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Mark Brewster

How profitable is Day Trading?


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Some Day Traders enjoy significant profits over a long period, and some make profits for a while then give it all back in losses. Most reports indicate the majority of Day Traders close their accounts within a year, either because of cash losses, or through realizing they don’t have the time available to commit to making it a success. To become a profitable Day Trader is difficult. It requires study, preparation, discipline and time. One common mistake that is often made at the outset is to set a profit target, and even worse, think of that as required income, for example, “I need to make $2,000 per month to pay my bills”. Don’t start there! The alternative approach is to measure trading performance in terms of percentage points rather than in absolute terms. Ask a professional portfolio manager at an institutional asset manager what their performance is like and you’ll likely be answered in terms of “Up or down x% on the month and Up or down y% on the year”. These guys, being paid salaries to trade, don’t talk in absolute cash terms until it’s time to negotiate their end of year bonuses. What’s more, the majority are going to be delighted if they make a 20% annual return. In fact, a portfolio manager with returns over that number would have to work hard at attracting new institutional grade investors. Some investors would draw on their gut feeling that ‘somewhere in there’ the risk return ratio must be skewed towards risk. Others might argue that “OK, you obviously had a good idea that worked out, but I really needed to be in the trade from the beginning”. If you’re looking to open a day trading account and have £5,000 capital available, then taking the account to £6,000 over the period of a whole year would in percentage terms put you in line with successful institutional investors. On the other hand an annual return of £1,000 might not be the kind of number you were thinking of when running with the idea of taking up Day Trading. It’s clear at this point that profitability in cash terms is dependent on the amount of capital you put up and the risk return profile you decide to run. Step back for a moment and consider how your trading methodology would be different if your target was to achieve a relatively modest return (say 10%), but not to exceed it, and are given a long-time window in which to trade. You may have twenty trading ideas that you are currently looking to put on. But in this different environment it’s not a question of which of the twenty would be proved to be good trades, it is more, which few of them are the best to use to meet the target. This cherry-picking of trades does mean you might not put on trades that turn out to be very profitable which is obviously frustrating but is what demo accounts are for. It does however mean you might not put on the other trades that would have gone on to lose you money and that is crucial.

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