The Day Trader is someone who is an extremely active speculator. Other Traders might not trade as often, but practice the same art. Different traders have different techniques. Some are “Day Traders” who make buy and sell decisions by the minute and can be in and out of new trades many times a day. Most traders aren’t quite this active. They watch chart patterns and make decisions which might be, daily, weekly, or monthly depending on what the charts are telling them.
A successful day trader is only right about 60% of the time, so a key to being successful for most traders is to cut your losses short (with disciplined stops) and to let your wins ride as far as the market will take them (although sometimes selling off a portion at some point to ensure gains).
Like any other form of money management, you should only do this if you really know what you are doing. The typical person that calls himself a day trader is someone who will be unemployed within a year. Whether you want to be a day trader or longer term trend trader….this takes years of study and practice, all the while learning from your mistakes. We don’t talk much about trading in this course.
We don’t do much trading here. The only trade that we really like are those that we feel we have a very high degree of probable success. These don’t show up that often. This is usually one that we feel like we understand pretty well and are comfortable and confident with the risk, reward, and time horizon set up. As time goes on, we might find more trading opportunities that we feel very comfortable with. This happens as you gain more experience. You notice more anomalies in the market. You should only focus on those trades that you truly understand and feel absolutely comfortable with. If this is the case, then you will have an edge on the rest of the market. If this is not the case, then the rest of the market will have the edge on you and you will never come out ahead in the long run even if you are lucky in the short run.
A trader might use a fund or a stock to make his trade. It’s probably not important to him philosophically, but he might very well be more comfortable with one over the other which is very important. Because Wall Street traders have become so powerful, the stock market in recent years has been moving in incredible correlation. This means that all stocks tend to go up or down at the same time. This is because these Wall Street traders (the Day Trader Kings) tend to trade the funds which move all stocks within the funds.
This is Part 4 in a short series on the different types of investors. At the following link you can find: Pt 1, Pt 2, & Pt 3. If you’d like to check out the related series on asset allocation and diversification, you can follow the links to read Pt 1, Pt 2, Pt 3, Pt 4, or Pt 5.