Why is day trading considered dangerous?
- Thread starter kfir
- Start date
Not at all Frederick Foresight. Asking precise questions where the answer can be judged true/false is a first step in getting useful information - and in finding good trading ideas. The position management issues you ask about are very complex.
No disrespect, but perhaps if your initial views were better focused then we would have been off to a better start. The nature and specificity of my questions merely mirrored your generalizations. Better focus begins at home.
Perhaps your experience is of a better quality than that of many others here, me included, but you are not the only one who has been at this for a while.
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I think the risk is all in the person and strategy. It is important to not be scared of risk, but understand what risk are associated with that trade you are doing and execute based on that risk....Let me pose a question.
What has more risk buying futures or buying stocks? My answer would be it depends. You could put a large futures trade on with stop losses in place (which would by definition limited your risk) or you could have a large long stock portfolio with no stop losses which would have a large downside risk potential. No one knows whether a equity will go up or down, but it is possible to know the value at risk you have for each position and your portfolio. Assess your own strengths and weakness and your risk tolerance to find out what works for you. Leverage instruments or day trading isn't for everyone, but that doesn't make it wrong or risky.
I think a worthwhile analogy to the OP's original question would be the difficulties most pit traders experienced trying to transition to screen trading in Chicago. Being a pit local always meant buying bids, selling offers, and making markets. In the late 90's and early to mid 2000's, the best bid or offer seemed to trade out in a flash. In the pit, you had maybe half a second more time to line up a broker and hit or lift him in order to scratch a trade. Not so on the screen.
In the mid to late 2000's, automated HF trading really took off, and to me at least, the flat price markets got choppier. It got much harder for a scalper to hang on to a position and he frequently got shaken out for a loss. Much "noise". Also, if there was a large bid or offer, and even just a few of them traded out, it seemed like everyone cancelled and flipped the DOM algo style. Again, very difficult to compete with that if you have a short trade holding horizon.
In the mid to late 2000's, automated HF trading really took off, and to me at least, the flat price markets got choppier. It got much harder for a scalper to hang on to a position and he frequently got shaken out for a loss. Much "noise". Also, if there was a large bid or offer, and even just a few of them traded out, it seemed like everyone cancelled and flipped the DOM algo style. Again, very difficult to compete with that if you have a short trade holding horizon.
I used to think the best way to learn trading was scalping. That way you got in a *lot* of trades and it seemed to me that that was the way to learn. I still think that learning trading takes a lot of trades, but I'm now more inclined to think that scalping doesn't give people enough time to become familiar with things, enough time to think things out. And scalping doesn't teach you to hold on to a trade when you should wait while it's going your way. So now I'll say that for learning, the best time frames for holding are about 10 minutes to two hours.
As far as "risk", well anything is too risky if you put too much size into it. You should start with enough cash that you can accept perhaps 500 or 1000 losing trades. Not that you'll have that many consecutive losses, but if you begin with $20,000 over a minimum PDT account size of $25,000 that would be $45,000 and you'll have enough to lose $20 per trade a thousand times before your broker takes the car keys away from you. At 100 shares per trade, to lose $20 you have to let it go against you by 20 cents which is about right, counting commissions of a few cents per share. Losing those first 1000 trades might take you a few years so you'd better have some other way of making a living or another pile of cash to live off of. During the years of learning, you should see your results improving otherwise you might consider quitting early. Consider it the cost of a college education. Not everyone finishes college.
As far as "risk", well anything is too risky if you put too much size into it. You should start with enough cash that you can accept perhaps 500 or 1000 losing trades. Not that you'll have that many consecutive losses, but if you begin with $20,000 over a minimum PDT account size of $25,000 that would be $45,000 and you'll have enough to lose $20 per trade a thousand times before your broker takes the car keys away from you. At 100 shares per trade, to lose $20 you have to let it go against you by 20 cents which is about right, counting commissions of a few cents per share. Losing those first 1000 trades might take you a few years so you'd better have some other way of making a living or another pile of cash to live off of. During the years of learning, you should see your results improving otherwise you might consider quitting early. Consider it the cost of a college education. Not everyone finishes college.
Or one could put together a trading plan first and avoid losing the money in the first place
As for the scalping, many people believe that that's what daytrading is. But any trade that's closed out before the end of the day is daytrading. I try to avoid having more than three trades. Preferably one.
