Why I am not a day trader?

Technical systems do work for short time frame as long as it is applied consistently. Therefore it works also for a day trader. For swing trades, I use a weekly, daily and hourly time frames. If I were to day trade, it can be easily changed to daily, hourly and 15 minutes.

So it can be lucrative to be a day trader. Once in a while, you hear someone who is successful although I am not sure on the longer term performance. It  seems tempting and lucrative. One can make all the gains and close it by the end of the day without worrying about your portfolio overnight.

But only a very small minority of day traders succeed. The successful ones normally do quite well. But to get super rich, I have not seen any over longer term. On the other hand, I have seen too many end up losing everything. Big money are made over trades held longer term with clear understanding of the underlying fundamentals. Just imagine if you had bought MSFT, WMT, AAPL, Gold and BIDU in the early days and held it over time or even just trade it with a consistent positive bias over time.

A great example of day traders is the computer algorithms used by big banks with teams of highly sophisticated programmers, mathematicians and super computers. They trade by nano seconds. They have a special internet pipe to the exchange which allows them to do execute trades with such speed. They are able to front run a lot of traders by having visibility to all the trades that are submitted. The computer is able to gage the psychology of the market and trading in the specific directions.The successful rate is more than 90%.

So who am I to fight these computers?  Constantly I am thinking of how to gain an edge over them – at least not the computer but with the crowd that were victimized by the computers. Most of these are very short term traders.

I cannot be a day trader.

First it does not fit my personality. Day trades made are strictly technical. You need to get in and get out. Strict stop loss must be executed. It works strictly on probabilities. A good video gamer may be good for the job!

More important I lose my edge in trading the market. My main competitive advantages are that I understand the longer term fundamentals and I use options to hedge increasing the probability of success. With day trades, all these competitive advantages are no longer valid.

One minor disadvantage is that with a lot of trades, commission can become an important factor although we are paying dirt cheap with on line brokers.

Also, it is my belief that the shorter the time frame, the more random the price behavior and it is more susceptible to manipulation by big money.  The probability of being whipsawed is very high. Big profits are always made by holding longer term.

I do not think my technical system is robust enough to handle day trades strictly. I have mentioned my system allows for more than 50% accuracy. But with fundamental and option hedges I increase my probability to winning to 80% as long as I follow my plan. My technical system also works for longer term trades.

Day trading can be emotionally stressful and addictive. I have seen day traders skipping lunch, get emotionally charged and losing weight.  It has a similar effect like drugs. It looks great short term but long term you suffer from stress, hallucination, withdrawal and all kind of side effects.

One of my key trading objective has been to do the opposite. I am trying to reduce the number of trades.I have different accounts for longer term and short term trades.  I have verified in my account over 15 years that the account that I trade less frequently are the one that makes consistent and good profits. It seems that short term trading only fulfill the gambling instinct inside me and it is not always profitable.

Today,  Bernanke is supposed to make an important announcement. I decided  I am not going to be reactive to whatever the outcome. Many traders are anxiously waiting for the outcome and ready to jump.  Whatever happens, I should be able to adjust my portfolio to longer-term profitability observing the reaction from the market after the announcement. I make sure I do not switch on to CNBC. I will trade what I see. There is minimum stress!