Day Trading Is Very Difficult: Here Are 6 Tips for Long-Term Success
Most day traders fail, but those with the right style and mindset can produce steady long-term profits.
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Last week, I discussed why the vast majority of day traders fail. Following up, the biggest problem is that day traders tend to have a gambling mentality rather than a speculative mindset. They approach the day-trading process without a real appreciation of the risks involved or the potential return. It becomes a constant search for a home-run pitch, and that inevitably leads to a series of strikeouts and a depletion of valuable capital.
Day trading can provide a nice stream of income if it is done right, but it requires sustained effort and will be very frustrating at times. If it was easy, you couldn’t make good money from it.
Here are some tips to help you develop an effective approach to day trading.
1. Don’t make day trading your primary focus. Make it an adjunct to longer-term trading and investment. When day trading is your primary focus, you are much more likely to force suboptimal trades even when market conditions aren’t favorable or there are few good opportunities.
The best day trades will often show up unexpectedly and are the product of vigilance rather than planning. For example, the sharp drop in Meta META stock on its mediocre earnings report created huge volatility, which offered great odds for day traders.
2. Focus on volatility. Day trading is all about navigating intraday volatility. Longer-term chart patterns or news flow only matter as far as they create big moves. Day traders do best when they focus on the reaction to news flow rather than try to bet on news events. The key is to react to movement very quickly rather than try to anticipate.
3. Don’t just trade memes and junk names. Most people associate day trading with some of the wild moves in meme stocks such as GameStop GME and AMC AMC. There were some absolutely giant moves in these stocks, and aggressive day traders made big money at times. However, the great likelihood is that those who had the biggest gains likely gave it all back when trying to duplicate the success in subsequent trades. You can generate big gains by taking extreme risks, but it is just a matter of time when your luck will run out.
Low-priced junk stocks still attract an audience of day traders every morning, but the folks who focus solely on this type of trading seldom are around for long. There is just too much risk to be able to produce steady profits, and usually, these folks will run out of capital quite soon.
Well-known big-cap stocks are often the best day trade vehicles, but many day traders avoid them because they like the idea of buying huge positions of low-priced stocks. Low-priced stocks make bigger moves, but that volatility comes with higher risk. If you trade a stock like Nvidia NVDA, you may only own a few shares, but it can be much easier to catch moves in a name like this that has big institutional support.
4. Day trade your favorite longer-term stocks. The best stocks to day trade are those you know best. Routine volatility in a small-cap stock that you are holding long term can offer very low-risk day trading opportunities. The moves are often driven by market conditions rather than a shift in fundamentals, which makes it easier to have stronger convictions.
5. Take many small losses and try again. Precise entry points are one of the biggest challenges in day trading. You are dealing with random movement, and one minute charts won’t necessarily be very helpful. If the trade doesn’t work immediately, then take the quick loss and try again. I often will be stopped out of a day trade several times before I finally nail the timing.
6. Set a profit target and stick to it. Greed will often turn a great trade into a loser. No one wants to sell too early, especially when a stock is a flyer, but the best day traders systematically take smaller profits and then try again. Day traders that try to capture giant moves may be successful at times, but typically, the higher level of risk leads to big losses that put them out of business.
Set a reasonable profit goal for a day trade, and don’t regret the fact that you will sell too soon most of the time. If you like the stock, then trade it in a different time frame. Don’t let day trades turn into long-term investments.
Very few day traders really know what they are doing which is why so many of them fail. Think about it as a business opportunity that can provide a steady opportunity, and make sure you have a business plan that addresses the issues I’ve listed above.
At the time of publication, James "Rev Shark" DePorre was long NVDA.
