I wanted to create an article that answers the question, ‘What is day trading?’ and also introduces the extremely important aspect of trading psychology.
As the most basic answer to this question, you could simply say that day trading is the act of buying and selling (trading) financial instruments (stocks, bonds, ETFs, options, futures contracts, currencies) within the same day.
So you buy and sell something before the day is over. You don’t hold any positions overnight.
Keep in mind that some “day traders” are also “swing traders” if their trading strategy and market conditions call for that. Swing trading involves holding positions for a few days to several weeks.
But in terms of definitions, a day trader will close out positions in 1 day. No positions are held overnight.
Obviously this definition isn’t enough to fully understand what day trading is, so let’s take a closer look.
Day trading is a speculative trading style where the goal is to profit from short-term price fluctuations.
Day traders often use technical analysis, news events, and market sentiment to make quick decisions and capitalize on small market movements.
The term “speculative trading style,” as used in the context of day trading, refers to an approach to trading that is primarily focused on attempting to profit from short-term fluctuations in market prices.
Unlike long-term investment strategies that rely on fundamental analysis of a company’s performance, growth potential, or economic factors, speculative trading involves making trades based on predictions of immediate price movements.
Day trading is not the same as traditional investing. If you’re a great analyst who can find investments that will pay off in the long run, it doesn’t mean you’re going to be a good trader.
Most people know what investing is. For example, buying and holding stock that increases in value over time. Many people understand that, however that’s not what day trading is.
They both participate in the same market, but they’re very different.
Here are some key characteristics of day trading:
- Short-term Focus: Day traders engage in transactions within the same trading day, aiming to capitalize on price movements that occur over minutes, hours, or throughout the trading session. The speculation comes from attempting to forecast these quick changes.
- Technical Analysis and Market Signals: This style relies on technical analysis, which includes studying chart patterns, volume, moving averages, and other indicators to predict future price movements. Traders also pay attention to news events and market sentiment to make informed decisions quickly.
- Requires Discipline and Focus: Successful speculative trading demands a high degree of discipline to stick to a trading plan, focus to monitor the markets, and a solid understanding of market dynamics to make quick, informed decisions.
In summary, the speculative trading style in day trading is characterized by its focus on leveraging short-term market volatilities to achieve gains, requiring acute attention to market conditions, a disciplined approach to risk management, and a readiness to act swiftly on trading opportunities.
Personality Traits of Successful Day Traders
3 clear traits that every successful day trader seems to have are:
- Discipline
- Independence
- Decisiveness
Discipline
When you look at the work it takes to learn how to day trade, it’s pretty obvious that successful traders have a lot of discipline. If you’re like me, you need to study this stuff on your own and with your limited free time.
When we start to trade, it’s also very obvious that you need to have a trading plan and stick with it. You need to start your day with a routine, and journal and track all your trades for review. You need to take your profits and cut your losses with no emotions. Unorganized and undisciplined people can’t do this.
Independence
Personally I like working alone.
I built an affiliate marketing business and the only contact I had with people was through email. Naturally, I’m attracted to day trading because it’s clear that independence is a personality trait that traders have.
If studying charts and working alone at your computer is something that you enjoy, that’s a good sign.
Decisiveness
Some people have a hard time making decisions. I think we all know someone like that. They need to consult with a few people before pulling the trigger on everything from what to make for dinner, to how to respond in an unpleasant social situation.
Successful traders can’t afford to get a second opinion. You need to execute your trading strategy in a timely manner and be confident. If you can’t make quick decisive decisions, you probably won’t be a good trader.
The other important trait that successful traders have is a strong mindset. The good news is that this is something you can and will have to work on.
As long as you have the awareness that working on your mindset is key to success, it’s something that you can 100% build and grow.
Why Does Everyone Talk About Trader Psychology?
For this section, I want to share my notes on the first chapter from one of the most popular trading psychology books called Trading in the Zone by Mark Douglas.
This is the one book that everyone involved with day trading will recommend to you. You can purchase it on Amazon through this link.
In summary, the chapter provides a compelling argument for the psychological aspects of trading, suggesting that technical skills alone are insufficient for success. Instead, emotional intelligence, a disciplined approach to risk, and a deep understanding of one’s psychological responses to the market’s ups and downs are what truly set successful traders apart.
Evolution of Trading Strategies
Trading has evolved from relying on fundamental analysis, which focuses on the intrinsic value of a company, to technical analysis, which predicts price movements based on past patterns, and now to mental analysis. This shift emphasizes the importance of the trader’s mindset in achieving trading success.
Technical analysis became popular because people realized that you can’t make money consistently by only using fundamental analysis.
Fundamental analysis is based on a model that factors in many things, and it comes up with a price a stock should be in the future.
But these models don’t factor in people as variables.
If people don’t know about the model or don’t believe in it, the price won’t go up.
The technical analyst knows that there are patterns that repeat themselves and can give a greater probability of something happening over another.
Technical analysis looks at what the market is doing now in relation to what it has done in the past instead of focusing on what the market should be doing based on what is logical.
Therefore there are more opportunities to make money with technical analysis.
But the big question is:
Can you take advantage of these opportunities?..
In the book, Mark Douglas explains that there’s a psychological gap.
You might know what to do, but can you put on those trades?
My thoughts from this section in the book:
As someone transitioning from an investment mindset, where decisions are made based on the long-term potential of companies, to a beginner day trader, it’s essential to understand that the focus shifts dramatically. In day trading, the immediate price action and market sentiment take precedence over the fundamental strengths or weaknesses of the underlying company.
This shift doesn’t eliminate the value of understanding a company’s fundamentals but highlights that with day trading, success is determined more on mastering technical analysis to navigate short-term price fluctuations and developing a resilient trading psychology to make decisions without emotion.
While investing is about planting seeds in fertile ground and waiting for them to grow, day trading is about navigating the waves of the market with skill and mental fortitude. Both require knowledge and understanding, but the tools and mindset for success in each are distinct.
Developing a Winning Mindset
Success in trading requires a winner’s mindset, which many traders lack initially. This mindset involves accepting losses as part of the learning process, being willing to start small, and embracing challenges as opportunities for growth. Achieving this mindset is crucial for overcoming the inevitable obstacles and failures that traders face.
The best traders think differently from others.
Attitude is everything. Winners have a unique set of attitudes that allows them to remain disciplined, focused and above all confident. They are not susceptible to the common fears and trading errors.
Mark Douglas – Trading in the Zone
Trading is Full of Paradoxes
A paradox is a logically self-contradictory statement or a statement that runs contrary to one’s expectation.
Here are some simple examples:
- Less is more.
- The only constant is change.
- You have to spend money to make money.
- The only rule is there are no rules.
Trading is full of paradoxes.
Things that seem to make sense don’t work in the world of trading.
For example, trading is inherently risky.
Nothing is guaranteed 100%. The risk of losing money is always there.
If you put on a trade, you would assume that you’re a risk taker right? The logical answer is yes.
When you put on a trade you’re taking a risk, but it doesn’t mean you’re accepting that risk.
When someone decides to trade, they’re essentially agreeing to take a risk. However, agreeing to take a risk is different from fully embracing it. Many traders enter the market without a true understanding of what it means to be a risk-taker. They might recognize the risk on a surface level but haven’t fully come to terms with the potential consequences of their actions.
Successful traders view risk differently. They not only acknowledge the risk but also accept and embrace it. This acceptance allows them to trade without hesitation. When a trade isn’t going their way, and cut their losses without letting emotions get in the way. Their ability to maintain discipline, focus, and confidence despite the risks sets them apart.
Fear of risk is a significant obstacle in trading. If you’re trading with fear, it indicates you haven’t fully accepted the risks involved. Avoiding risk may seem like a safe strategy, but in trading, it’s a recipe for failure. Success in trading requires confronting and managing risk head-on, not running from it.
Trading presents us with the fundamental paradox:
How do we remain disciplined, focused and confident in the face of constant uncertainty.
You need to think like a trader.
You need to learn to accept the risks.
With no emotional pain there’s nothing to avoid. It’s just information.
The best traders aren’t afraid. They have attitudes that give them the greatest degree of mental flexibility to flow in and out of trades based on what the market is telling them about possibilities from its perspective. They don’t get reckless.
Mark Douglas – Trading in the Zone
The best traders have no fear. They are never afraid and never reckless.
4 Primary Trader Fears: Don’t be a Deer in the Headlights
People fail because they have the wrong attitude about:
- Being wrong
- Losing money
- Missing out
- Leaving money on the table
If you have the wrong attitude about being wrong, losing money, missing out, and leaving money on the table, you will fail.
It’s logical to think that you should maybe have some fears regarding the market, but when it comes to trading, your fears will cause you to act in ways that bring about what you are afraid of.
It’s like golf.
Imagine you’re standing up at the tee and looking down the fairway. On the left side there’s a large pond. If you say to yourself: Don’t hook it left, don’t hook it left, don’t hook it left… What do you think will happen? You stand up and take a swing, and hook it into the water.
Trading works this way too. As stated in the book:
If you’re scared of being wrong, your fear will act upon your perception of market information in a way that will cause you to do something that ends up making you wrong.
Mark Douglas – Trading in the Zone
Fear is immobilizing. It doesn’t let you see and understand all the information that is available to you.
The source of this fear problem is our own attitudes. This is why fear is subtle. The thinking patterns that affect our trading are just based on the natural way we think. It’s internal not external.
This is why you can’t blame the market for inconsistent results.
In the book Mark explains that to be consistent we need to understand how our beliefs and attitudes affect our perception of market information. For those with the wrong mindset, it will seem as if it’s the market’s behavior that is causing the lack of consistent results in your trades.
Unfortunately this leads you to learn more about the markets which is a trap. There are too many variables to consider and the market can do anything unexpectedly.
You can’t do enough market analysis to overcome the fear you have of losing money.
You obviously need market analysis, but it’s not the path to consistent results. It won’t solve the problems that come from a lack of confidence, discipline or improper focus.
To be confident, you need to have trust in yourself. That’s what confidence is. To get this trust, you need to train your mind to override your natural inclination to think in ways that are counterproductive to being a successful trader. Market analysis is not this training.
So what can you do?
You need to adjust your attitudes and beliefs about trading in such a way that you can trade without the slightest bit of fear while at the same time keep a framework in place that doesn’t allow you to become reckless.
That’s the recipe for success and it’s what the rest of the book teaches you.
