Day Traders | How the hell do day traders make money? | Stock Pick ...

The three answers above are all good. Here?s some more insight.

Most day traders are undercapitalized. They have no idea what kind of adverse runs they could be facing and how to measure them.

Most people who fail at day trading are victim of either wishful thinking or what I call ?It?s really worthitis.?

Wishful thinking is sitting at your screen and thinking you are going to make a lot of money because you know how to do things better than the rest of the market. Doesn?t usually happen. You make a trade and take out $ 100. You immediately annualize that profit and figure you could make $ 3,000,000 a year. Hubris sets in and you lose a bit of objectivity. The rest is tragedy.

The ?It?s really worthitis? is much more seductive and insidious. If you put on a trade at 40 with a target of 42 and a stop at 38, you have said to yourself, in essence, that the stock is worth 42. If the stock gets to 41 and stops, you have two points of reference: your preconceived idea that the stock is worth 42 and the evidence that you could have sold the stock for 41. If the stock now goes to 40, you could be hesitant to sell it, because ?it?s worth? 41. Why is it worth 41? Because it was just there. Many people play this game all the way down, waiting for a stock to recover a bit of the loss before they sell.

Another problem is selling the winners for a point and letting the losers run, because of ego (I can?t make a mistake), ?worthitis,? or fear (If I don?t sell now, it?ll go down.)

Trading friction is another problem day traders face. Every transaction costs money, maybe just a few pennies, but those few pennies add up. When you add in the pennies you give back through actual prices versus system prices, you can see some more profit fade away. Remember, you are buying on the offer and selling on the bid ? you have to make something just to break even.

Welcome to the Wall Street Casino. At least in Atlantic City, you get a free room, a meal and a few drinks before the house takes all your money.

The next to final reason day traders fail is that they are not supposed to succeed. They are competing with the prop trading desks of the largest brokerage houses. Imagine that you are running a small prop trading account at a bank. You have the resources of the bank and of all the guys on your phone board at your disposal, in addition to excellent, cheap execution capabilities. The day traders are food for the big boys, just another source of profits for the banks.

The final reason is the nature of the market itself. Day traders are 99.99% on the long side of the market. They have done all the technical analysis and have determined the indicators they should use, the limits to set, etc. What they don?t understand is the essential nature of the market itself. The market is not, as most (99.9%) of the technical work that amateurs use, a normally distributed thing. It is leptokurtic pareto distribution ? much more tightly centered around the mid point or very small changes. It?s the difference between two islands, one of which is a flat, sandy thing, just barely above the waves and the other a steep, craggy piton. The tails of the normal distribution fall to zero probability at +/- 3 standard deviations. But the real distribution has much fatter tails very far past where the normal distribution says things shouldn?t happen. The real kicker comes when you combine this pareto distribution with the fact that markets and stocks can break down 10 or 15% in an instant and stay there, with no bids, for a a long time. Market breaks on the upside, however, are short-lived and nervous, and frequently give back a lot or all of the gain very quickly.

Put all this together and you have a prescription for a broke day trader. I haven?t any information on how many private day traders make a living at it, but I?d bet that the 5 year survival rate is just about zero.

Source: http://stockpickusa.com/stock-market/day-traders-how-the-hell-do-day-traders-make-money/

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