my own laws and rules of day-trading

my first introduction to stock market was in november 2003. but i got serious only in jan 2009. though i had become literate about trading by that time, my real education and training started only after that. and what a journey it has been in these 46 months. full of sweat, tears, blood, death and re-birth....

majority portion of this journey is archived in the form of my 1000+ articles and posts in mudraa.com as well as my blog.

while the learning is still on and will and should always be, i have no hesitation in admitting that i have passed out of the univ and started my pro journey.

in the past 2-3 months i have been seriously devoting time to fine-tune and test and retest and improve my trading method. during this period, i have written and shared quite less due to the time constraint.

today, was in quite a relaxed mood and took the liberty of teasing myself with one of my favourite self-questions - "what are the laws of day-trading as per you as of today as per your method and understanding?"

this is one question that i have been asking myself very very regularly so that i always keep the larger picture right before my eyes and mind.

here is the latest list of my laws and rules for day-trading.

- trade pro-trend and even your blunders will be pardoned. (i have devised my methods to identify the three phases - up trend, no-trend, down-trend)

- technical indicators are the time tables of operators. operators and bandits never stick to time table. don't fool yourself with technical indicators but be aware of them anyway. look for the clue of the operator movement. retail traders play at the technical level and lose at the tactical level. retail traders will lose lesser simply by playing the trade rather than trading the trade.

- market does opposite to the majority opinion.

- use options, not stoploss.

- do your homework and enjoy the "game" of operators. choose right, sit tight.

- never spend your profit. plough it back after taking out contribution to the buffer fund. start with small principal, don't infuse any more capital. resolve to be a millionaire from one coin with the clever method.

- when you realize your mistake or see that the situation has changed since your homework, admit it and save whatever coins are left. stand up and win back lost coins and more.

- play points and not money. gradually, you will develop strong stomach muscles for bigger bets without butterflies.

- take advantage of the temporary adversity rather than succumbing to it.

- divide your capital in parts and start only with one. don't rush to become an operator overnight. learn to stand before you walk, learn to walk before you run before you fly....multiplication will take care of any amount of time you take to wait and learn addition and subtraction.

- experts know nothing. whatever they say won't happen. atleast that way, that day. not because they don't know, but because operators make it a point to go the other way, the other route. operators' modus operandi will never get exposed openly. because when it gets exposed openly, the operators would have abandoned it much earlier.

- all days are not tradable, all trades are not of same duration and juice. all trades are different in tactically.

- more study takes you away from the truth. finally, you would have to unlearn all to bring the real thing back in focus. the world of conventional trading training is fake. it is creating an army of goats for the predators.

waiting before the next trade

http://www.mudraa.com/singlepost.php?messid=142999

dear murliji,

nice to hear from you.

now when i know that you are physically in the u.s. i miss your routine presence in mudraa more than when i knew, in the back of mind, that u were somewhere around.

your observation is good and your question pointed and right.

let me ask myself and attempt a frank answer.

-

i put the sl @ 5090spot equivalent because, at that time, 5090 was the line which, if crossed from below, would have indicated, as per my understanding, the pause or end of the downward slide.

infact, for quite sometime, nifty spot kept hovering around 5089.....almost teasing......missing it by a whisker 2-3 times before finally crossing it.

why i didn't square @ 5077spot = because that was not the line which indicated the end of downslide.....unlike 5090 which did.

the next question is - why i didn't go long @ 5090 after squaring shorts.

there are a few reasons when i rethink.

one, i was quite stressed after spending quite some time observing tick by tick in that tense situation with loaded position. i had to breathe again after coming out of the ring.

second, somewhere in the back of head, i knew that while markets may stop falling that may not itself indicate that they are about to rise.

so, as a natural instinct, i stood up the table, walked out, freshened up, relaxed a bit, returned, forgot the day trade and started looking for btst stbt opportunity.

with that fresh mind, and once out of the shadow of day trade's stress, i could focus on overnight trade signals better.

one more thing, the momentum (often unjustified and mob-minded) is difficult to change at the end, it is often hiding a different picture for the next day, when seen from a distance.

just like every morning is like a fresh puzzle and needs fresh look, every overnight set-up is a fresh riddle and needs a fresh view, detatched from the midset overhang of the day's workout.

--

the sabzimandi train analogy is right.

---

when i squared the shorts, i was not sure whether the train to the other side was ready for leaving.

the markets could easily have risen to 5030 levels before gap down the next day. in that case, it would have been prudent to book shorts and wait for shorting again.

---

say my hello to the president.

hope he or his treasury secretary or fed chief doesn't say anything which spoils my overnight weekend long position.

secret of day trading success

which of the following trading scenario would you prefer
A. (total 375 points profit in 7 trades) + (total 95 points loss in 8 trades)
B. (280 points profit in 7 trades with no loss)
(*brokerage adjusted profit and loss)
well, on the face of it
both the above scenario look same.
rather, scenario B looks better than scenario A which looks scary!
but, the reality is
that
1. scenario B is just a mirage....it doesn;t happen pratically.
2. scenario A is not only practical but is the best way to be successful in trading.
3. even scenario A doesn't happen
instead scenario C happens as below
C.  (total 175 points profit in 7 trades) + (total 375 points loss in 8 trades)
why?
cutting winning trades early
and cutting losing trades late!
------------------------------------------------------
there is nothing called opportunity without risk.
and where risk is there, there has to be loss.
"cutting loss early, letting profit go on till max possible and trying to increase percentage winner trades"
is the secret of trading success.
------------------------------------------------------

in the above example (scenario A) which is close to reality, you will notice that trade success ratio isless than 50% but the net result is good! this fact speaks volumes. traders are so scared of loss as well as losing trades that they miss the real thing....the net profit!

same thing happens in life. we are so obsessed with the hardships and troubles that we miss the real things.........!!! 

(niftyshots.blogspot.com)

types of trading

there are only two types of trading
(i am talking of trading and not investing)
- day trading, and
- night trading.

and since the stock markets are closed during the night
even night trading is not there.

so this leaves us with only one type of trading
- day trading!

rest everything else
is only a derivative of day trading!

a 6 day swing or positional trade
is nothing but the 6 times multiple
of day trading.

the only difference being
that in swing or positional trading
a trader accepts
that he or she will not mind day-to-day and intraday fluctuations
including gap openings.

whatever technical rules apply to day trading
on 2 minute or 5 minute tick charts
apply exactly to swing or positional trading
on 30minute or 1 day tick charts

as i had said earlier also
day trading is miniature swing trading
and swing trading is enlarged day trading!

essence of day trading

like millions of others
i have been
and am
the fan of mike tyson
former undisputed heavyweight world champion.

he won his first 19 professional bouts by knockout
12 before the end of the first round.
in 1988, he knocked out michael spinks in the 91 seconds.

but when the fight lasted 10 rounds
in a fight with james "buster" douglas in 1990
mike himself got knocked out.

--

a fight worth a few million dollars
lasting a few seconds
makes every second quite pricey!!!

--

now here is the beautiful question -
should the bout be short or long?

well,
from the audience and tv channels and sponsorers point of view
it should last quite a few rounds.

from tyson's point of view
it should be over as fast as possible.
the more time it takes
the harder it may get to beat the opponent.

after all,
a career and hell lot of money is at stakes.

longer fights have more entertainment value
but increase risk of losing!

--

now lets extend the scope of this question
to trading!

should the day trade "bout" be short or long?

while longer trades have high "entertainment" value
they don't necessarily have higher "prize" value for the trader!

rather it is often the opposite.
the longer it takes to be profitable in a day trade after getting into the trade
the lesser the chance of making profit
and more the chance of one being in the wrong trade.

as art simpson said in his famous "phantom of the pits" rules
- if a trader waits for the markets to prove his trading position wrong
it might be too late! it is wiser to assume oneself wrong if not proven right in reasonable time!

coming back to the question
'should the day trading bout be short or long?'

-

every day trader starts the day with a dream of making 50 points from nifty!

what a paradox that he/she misses out a simple mathematics option.
there are a few alternative ways to make those 50 points
- make 50 point in one lot!
- make 25 points in 2 lots!!
- making 17 points in 3 lots!!!

how many 50 point movements are there in a week?
and how many 25 or 17 point moves?

you know the answer....
while 50 point intraday moves generally happen 3-4 days in a week
25 point moves happen 2-3 times a day
while 17-point moves happen once every 30minutes or an hour!!!

getting a trade right has nothing to do with the number of points that trade may give.
so success ratio of getting the trade right is same
for a small or medium or large ride.

so, why don't day traders go for multiple lot - short rides?

what a paradox
that traders fear double or triple or multiple lots
but do not fear single lot for a 50-point ride which comes so rarely
(assuming they actually recognize, catch and ride it full!)

- no wonder the failure rate in day trading so high.

the reason is not far to be found.

traders feel less pain in bleeding to death
than facing the fear of a fast fight.

but herein lies the second and bigger paradox
- if you are not so sure of your method
and want to trade single or small lot
why even lose that??

and if you are reasonably sure of your method
and ready to put one lot at stake
why not trade with two?

it is a mindset issue
a habit trap.

a 17point high volume trade
has high probability of success.

all you need is
a reliable method
strong risk management
and a fighter-pilot mind.

never trade to an audience.

day trading is a guerilla warfare -
wait behind the bush for the opportunity
pounce on one
and get lost with the booty!!!

the longer you stay in sight
more the chances that "they" will get you down.

clarification on 'instant day trading rules' - II

dear bipin, pramanik,
u have got point 1 right
point 2 was something different :
let's take today's example (i will use today's eod data of nifty to explain)
top selling option = 4800pe (no. of contracts sold = 321181)
runner up (only opposite option) = 5000ce (no. of contracts sold = 297354)
here, since top selling option is a put, i would interpret it as an indication of "upward bias" and hence find points to buy. i will by and large, try to find opportunities to buy on dips.
and since the number of contracts sold of the runner-up enemy option (in this case 5000CE is runner up by not-too-small margin i will consider the upward bias interpretation of mine as reasonably ok.
had this difference in the number of contracts traded been more, the upward bias would have been stronger.
but please note that this is a crude (though logical and reliable) method to day trade. i used to use this but not now ( i have other guns to trigger). please don't use blindly. recently one of my friends shared a similar idea and this reminded me of all this. i thought of sharing with everyone.
picking the right entry point is critical after having got the direction of the wind.
also, pl keep in mind that since the data is only for the day (http://www.nifty50options.blogspot.com/ , http://www.nseindia.com/content/fo/MostActiveContractsOPTIDXBANKNIFTY.htm) the interpretation would be for that very day only.

clarification on 'instant day trading rules' - I

dear mitul, i have already shared the logic in another post.

i am sharing it here as well.

retail traders buy options and big pockets / operators sell/write options (overwhelming majority).

if there is a mad rush amongst retail traders to buy options (whether they are doing that voluntarily or are being coerced and trapped by the operators to do so is an altogether different and interesting matter) it is obvious that they will not have their way. they are unlikely to be allowed so - by the operators.

operators are no santa claus and christmas is always a trading holiday.

operators are not there to lose money.

what they do should be taken as right and others should be taken as wrong.

trading is not about what is wrong and what is right. trading is about who is wrong and who is right and being with the right. 

instant day trading rules

rule 1. always go opposite to the direction of the top selling option for the day.


rule 2. the closer the runner up anti-option to this top selling option, slower the trend.


rule 3. buy at higher low and sell at lower high. 


rule 4. note down the sequence of options (of different strike prices) in decreasing order of number of lots sold. e.g. call, put, put, call, call, put. keep an eye on the change in the sequence. it indicates the shifting techtonic plates below the trading earth.


http://www.nifty50options.blogspot.com/


http://www.nseindia.com/content/fo/MostActiveContractsOPTIDXBANKNIFTY.htm

6 passwords of day trading - VI

day trading is an enigma.
investing calls every new trader but none goes there first.
many never go there.
all come pulled towards day trading like hypnotised souls.

this write-up is for those souls
who want to live and die with their obsession
the day trading.

if day trading is a vault of money.
here are the 6 passwords to open that vault.

--------------------------

password 6 = don't "trade"

this one is controversial, exciting, mysterious
and most rewarding!

genious and most successful traders
never look like one!

they are never conscious or excited about trading.
for them trading is a routine business of common sense.
and common-sense is nothing but emotional wisdom.
they are not desperate for money
so they don't take "hyper" decisions.

they don't"look" like a trader at all!
they look dull and pretty ordinary.
they have no hoopla or air of a trader!

they don't trade with money but their edge!
they don't trade for money but for vindication of their edge!

that they put in money
and that they get a loads more back
is just incidental.

they know emotions are the handles operators catch the small traders.
by being emotionless, they are beyond the traps of market manipulations.

when things go or don't go their way
they are not excited or scared.

all they humm to themselves is
"is it!"
"o, i see!"
"all right. so be it!"

they trade like a machine.

they don't trade with a software
they trade like a software.

for them loss is just a "pickle" with the main dish of profit.

6 passwords of day trading - V

day trading is an enigma.
investing calls every new trader but none goes there first.
many never go there.
all come pulled towards day trading like hypnotised souls.

this write-up is for those souls
who want to live and die with their obsession
the day trading.

if day trading is a vault of money.
here are the 6 passwords to open that vault.

--------------------------

password 5 = "edge"

i am shocked to see
amateur day-traders entering trading pit
with only money stacked in both pockets of their pants!

no wonder
while coming out
they have not only lost all that money
but also their pants!

and what a relief it is
to see a trader
with money in one pocket
and a "secret personal trading weapon" in the other!

this "weapon"
may be a combination of deadly indicators
a support-resistance-breakout-breakdown gameplan
a gap opening strategy
a price-volume momentum plan
...some trick
...some secret knowledge edge!

the point is -
money is not enough to fight!
you need some method, some weapon,
some trick, some advantage,
a unique gameplan you specialise in.

all in all
you need a dependable edge
on the basis of which
you can bet your money.

trading without an edge
is like trading with orphan money
which is begging to be "adopted"
by a responsible deserving trader.

an edge is your personal specialised trading idea
that has proven to be successul for you
majority percentage of the times!

once you have got that edge
don't bother whether it works in that particular trade or not
just keep repeating it
ruthlessly
and repeatedly.

if the edge was right
it will get you money
majority of the times.

specialise and keep improving your edge!

one good one is more than enough!

6 passwords of day trading - IV

day trading is an enigma.
investing calls every new trader but none goes there first.
many never go there.
all come pulled towards day trading like hypnotised souls.

this write-up is for those souls
who want to live and die with their obsession
the day trading.

if day trading is a vault of money.
here are the 6 passwords to open that vault.

--------------------------

password 4 = "time"

well begun is half done, they say!

so true in day-trading!!

when to enter a day-trade is decisive.

if you enter at the wrong time
even if your direction of trade is right
you may slip into loss for some time before the trade actually turns in your favour!

by that time, you may have panicked and chickened out or quit.

even otherwise, you are unnecessarily inviting stress.
you are unnecessarily cutting down potential profit.

i have seen many day-traders enter positions randomly.

even when you are on the side of smart money
even when you are mentally aligned and aware of the bigger picture
even when you are prepared for the "guerilla" war
you need to enter at the right time!

i give some examples below:

- enter only at a higher low (for a long position)
or a lower high (for a short position)

- keep intraday fibonacci retracement levels in mind.

- keep support and resistance levels in mind.

- don't enter the position without the permission of the indicators, if you have some on your payroll.

"never try to time the market" may be a rule for investing but certainly not for day trading.

6 passwords of day trading - III

day trading is an enigma.
investing calls every new trader but none goes there first.
many never go there.
all come pulled towards day trading like hypnotised souls.

this write-up is for those souls
who want to live and die with their obsession
the day trading.

if day trading is a vault of money.
here are the 6 passwords to open that vault.

--------------------------

password 3 = "run"

day trading is not for wealth creation
it is for cash flow generation.

it is an atm.

you never retire from day-trading.

if u want to accumulate wealth
go to swing trading and then to investing.

day trading is self-employment at its best.

i have seen many day-traders bleeding to financial death
by not getting this basic password right.

they expect to become rich by trading trading
and all their trading decisions go wrong because of this.

greed of "all the money" immobilizes them.
fear of "recovering that gone wealth" freezes them.

day trading is a guerilla war.
you don't go there with tents and bonfire!
you go there on a mission
do it
and get lost!

what a paradox
that amateur day-traders
fear losing money
and hence don't buy multiple lots
but still expect big money.

this leaves them with only one way
stay in the position for long....and this traps them.

day trading doesn't mean you have to be there all day!

it is not a 9 to 3 job dammit!

as i said earlier
it is like a visit to an atm
put in the debit card of indicator
key in the amount
wait for the machine to count
take the money before it re-enters the machine
hold it tight
and go!

6 passwords of day trading - II

day trading is an enigma.
investing calls every new trader but none goes there first.
many never go there.
all come pulled towards day trading like hypnotised souls.

this write-up is for those souls
who want to live and die with their obsession
the day trading.

if day trading is a vault of wealth
here are the 6 passwords to open that vault.

--------------------------

password 2 = "write"

there is nothing right
nothing wrong
in day trading.

all morality, righteousness, should, would and could
are taken care of
and neutralized
within one minute
of the day's opening.

the gap up or gap down eats up
all pressure of the accumulated overnight developments.

the real drama starts thereafter.

95% of the day-trading money
is in the hands of just 2% of the players.

after the opening
a game is triggered by the "big pockets"
which seems to have nothing to do
with the weekly theme being played in the market.
despite the fact that it always stays within those boundaries.

afterall the smart money is not fool money!

i have seen that majority day-traders are trapped
and stay trapped
wondering why the obvious is not happening!!!

the rope of being right
gets them butchered.

they fail to see
that if 'the right' keeps happening
nobody makes money
as everyone knows what is right!

the should and could never would
in day trading!!!

what is happening is the reality.
what should happen is the trap!

don't be caught in the dilemma of right or wrong
be on the right side of the trend.

more and more day traders are opting for options.
they buy cheap options
written (sold) at unlimited "risk" by smart money.

smart money has the money power to control
accumulation and distribution game.

this is the reason
why the option (whether call or put) on the top of the traded-volume chart
is the wrong way for that time for that day.

if you are with the trend
then you are right
even when you are "wrong".

"right" is not right in day-trading
"write" is right.

stay with the trend.....whatever.
no if, no but.

6 passwords of day-trading - I

day trading is an enigma.
investing calls every new trader but none goes there first.
many never go there.
all come pulled towards day trading like hypnotised souls.

this write-up is for those souls
who want to live and die with their obsession
the day trading.

if day trading is a vault of wealth
here are the 6 passwords to open that vault.

--------------------------

password 1 = "light"

= day trading is the refuge of those who fear the night.
those who fear the darkness.
why i say so?
well, one day is just a part of the bigger picture being painted.
not all billions in the market are taken out every evening.
if that were so, nifty to crash to zero every evening!!!
markets don't fall like newton's apple.
they just yo-yo.

market moves in cycles.
there are cycles inside cycles inside cycles.
there are yearly cycles
with monthly cycles inside them
with weekly or fortnightly cycles inside them
with one or two day cycles inside them.

while majority money stays in outer cycles
mischievous money does play the one or two day cycle.
that is where a day trader should focus to have any chance
of making money in day trading
and that too consistently.

market is overwhelmingly packed with day traders.
beeing a day trader is itself a sign that
the trader has accepted the reality
that making big money and creating wealth in stock trading
is not for him or her.

he or she has consoled the self
to focus on daily earning of bread!

these day traders
treat every new day as a new puzzle to guess and crack.
they forget that the day is only a part of
the weekly or monthly puzzle being solved.

the only difference is
that the mischievous money
cause and use day trading volatility and unpredictability
to play catch-me-if-you-can trap game.

almost all day traders
get trapped in this.

if only the trader were to realise
that this mischievous money
has serious limitation
of staying within the outer puzzle boundaries
the trader will not run like scared lambs.

"light" of this knowledge
is must.

a day trader
whatever technicals or method or tricks or strategies he or she uses
must know
what theme is being played since last few days!

once this is clear and etched in your mind
the remaining passwords will help you win.


(to be continued)

gambling and trading are so different!

gambling

and

trading

are so different!


in gambling

the winner

is not allowed

by the losing gang

to leave for the day

till he loses back everything!


and in trading

the lucky winner

refuses to go away for the day

till he loses back everything

to the unaware gang!

eyepiece, trigger,shoulder and head - II

every morning, late afternoon, evening

and every half an hour in-between

i keep checking

the high-probability turning points

on the 1-month and 6-day chart,

get ready

and wait for

the "trigger" indication

on the 1-day chart.

if the final "execution" signal comes

i pull the trigger

otherwise

i let my photo memory

of what i saw in the "eyepiece"

of medium-term charts

fade away!

eyepiece, trigger, shoulder and head

"use eyepiece on the gun to aim

use the trigger to shoot

stabilize the gun with your shoulder

keep your head cool and calm"

the shooting trainer told the cadets!

--

the above message

after translation

is equally valid

for a trading cadet

"use 1-month chart to aim

use 1-day chart to shoot

stabilize the trade with the shoulder of method

keep your head cool and calm"

the best place to call a bluff !

if you hide a small bluff in a small place

others will obviously catch it.

so, there is little incentive in that.

if you hide a small bluff in big place

it is likely to go unnoticed!

besides, why tell a small bluff when you can bluff big?

--

you surely can't hide a big bluff in small place

but you can definitely hide a big bluff in big place!

--

though it is likely to get noticed

it still makes a big trading sense

especially when you are an operator

and the scared

and un-resourceful small traders

are failing to notice

even the big bluff

in the big place!

--

let's come to the point.

operators love day-trading setup

because their bluff is big

while the place

(the time limit for the small traders to catch and respond to it)

is too small

thereby allowing the operators to make a killing.

this is the reason

why day trading is not a safe ground for small traders.

--

but operators are also very fond of bluffing big on big places

they defy fundamentals to dodge the swing players

on the time scale of a week to months!

--

fortunately

this larger playground

also gives sufficient maneuvering space

to the experienced and trained trader

and hence

is strategically the best bet for him!

--

semifinal words on day trading

here are the

semifinal words on day trading!

--

why not the final words?

because there can't be any final words

in trading.

then why the semi-final?

because these words are very important

and deserve to be treated atleast next best to the final words!

--

so what are the words :

"day trading is all about

who takes whose money.......and how!"

period.

--

if you believe this

i bet, you are making money in the market or can make!

and if you don't believe this,

you are the one bleeding most of the time!

--

over the period of time

rules have been made to

help ordinary trader

to be able to day trade!

pity, that these very rules

are being used to trap

these very traders!

--

those who have big money

or big stockpile

can fail any rule of this game at their will!

--

i once again repeat the words :

"day trading is all about

who takes whose money.......and how!"

the "how" in the above statement

is the heart of this

gand con-game!

--

everyone new trader in the town

is madly running after rules

little does he know

that the rules he sees

are dummies!

these are the baits to trap!!

for small traders

day trading as per rules

is the surest way of losing!

--

the unsuspecting traders

don't know

that day trading is the only

"free-floating" game in the world

which has no fixed rules!

--

if at all, the only rule is

to find a way

to take the other man's money

--

for this one rule

you are supposed to break any and every rule to confuse and dodge others!

--

having said that,

let me make it clear

that small time retail traders

neither have the money

nor the stock pile

to confuse or trap anyone!

mouse can't trap the cat

in this tom and jerry series!

only big players

can confuse, dodge and trap!

so what can small traders do?

small traders can only

hope to devise a method

or trick

or trading style

to avoid getting trapped!

the fact is that operators can't trap all of the traders simultaneously in every trade!

just like a broom can't move all of the dirt simultaneously in every sweep!

the operators trap the majority

while the minorty, by default

lands on the side of the operator

and thus sharing the kill with them!



another hope for the retail traders

is to

learn

wait for

and call the bluff

of the big players!

(will share about this in my next articles!)

a must read research paper for all day traders

detailed excerpts from research paper submitted by

Brad M. Barber (University of California) &

Yi-Tsung Lee & Yu-Jane Liu (National Chengchi University Taipei)

--------------------------------------------------------------------



Most day traders, especially heavy day traders, lose money trading.

Why do investors engage in such a wealth reducing activity?

One possibility is that investors simply find day trading entertaining.

Undoubtedly some investors do find day trading entertaining, but can entertainment account for the extent of day trading that we observe?

Do day traders knowingly and willingly accept such large expected losses for fun?

For all but the wealthiest investors, this would be a very expensive form of entertainment indeed.

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Another reason why day trading might entice investors would be if it provided an appealing distribution of returns.

People often display an attraction to highly skewed investments, such as lotteries, that have negative expected returns but a small probability of a large payoff.

However, the day trading profits that we document are similar in magnitude to, and far less prevalent than, losses.

Unlike lottery winners, day traders must succeed on repeated gambles in order to achieve overall success.

Such repeated gambles do not tend to generate highly skewed distributions.

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A final potential explanation for the prevalence of day trading is that most day traders are overconfident about their own chances of success.

Several papers argue that overconfidence causes investors to trade more than is in their own best interest.

Overconfident day traders may simply be bearing losses that they did not anticipate.

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While day traders undoubtedly realize that other day traders lose money, stories of successful day traders may circulate in non-representative proportions, thus giving the impression that success is more frequent that it is.

Heavy day traders, who earn gross profits but net losses, may not fully consider trading costs when assessing their own ability.

And, individual day traders may believe themselves more likely to succeed than the average day trader.

We are unable to explicitly test whether day traders are motivated by overconfidence rather than the desire for entertainment.

Our opinion is that the average losses incurred by day traders are more than most would willingly accept as the cost of entertainment and that, by and large, day traders must hold unrealistic beliefs about their chances of success.

We find that the trades of heavy day traders are profitable before deducting transactions costs and that the trades of previously successful traders are profitable even after accounting for costs.

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Conclusion

About one percent of individual investors account for half of day trading and one fourth of total individual investor trading volume. Our analysis of performance indicates day trading is treacherous, but not entirely a fool’s game.
Over the typical six month horizon, using lower range assumptions regarding transaction costs, less than 20 percent of day traders earn profits net of transaction costs.

These results paint a rather dim portrait of day traders. However, we do document a select few are able to consistently earn profits sufficient to cover transaction costs.

We identify day traders who earn substantial profits over a six-month period and analyze the performance of their subsequent trades. These profitable day traders continue to earn stellar returns.

There is strong evidence of persistence in the ability of day traders. Our analysis makes clear the need for comprehensive risk disclosure. Prospective day traders should be apprised of their likelihood of success: only two out of ten make money; fewer do so consistently.