To the layman, day trading is something exciting and mysterious. The flashing screen and fast money, the pit traders shouting. What is it that people like about day trading? Many of the untrained would say ‘you can make money fast’ or ‘you don’t need to spend much time trading’.
These points alone count for a huge percentage of entrants into day trading. They’re lured into ‘living the dream’ and quickly realise that all is not as it seems.
For the purposes of this article, we will take ‘day trading’ to mean trading off a 15-minute chart or under. The 30-minute chart is classically thought of as the separation between day and swing trading.
If you’re on these timeframes, it can turn into a slippery slope of trade quantity. Being on a lower timeframe and perceiving yourself as a ‘day trader’ doesn’t excuse the race to the bottom in trade quality. ‘Only taking the highest probability trades’ is the mantra which needs to be carried across all timeframes.
The industry portrayal of day trading
The frantic phone calls to your broker and dollar signs shooting across the screen. When ‘outsiders’ hear ‘day trader’ you know that’s what they’re thinking. They picture the shouting and elation and making thousands of dollars in seconds.
Saying ‘I take 2-4 trades per week’ doesn’t sound nearly as glamorous. Not much likeness to the fast-money Lamborghini-lifestyle which many portray trading as, particularly on instagram.
The reality is, most day traders are spending hours upon hours trading and watching the market. They clock off late and start again early the next day. People get sucked into trying their hand at day trading due to their incorrect perceptions. It can escalate and end with traders being constantly in the market, probably losing money while doing so.
Look above you!
Some promoters absolutely love to say how well suited day trading is for beginners. ‘Only the old sage investors trade on higher timeframes, young and new guys day trade’ – false. Everywhere you look on the trading web there are people talking about day trading.
Given the higher degree of randomness on the lower timeframe charts, isn’t it wise to learn your trade on the timeframes which allow market mechanics to play out more successfully?
Build your foundational knowledge before moving to the timeframes which need you to think quicker, act faster, pay more to play and deal with more randomness.
Start higher, work your way down.
Your broker will love you though!
Think of your costs per trade. You’re paying the spread and/or commissions. More trades = more money for Mr Broker.
These trading costs directly effect your edge over the market. The more you are leaking in trading costs, the less your account is growing. This makes day trading more difficult than higher timeframes. The more money you spend on trading costs, the less you have to execute your edge, when the highest probability trades come around.
If you pay a spread of 1 pip on top of a 9 pip stop-loss, your trade cost is 10% of your total trade risk. This is what happens when day trading.
You plan for a total trade risk of $1000. Your stop loss is 9 pips. You must then add 1 pip for spread – your stop is now 10 pips. Suddenly, $900 of the initial $1000 is actual trade risk, the addition $100 is just trade cost. $100/$1000 = 10% of the total risk taken.
A 1 pip spread on top of a 49 pip stop-loss is just 2% of total risk! You’ve literally just made each trade easier by not day trading and moving to a higher timeframe.
What about the stops?
All of these big players know exactly where you’re putting your tight stops on the intra-hour charts. Day traders directly give them liquidity! Your big fish know the market a hell of a lot better than your average day trader, they have big orders to execute and will use yours to get the job done.
In my opinion, the goal of putting in a stop-loss, is that you do not want it to be hit. I try to aim to lose as little as possible.
Most day traders blame their broker for ‘stop hunting’. The fact of the matter is (unless your broker is unscrupulous), the reason your stop gets picked off is because it’s in the same place as everyone elses! Big guys know exactly where the weak hands are likely to put their stops. Make sure you aren’t the weak hand at the table.
It’s a bit noisy!
While markets are fractal (behave the same on all timeframes), it’s a mathematical fact that your edge per trade is slimmer on the lower timeframes. The trade frequency of course goes up, but with that so does the stress and exposure to event risk.
Big HFT (high frequency trading) firms are usually just there to make a pip or maybe even less. These algorithms can make for poor conditions for day trading. They are quicker than you, their orders go in before yours, and they have more money than you. These firms have changed the landscape of day trading and reduced the human element of market movement – making it more difficult for your average retail trader to read the chart and market mechanics.
You can smooth out this noise price movement by flicking your charts up on the timeframes.
Risk a lot, make a little
Markets can be fickle beasts at times. Was anyone around in January 2015? What about as recently as October 2016? These are the months where we saw the CHF and GBP flash crashes.
If you had been day trading during these, you could’ve taken losses. Big losses.
Day trading usually involves being in the market a lot, taking more trades. This can increase your risk to these external market forces.
By virtue of trading lower timeframes, you have a tighter stop. Tighter stop means bigger size (if you position size correctly). Bigger size during a hugely unexpected and out of line move = carnage.
‘But I use stops’ – that doesn’t matter during these black swan events. Your stop loss order will likely not fill at a good price. If you have a 10 pip stop and it gaps 90 pips past your stop, you’ve just lost 10R. That is brutal.
Find what works for you
Although I’ve outlined reasons not to day trade, you may have a genuine edge there and prefer it over different styles of trading.
Just don’t fall foul to the quantity over quality mindset which can affect many day traders. If anything, you must be more picky on lower timeframes, due to the commissions eating away at your edge! You’re up against some of the best traders and robots down there, don’t spin your wheels and fry your wits.
I trade on the hourly timeframe (with exception of one market) in order to filter out the bullshit and use a reasoned approach. Trading on timeframes this high allows me to do other things and not be chained to a screen, watching the markets and waiting for the best day trading setup. By filtering out the noise you can also increase your winrate.
Work smart, make it as easy for yourself as possible. Just because you get half the number of trades on higher timeframes, doesn’t mean your bottom line can’t have higher numbers.
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