Last Updated on March 17, 2021 by Oddmund Groette
How can you become a profitable day trader? How can you make money day trading? We were pure day traders (profitable) in stocks and indices from 2001 until 2018. In this article, we briefly discuss how you can minimize the hurdles to become successful. To succeed at day trading, we believe you need to be systematic, detailed, and quantitative oriented. Read below for why:
The trading day is mostly noise and randomness
Day trading attracts many newcomers to the trading scene. That’s perhaps not so strange given that day trading is action-filled and fast-paced. Day trading removes the dreaded overnight risk, but unfortunately, day trading is very hard to master. Most of the action between the open and the close is just randomness and noise, making it extremely hard to make any significant amount of money. Only Jesus has transformed water into wine, and very few traders consistently transform randomness into a big bankroll.
As of writing, in March 2021, we’re in the 12th year of a bull market and headlines about traders and day traders raking in money pop up frequently. However, don’t fool yourself by the positive articles. Most of these traders later lose parts or all of their capital when the tide turns. Moreover, we see the current winners, but not the losers. This is explained in the opening paragraph of Rolf Dobelli’s The Art Of Thinking Clearly:
No matter where Rick looks, he sees rock stars. They appear on television, on the front pages of magazines, in concert programmes and on online fan sites. Their songs are unavoidable – in the mall, on his playlist, in the gym. The rock stars are everywhere. There are lots of them. And they are successful. Motivated by the stories of countless guitar heroes, Rick starts a band. Will he make it big? The probability lies a fraction above zero. Like so many others, he will most likely end up in the graveyard of failed musicians.
We don’t want to be negative or pessimistic, but Dobelli’s quote is just as relevant for day trading as for rock stars. We see the winners and not the losers. And the winners are few, unfortunately.
Furthermore. a monstrous P/L doesn’t mean a trader is any good – it could result from luck. There are many profitable traders at any time – just because their style happens to fit the current market. It’s easy to fall prey to survivorship bias: most traders are keen to show P/L statements when they are green, but not see eager to show their performance when red.
What is day trading?
A day trader keeps no open positions overnight. However, overnight is sometimes hard to define. Like the forex market, some markets are open 24 hours a day and the stock market is open both before and after the official market hours. The same goes for stock futures which practically trades 24 hours a day except for weekends. But no matter what, a day trader has a very short time horizon and wants to roll over his account frequently.
Why limit yourself to be a day trader?
We had never any goals of becoming day traders. We chose that path because we had mentors who showed us profitable methods that happened to be day trades. We kept going as long as day trading made money until profitability gradually dried up after the GFC in 2008/09. Markets became less predictable and the efficiencies were arbed away. It was then time to move on to other strategies and time frames.
So why limit yourself to day trading? With computers comes leverage in the form of automation.
In our opinion, it doesn’t make much sense to minimize your time frame to only day trading. Most of the best traders we know are agnostic: they trade whatever time frame that makes sense. Day trading can serve as a useful diversification strategy in a portfolio of many strategies, but it shouldn’t become a goal in itself.
Day trading is difficult
Before we go on, we’d like to emphasize how difficult day trading is. Understanding why day trading is difficult makes it easier to diagnose what needs to be done to become successful.
Judging by the statistics circulating on the web as many as 95% of all day traders fail to make any money. We have no idea if this number is correct, but we believe the number is even lower if we look at the day traders who make any meaningful amount of money. Day trading is a scalable and skewed business where only a very few make most of the money. If you want “easy money” we believe there are better options than day trading:
Day trading is hard because you most likely end up being the prey and not the predator. The markets are highly complex with a lot of noise and randomness and you are competing against some of the smartest and best-equipped traders in the world. Furthermore, in the short-term, most markets are a zero-sum game. Opposite, the stock market is, in the long-run, not a zero-sum game, as witnessed by the steady rise in value over decades.
You can do like Charlie Munger: inverse your thinking and spend your effort and focus on how to avoid the most obvious mistakes.
The main reason why day traders fail is the lack of tailwind:
Day traders have no tailwind. If you’re a swing trader in stocks, at least on the long side, you get the tailwind from the overnight movement in stocks:
The chart above shows the performance by holding the S&P 500 from the close until the open next day. The CAGR is 10.32%, slightly better than the buy and hold which was 9.9%. The drift is about 0.04% per day! It’s pretty obvious why shorting the stock market is hard and often a very bad idea. Over time you get nicely rewarded for being an optimist and not a pessimist.
There is nothing to be made from the open to the close – it has negative returns over the 27 years:
Day trading is competitive:
Most of the volume intraday is done by high-frequency traders (HFT) and bigger funds filling their orders. HFTs outcompete you and the second uses smart algorithms to fill their orders.
The markets are becoming ever more efficient as more and more people have received access to the markets through online platforms. In addition, computerized and algorithmic trading has become much more widely accessible and affordable, with the result that competition not only increases, but also becomes faster and more exact.
What is a successful day trader?
Each day trader has his or her own goals, and thus it’s hard to define success. Your first goal should be to write down some realistic goals. Why are you day trading? What are you trying to accomplish? What is your edge or competitive advantage? Your first goal should be to survive and your secondary goal is to make money.
What percent do day traders make a day?
Because all day traders use leverage, sometimes it doesn’t make sense to measure returns on your equity, but rather the return on your capital employed.
So what is a good percentage return? On the capital employed, we believe anything above 10-15% is very good (over time). If your leverage is 3x the return on your equity is, obviously, three times greater. Unless you’re exploiting a real inefficiency we believe it’s hard to make anything better than this over time. But at the end of the day, you need to measure your returns in relation to your risk. Risk is hard to quantify. In our backtests, we normally use these two metrics:
Five important factors that determine success (or not) in day trading
Below we list five factors that determine your success or lack of success:
Your bankroll or starting capital:
How much money do you need to be a successful day trader? The more capital you have, the better chances you have. If you start with anything less than 20 000 USD, you can only trade heavily leveraged products like futures and forex. In most cases, this ends badly. Lack of experience and leverage is not a good combination! Undercapitalized traders get wiped out by margin calls after random swings in the markets. The main purpose of undercapitalized day traders is to provide food in the food chain.
We suggest a minimum start capital should be 25 000 USD. This lets you trade with no leverage, and you even might manage to trade several products.
Depending on the size of your account, you are restricted to certain markets. The stock market is more capital-intensive, while, as mentioned, forex and futures are highly leveraged. We suspect the success ratio is lower the more leverage is involved.
Day trading should be your passion. The end result is in most cases proportional to the effort and rational thinking you put in. Look at day trading as an education.
Personality: Are you disciplined and/or patient? Can you delay gratification?
How long does it take to learn day trading?
How long it takes to learn day trading varies from person to person, but we would say it takes years to master. Some might never get the skillset required to day trade, no matter how hard they try. It takes four years to finish a degree at the university, and it most likely takes longer to “master” the markets – if you ever do. The markets change constantly, and you need to adapt. No degree can help you adapting – that is mainly a personality trait.
How can you speed up the learning process? One option is to enroll in a trading course, but be careful which course you enroll.
Good things don’t come easy – they always require effort and time. Day trading is certainly not an exception. You need to work hard, but more importantly, you need to work smart. If you want to reap the benefits of having a skill that allows you to consistently pull money out of the financial markets, especially the stock market, you have to work extra hard to acquire those skills — you must put in the hours for several months or, if necessary, years!
How to learn day trading fast:
We believe you can fast-track your learning by doing a few “tricks”:
- Buy a trading platform like, for example, Amibroker or Tradestation. Learn to code. Just knowing 1% of each platform’s capacity gets you a long way.
- Make sure you do your research scientifically. Use backtests to test your ideas. The market is full of experts showing anecdotal evidence, and this is unlikely to hold up in a quantified test. Don’t trust any case studies. Do your own research!
- Keep a track-record to make sure you know what you’re doing right or wrong. You most likely learn more from your mistakes. Experience is the best teacher! Record all trades and save all the strategies you skip. Later you might have an idea that could improve the result.
- A profitable mentor is invaluable. Two people think better than one.
- Create a network of traders. Throwing off ideas back and forth is the best way to improve. The drawback is that most traders are very secretive and keep the best ideas for themselves. However, other traders might give you new perspectives and innovations you didn’t think of.
- Use a paper account. Never go live with a quantified strategy unless you test it out of sample for a few months. It will never resemble live trading, but it’s a good start and tool.
- Subscribe to our Trading Edges. They are no recipe for success, that is dependent on you, but they might give you relevant ideas you can use in your trading no matter your time frame.
Disclosure: We are not financial advisors. Please do your own due diligence and investment research or consult a financial professional. All articles are our opinion – they are not suggestions to buy or sell any securities.