Continuing on from last week, I am hoping to give even more compelling reasons to consider other trading approches to that of only day trading.
Profit per hour of trading is hugely inefficient for day traders
When day trading currencies it is not unusual to be at your pc for up to 10 hours a day. If you are fortunate enough to be able to make a net profit of $200 per day (which most people are not able to achieve) then that is the equivalent of earning $20 per hour which is not unreasonable earnings. Most people who day trade don’t make anywhere near this amount and many spend 10 hours a day in front of their pc and end up with a net loss on the day. It is also very difficult to be able to do anything else when in a trade and requires a great deal of your attention. By comparison, placing trades that are swing positions or longer term do not require more than around 30 minutes of your time a day and the profits are usually much greater. So in the event that I am able to make a $600 profit over 3 days and that it has taken 1.5 hours of my time to achieve this then my profit per hour of activity is 600 / 1.5 = $400 per hour. This is 20 times more effective than if I am able to make a $600 profit over a 3 day period by day trading.
In addition to this if you are not sat in front of your pc all day then you can go and make money engaging in other activities such as selling trading courses (pun intended, I am only joking). Seriously though you do have the time to do many other activities that can generate revenue or spend time doing something else that may interest you.
Tax Benefits (UK Traders)
If you live in the UK then spread betting offers major tax benefits but only for longer term trading and not for day traders. When I was day trading I always used a direct market access platform as this gave almost instant executions and often the spread was zero on currencies. At the end of the financial year though I still had to declare my profits to the inland revenue, or IRS if you are in the US, and pay tax. In my view it is not possible to successfully day trade using bucket shops or spread betting companies. There are many reasons for this from the cost of the spread, (assuming you get filled at the quoted price) to the “alleged” claims by some that prices are manipulated in favour of the company you choose to trade with. As I said earlier, it is easier to manipulate prices in a short timeframe but certainly not on a swing or position trade because if so then arbitrage traders will slaughter those who do it. I remember many years ago one of my trading associates taking over £70K in risk free trading off a spread betting company by doing exactly this. This was because they were manipulating prices but he was banking on them doing this and would place two trades with different companies and pocket the difference when prices came back into line. Of course the ability to do this has long since gone but what it means is that if you are a swing or position trader you can use a spread bet company and avoid paying tax that you would have to otherwise pay using direct market access. This is because the spread is of almost zero consequence when taking longer term positions and as there are fewer trades it works out a lot less of the overall profit or loss.
In addition to all other day traders that are competing with each other for daily profits, there is the additional problem of trades placed by computers. In some sectors of trading, computers now account for up to 40% of all daily trading volume and this is set to increase. Trading against a computer has many disadvantages ranging from the speed at which they can execute orders to their ability to very quickly move a market against your position more quickly than you can react to it. They do however have no positions open overnight and that is great help to swing and position traders.
Risk Control Through Relative Position Sizing
The view that there is more risk when placing swing or position trades is not true in my experience as long as position size is adjusted to market volatility. There are different ways in which market volatility can be measured such as implied volatility but one of the more popular methods is to use average true range (ATR). This can be used in any timeframe that is chosen to be traded from 1 minute timeframes to yearly if you so wish. I use a daily ATR to determine the likely number of pips movement and my preferred number of days to measure this over is 10 so this will be seen as ATR(10) on charts that I am using. Obviously there is a larger number of pips movement for me using a daily timeframe than for someone using a 5 minute timeframe but the risk per trade should be equal.
For example: if the ATR(10) for a 5 minute chart is 10 pips then for me to risk $500 in a trade would mean risking $50 per pip and in the event that the market moved against me by 10 pips then I would lose $500.
If I decide to adopt the same approach on a swing or position trade that has an ATR of 100 pips then for me to risk $500 per trade would mean risking $5 per pip. In the event that the market moves against me by 100 pips then I would lose the same amount as in the previous example of $500
Finally the psychology of being successful in day trading is at best punishing and much easier for swing and position traders. The reason for this is that when a position is taken or adjustments are made to stop positions or profits are taken, I then walk away. When I was day trading, I was having to constantly monitor what the market was doing. Very often I would start to want to do something that was against my plan and the necessary discipline to continue being successful. This is something that all of my day trading associates have now and still suffer from. This has been exacerbated in recent weeks as many markets have been whipsawing and day traders are sitting there waiting for an opportunity, if and only if, they can maintain the discipline. I know of quite a few that couldn’t wait any longer and took a trade and in some cases it worked out but this put them in a dangerous situation. Why you may ask? well because it gave them negative reinforcement in that they broke their own rules and made a profit so setting a new precedent for the future. I have seen this many times and what will happen is that they will eventually lose and this will dent their confidence. It is so much easier to make and adjust positions once a day and then not think about it until tomorrow.
I hope this has been of interest to others and I am not against day trading if that is what suits you. But there is a view that it is the only way to be a successful trader and I know that is not the case. We hear that at least 80% of those who day trade lose so maybe it is time to look at the alternative and free up your time to do other productive things.
I urge you to at least give it some thought