Expert: Mark Hodge - 11/26/2007

Question
QUESTION: Hi
I have read that 95 % from day traders loose money. Is it true? if true, then... making money in day trading is not much different then going to the casino...
I have just started day trading. Can you give one advice? The most important?
Thanks
Dag

ANSWER: Hello Dag,

Day trading can be very fun and rewarding, but you are right that many traders experience challenges and lose money. This definitely doesn't need to be the case. In a nutshell, I believe that the following are the most important things a daytrader needs to be aware of:

1)Have realistic Expectations. Are you going to start with a $1000 Forex account? a $5000 futures account? $100,000 stock trading account? What type of growth do you expect? Many traders lose money by gambling with their account instead of learning to trade. You can start small and turn a small account into a considerable size, but trading shouldn't be considered a get rich quick scheme. In addition, you need to understand that losses are part of the business! I've only heard of one trading strategy that had a 100% winning percentage without a losing trade. The strategy identified ONE trade in the 1900's (kind of defeats the purpose of trading). Traders need to understand that losses do, and will, occur. A strategy with a 20% winning percentage can still bring considerable profits. It all depends on the strategy! In general, the higher the winning percentage, the smaller the profits. The lower the winning percentage, the higher the profits. Too many beginning traders think that the only way to be successful is by trading a strategy with big profits and high winning percentages. Not only is this unnecessary to be profitable as a trader, it's unrealistic.

2) Have a plan. Know the strategy and methodology you will use for your trading. Is it tested? Do you know when/why you will enter a trade? Do you know EXACTLY when/why you will exit? How much are you willing to lose or risk? How about money management? What are your trading goals and objectives? Too many traders begin trading with wide eyes and believe that with a few mouse clicks they can make millions. Trading should be treated like a business. You NEED to have a business plan.

3) Get experience and an education. Would you expect to be a successful heart surgeon after reading a "How to Operate" book for Dummies? Of course not. Trading can be a successful venture for the experienced AND inexperienced, but you will find that with dedication and commitment each day, your learning curve will be exponential. Every day will bring new experiences and challenges that you will learn from. You simply can't expect to have it "all figured out" in a week or a month. You will find that the more you know, the more you know you don't know and you need to be willing to learn about your strategy AND yourself along the way. There is nothing wrong with beginning your education and experience on a paper account.

As a trading coach, I have coached numerous students around the world, and experienced a variety of personalties. The traders who find the success they are looking for are dedicated, disciplined, and willing to do whatever it takes to be successful. Some traders find immediate success, some traders take awhile before they achieve what they are looking for, but the underlying characteristics are always dedication and discipline.

I wish you the best with your future trading endeavors. (I apologize for the delayed response to your question but I took some time off from trading with the U.S. holiday).

---------- FOLLOW-UP ----------

QUESTION: I am very grateful for this straight and detailed answer.
I understand now that it can be done with hard work, dedication and discipline. I  understand that a trade should be planned, and the exit points should cut losses fast, when they are still small.
Do you think that technical analysis is the right way to find profitable day trades?
Thank you
Dag


Answer
Hello Dag,

YES! I definitely think technical analysis is the right way to trade, ESPECIALLY in the short term. Fundamentals can be used if you are an investor, seeking returns from long term positions. If you plan to hold a stock for years, you want it to be a financially sound with strong fundamentals. In the short term it just doesn't really matter.

I've seen stocks with HORRIBLE fundamentals shoot through the roof and stocks with great fundamentals selloff without warning (if paying attention to fundamentals alone). Technical analysis will tell you where the money is, show you how to identify strong buying and selling and point to price levels that might be of concern.

I personally don't think that fundamentals need to be considered for short term trading, but for long term trading understanding technical analysis will help you identify a good entry. So, whatever your trading strategy is, short term or long term, understanding technical analysis will be of great benefit to you.

Happy Trading!

Mark