focuses on the latter, where the possibility of making money is most likely higher. Just in the US, there are about 5 000 possible stocks to trade.
According to some studies I have covered on this website, the huge majority of day traders will never make any money (and probably no other way either unless investing for the really long-term). Be careful so you can learn and build experience.
Trade as small as you possibly can for at least a year. After having day traded for 13 years I’m still astonished I find new things which I haven’t thought of. Be humble and don’t overrate your abilities. You might be just lucky and found a strategy in a market cycle that fits.
I’ve had four losing months since starting, all of them in 2012. I think that’s pretty good. In this article, I give suggestions on where to look for trading ideas. Of course, I am not the Delphi Oracle, far from it, but looking back I think there are certain people who have a lot better chance of being successful than others.
At the same time, certain methods will most likely give better results. I know that a lot of traders will disagree. That’s fine. There are infinite ways to succeed. However, I have tested so many strategies (both live and on paper), and I believe there are certain things that have a better survival rate than others.
Some readers might get disappointed after reading this article. There are no answers as to when to buy and sell! If so, most likely you’re looking for the easy route and let someone else develop strategies for you. No one can do that for you.
My best advice to make money is the following (somehow ranked in the order of importance) and based on day trading stocks only:
Day trading requires experience – aim for survival
This is by far the most important factor. Do you think you are experienced after one year? Think again. You learn something new every day.
I have day traded for over thirteen years and I’m stunned that I actually made money the first couple of years, given my limited experience. Looking back, I could have made a ton of money on those strategies with a lot more experience.
The longer you survive, the stronger and fitter you become. It’s like Darwin’s evolution theory. The strongest, most adaptable, and the fittest survive. Nassim Nicholas Taleb writes about the Lindy effect in Antifragile. Taleb never reads books less than one year. Why?
Because books that have “survived” ten years most likely will last another ten years. Books that have survived 100 years, will most likely be around the next hundred years.
You will never get experience by paper trading and/or backtesting. You have to trade real money. When real money is at stake you also discover potential new strategies/ideas.
If you want to start day trading, you have to accept this is a long-term project. Give yourself at least two years of practice. You have to look for trading edges constantly.
Personally, I have twice in my career come to a complete halt with my strategies. Both in January 2005 and in the fall of 2011 all my strategies simply just stopped working. I couldn’t make money. Both times I managed to fight back. In 2005 it forced me to think “outside the box” and I returned much stronger and profitable for the next years.
My best year of day trading was from 2005 until 2009. If my strategies prior to 2005 hadn’t stopped working, I wouldn’t make nearly as much in the coming four years. The abrupt stop in trading was a blessing in disguise. When one door closes, another one opens.
However, I have struggled a bit more since the fall of 2011, but since July 2012 I have managed to make some decent money again. All these “comebacks” are due to two things: First off, I have gained experience and market knowledge, and that experience makes me think/create new strategies. The second is my tip number 2:
Day trading requires thinking outside the box
To survive and prosper in trading you need to be adaptive and creative. Be open, humble, and flexible. Often the counterintuitive could be the best place to start/look. Rory Sutherland has written a fantastic book on this subject called Alchemy – The Surprising Power of Ideas That Don’t Make Sense. I highly recommend anything by Sutherland.
Look on the web for input, but never expect to find profitable strategies. Look for ideas to test. Ask questions. Try to find strategies that no one trades. Realize you have to develop strategies yourself. The strategies you find on the web are mainly untested and based on presumptions. Look at stocks or sectors which are not popular among traders. Look where there is less competition. The more crowded, the less likely to be prey.
There are hundreds of thousands of people trading the S&P 500 and DAX. You compete against very bright people and against machines/software that PhDs have developed (although a Ph.D. might be worthless in the stock market – please read When Genious Failed). Know who you are trading against. Know where you are in the food chain! You need to prey on weaker players. It’s a brutal marketplace and you better be prepared for some fights.
Look for structural inefficiencies when day trading
Try to find structural inefficiencies in the stock market and understand how the stock market/exchange operates. Previously I used the specialist system. The NYSE used a specialist (and still uses) a specialist to fill orders. However, that has changed due to algorithmic trading. There is hardly any money to make this route now (as far as I can see). Instead one has to find flaws in how algos trade.
Computers are stupid, and one can pick up patterns on how the machines trades. I believe short-term movements for about 1-5 minutes are more inefficient than 1-2 hours, and not to mention daily movements.
I’ll give an example: Svend Egil Larsen, a Norwegian daytrader, found out how the computer algorithm of Timber Hill worked, a unit of US-based Interactive Brokers, would respond to trades in certain illiquid stocks. The stocks would change prices in a uniform way regardless of how much was bid. He found that he could bump up the price with very small trades and then sell with much larger trades for a profit.
He was not the only trader who worked out this flaw, which he called “painfully obvious”. (Charges of market manipulation were brought against Larsen and another trader, Peder Veiby, in a high-profile court case where the public came to look on the duo as heroic Robin Hood figures, beating financial houses at their own game. They were found not guilty in Norway’s Supreme Court in 2012).
Meanwhile Mr. Larsen – and others – continue to beat algorithms. A few months ago he says that UBS failed to set a bottom limit on one of its trading algorithms and he picked up some shares at a discount. He estimates he made $14,000 in a few minutes.
“Every few weeks an algorithm is going wrong, and there is always someone making money from it,” says Kjell Jørgensen, associate professor at BI Norwegian Business School to the Norwegian press.
A perfect example of this happened on the 1st of August 2012: Knight Capital (KCG) lost 440 million USD because of faulty software on US stock exchanges. Their software sold and bought stocks, making share prices go both up and down in 148 different stocks.
Day traders bought on the way down and sold on the way up. KCG’s loss was mainly absorbed by day traders and algo traders. Some private/home office day traders made tens of thousands of dollars that day by buying from the distressed (KCG).
Every time there is a big failure of an algorithm, for example, due to a “fat finger” or programming error, there are always some traders making a lot of money.
The big advantage of finding structural inefficiencies is that you know when the strategy is done and over with. The chances of finding a strategy based on randomness and/or just a market cycle are a lot less if you know there is some kind of inefficiency. You can also trade a bigger size because you should know that there is an edge.
Day traders need software for automation
Trading platforms are cheaper than ever and they are a necessary tool to make quantitative or algorithmic trading strategies. You can trade as many strategies as you wish and thus get diversification on both timeframes and markets. Focus on developing trading strategies, and let the trading software do all the automated trading.
Day traders should look for abnormalities
Usually, abnormalities revert to the mean – mean reversion strategies. Of course, sometimes they don’t but this is a numbers game. Opposite, you have trend-following strategies with a much lower win ratio.
Historical quotes can be used to get info on a stock’s distribution pattern. Here is just a very naive and simple method (and serves just as an example):
- Find an average price over some past period.
- Find the average High-Low range.
- Buy when the stock drops x times than the average High-Low range. Opposite on the short side.
This is a naive strategy, but it serves as an example. Stock prices are NOT normally distributed all the time, occasionally you have the black swan, ie outliers that deviate a lot, potentially negatively skewed. They can sometimes create havoc. But again, trade small and trade many so these outliers don’t ruin the whole strategy.
Day traders should provide liquidity to the markets – act as a market makers
Most day traders trade reversion to the mean. That means they provide liquidity for sellers/buyers. The stock market offers risk-taking day traders a different form of compensation. They can earn a premium for providing liquidity for motivated sellers.
There are systematic price movements that can be exploited with countertrend strategies that buy stocks that are weak/going down. Owners of stock with an urgent need to liquidate their inventory need buyers and you as a daytrader can take the opposite side and make money on them.
Day traders should be careful with indicators and charts
Be careful using indicators and/or charts. Many people make money on charts, but I believe it’s better to find other alternatives.
The best traders I know don’t use any charts or indicators at all. They mostly trade based on quantitative strategies, or what people call algorithmic trading. They simply form hypotheses and make tests based on the scientific method. Many of them trade like market makers. They buy on the downside and sell later during the day.
When you read magazines like for example Trader’s Magazine, there are unlimited articles explaining possible strategies with charts. Typically, they’ll conclude like this: As you can see, this is a robust strategy. The evidence is just some random charts and anecdotal evidence. The strategies are not tested. The reader has no idea if it really is a profitable strategy. Why doesn’t the writer verify the strategy by quantified analysis? Most likely because the strategy is no good and/or it’s not testable.
The more testable a strategy is, the better for you. By using numbers and quantified testing your confidence in the strategy increases. Do your own research. Never make any decisions based on someone else’s research.
Day traders need to rely on the law of big numbers – not day trading tips
Find strategies based on quantified testing, and make as many trades as possible. If the average gain per share traded is just 1,5 cents, this amounts to significant profits if you’re trading 100 000 shares a day. The best traders think like an insurance company. You have to calculate an edge in the law of big numbers.
In day trading, your mindset is just as important as the quantified strategies
Your mindset is just as important as trading strategies. There are many investment styles and you should find out what fits best for you.
Get rid of your ego. Be flexible and adaptable. It’s not necessarily the most intelligent that survives, but the most adaptable to change.
Resolve your weaknesses and build confidence in yourself. That is a lot easier when you have a defined plan. Accept that you’ll lose money in between.
Controlled losses are simply the cost of doing business. To make money, you have to face risk and uncertainty. Risk-taking involves inevitable losses.
This balance is of course very thin, and everything looks so easy in hindsight. But believe me, it’s not easy to make rational decisions when you’re in the middle of the frying pan.
Details matter in day trading
Look at numbers. Keep statistics. Personally, I think introverted traders have a lot of attributes that suit day trading. Certainly, if you’re a sucker for risk you won’t last long as a daytrader. You’ll simply blow up. You need a plan and methodology. A bad plan is better than no plan at all. Be disciplined. Develop a methodology and stick to it unless proven otherwise.
Day traders know when to take a break
When times are good, trade big and delay your planned vacation. Know when to trade, but also when to fold. Only experience can tell you that.
Profitable day traders are humble
Be humble. Be very careful when you’re full of confidence. Confidence is a good thing, but too much will make you take unnecessary risks.
You’re only as good as your last trade
If you made good money in the past, it’s no guarantee that you will in the future. I know a guy who made millions of dollars but later lost it all. As far as I can see, he was a great trader and had a great trading mind. He most likely was not lucky. He understood the game and played it well.
But in the end, he broke his own rules and started making trades not signaled by his quantitative strategies. He stopped waiting for good trades and instead started making shots. He was trading too much size and developed too much ego. It ended badly.
Be an investment agnostic
You have to be adaptive and flexible. Sooner or later everything changes and your strategies become obsolete. The ever-changing market cycles. Don’t despair if that happens. You can return even stronger if you work hard enough.
No one can teach you much. You have to learn this by trial and error. There is no magic strategy.
Be focused. If you’re trading from home, like many do, make sure you have no distractions from your wife, kids, dog, etc. Buy a nice desk, chair, and computer, your best friends at the workplace.
Free commissions and lots of info, what can possibly go wrong?
There have never been better opportunities for losing money than now. Free commissions make you overtrade, and lots of information make you see patterns where there is noise. As Taleb wrote: If you want to bankrupt a fool, give him information. There is information overload in the marketplace. Ignore it. Don’t read too many websites, focus on just a few which generate trading ideas. Focus on making trading as simple as possible. You have to focus on yourself and your trading, not on things that are completely out of your control.
Listen to a select few traders
Listen to other traders, but only if you know their track record. Never trade on tips and rumors.
A margin of safety is required for day traders
Benjamin Graham was an advocate of the margin of safety when you invested in stocks. Likewise, make sure you have a safety margin in your financials. Make sure you have a financial buffer. If you are desperate to make money, surely you’ll fail. The best traders don’t focus on money but on trading. Money is just a way of keeping score. Make sure you never force trades.
Be careful with stop-losses
Many trading coaches and websites focus on the necessity of stops. I believe they are wrong, stops will take you out at the wrong time. Instead, focus on trading small, trade many asset classes, different time frames, and trading styles. Avoid correlation.
The correct mindset is crucial for success in day trading
At the end of the day, the best day trading tip we can give you is that you must have the correct mindset. No tools or strategies will ever help you if you can’t execute and do what your systems tell you to do.
Make sure you understand how you react under stress and how you make decisions. Keep a trading journal and try to systemize all you do. Please check out my trading journal example.
How to make money day trading – conclusion:
I hope this article that explains how I made money day trading gives you some indications on what to do. Avoid looking for specific day trading tips and focus on developing your mindset.
Day trading is just as much about having the right mindset in trading as having good strategies. A good trader with the correct mindset makes money on poor strategies, while a bad trader loses money on good trading strategies.
I managed to make a decent amount of money on day trading by knowing myself very well and at the same time use the law of big numbers to trade often and many different strategies. I’m neither smart nor intelligent, but I’m disciplined and reasonably rational.
My experience tells me that the day trader who uses some kind of quantifiable rules fares a much better chance of succeeding in day trading year after year.