Chapter 14
Setting Up Your Day Trading Like a Business
IN THIS CHAPTER
Writing a business plan
Choosing your equipment
Managing the stress of the trading day
Day trading is a business venture. It may be a part-time gig or a side hustle, but face it: you’re committing real money, so you should set yourself up in order to increase your chances of success. The stakes aren’t only financial. You’re committing your time and your energy, which is worth something. Honor that time and energy by figuring out how to use them effectively.
In fact, protecting your energy is a key reason to have a plan. Trading can be extraordinarily stressful, which is good for many people who function best under pressure. (For example, I know a book author who leaves a manuscript alone until two days before it’s due. Maybe you know who she is? Hint: Check the cover of this book.) People like this find that the weight of the endeavor pushes everything else out of the way so that they can get down to business.
Of course, even those who function well under pressure occasionally get a visit from the yips — that sports term that describes what happens when a high-level athlete suddenly becomes unable to perform at any level, even that of the rankest beginner. Traders choke, too, and knowing that it could happen can help you recognize when you’re going down and what you can do to recover.
Chapter 7 covers trade planning, which is a habit that successful traders recommend over and over. This chapter looks more at the important background factors that can get your trading up and running as well as possible.
Planning Your Trading Business
The day trader is an entrepreneur who has started a small business that trades in securities in hopes of making a return. You can get your business off to a good start if you have a plan for what you want to do and how you’re going to do it. With a plan, you know what your goals are and what you need to do to achieve them.
You can find a lot of sample business plans in books and on the Internet, but most of them are not appropriate for a trader. A typical business plan is designed to not only guide the business but also to attract outside financing. Unless you’re going to take in partners or borrow money from an outside source, your day trading business plan is only for you. No executive summary and no pages of projections needed.
So what do you need instead? How about a list of your goals and a plan for what you’ll trade, what your hours will be, what equipment you’ll need, and how much to invest in the business? The following sections have the details.
Setting your goals
The first thing you need in your plan is a list of your goals, both short term and long term. Here is a sample list of key questions to get you started:
- Where do you want to be with your career and your life in the next three months, six months, nine months, year, three years, five years, and ten years?
- How many days a year do you want to trade?
- What do you need to know to trade better?
- How much do you want to make?
- What will you do with your profits?
- How will you reward yourself when you hit your goals?
Be as specific as possible when you think about what you want to do with your trading business and don’t worry if your business goals overlap with your personal goals. When you are in business for yourself, the two often mix.
You may be tempted to say, “I want to make as much money as I possibly can,” and forget the rest, but “as much as I can” isn’t a quantifiable goal. If you don’t know that you’ve reached your goal, how can you go on to set new ones? And if you don’t meet your goal, how will you know how to make changes?
Finding volatility
You can day trade so many different securities and derivatives! Sure, you want to trade anything that makes money for you, but what on earth is that? Each market has its own nuances, so if you flit from futures to forex (foreign exchange), you may be courting disaster. But if you know what markets you want to trade, you have a better sense of what research services you need, what ongoing training you may want to consider, and how to evaluate your performance.
Chapters 3 and 4 cover different asset classes in great detail and discuss how you may use them. For now, the little cheat sheet in Table 14-1 lists asset classes that are most popular with day traders. Think about your chosen markets in the same way: What do you want to trade, where will you trade it, what is the risk and return, and what are some of the characteristics that make this market attractive to you?
TABLE 14-1 Popular Things for Day Traders to Trade
Item |
Main Exchange |
Risk/Reward |
Characteristics |
Stock index futures |
CME |
Zero sum/leverage |
Benefits from movements of broad markets |
Treasury bond futures |
CBT |
Zero sum/leverage |
Best way for day traders to play the bond market |
Foreign exchange |
OTC |
Zero sum/leverage |
Markets open all day, every day |
Corn |
CBT |
Zero sum/leverage |
An agricultural market liquid enough for day traders |
Large-cap stocks |
NYSE, NASDAQ |
Upward bias |
Good stocks for day trading; large and volatile |
Exchange-traded funds |
NYSE, NASDAQ |
Depends on the fund’s structure |
Offer plays on indices and different market strategies |
Key: CME = Chicago Mercantile Exchange, CBT = Chicago Board of Trade (a subsidiary of the CME Group), OTC = Over the counter, NYSE = New York Stock Exchange
What do zero sum, leverage, and upward bias mean? Well, zero sum means that for every winner, there is a loser. The market has no net gain. Leverage is the use of borrowed money, which increases potential return as well as risk. Upward bias means that, in the long run, the market is expected to increase in price, but that doesn’t mean it will go up on any given day that you’re trading. Refer to Chapter 3 where I discus them in greater detail.
The characteristics of the different markets and assets affect both your business plan and your trading plan. The business plan should include information on what you’ll trade and why, as well as what you hope to learn to trade in the future. The trading plan looks at what you want to trade each day and why so that you can channel your efforts.
Many day traders work in several different markets, depending on their temperament and trading conditions, but successful traders have narrowed the field down to the few markets where they want to concentrate their efforts. Start slowly, working just one or two different securities, and consider adding new markets as your experience and trading capital grows.
Fixing hours, vacation, and sick leave
The markets are open more or less continuously. Although many exchanges have set trading hours, you can find traders working after hours who are willing to sell if you want to buy. Some markets, such as foreign exchange, take only the briefest of breaks over the course of a week, which gives day traders incredible flexibility. No matter what hours and what days are best for you to trade, you can find something that works for you. If you’re sharpest in the evenings, for example, you may be better off trading Asian currencies, because those markets are active when you are. Of course, an always-open market can be a disadvantage, because no one is setting limits for you. Few markets are great places to trade every hour of every day.
Investing in your business
You won’t have the time and money to do everything you want to do in your trading business, so part of your business plan should include a list of things that you want to add over time. A key part of investing in your business is continuous improvement: No matter how good a trader you are now, you can always be better. Furthermore, the markets are always changing. New products come to market, new trading regulations are passed, and new technologies appear. You need to continuously absorb new things, and part of your business plan should consider that. Ask yourself
- What percentage of your time and trade gains will go into expanding your knowledge of trading?
- Do you want to gain this additional knowledge by taking seminars or by allocating the time to simulation test (refer to Chapter 13 for more on that)?
- What upgrades will you make to your trading equipment? How about to your programming capabilities?
- How are you going to set yourself up to stay in trading for the long haul?
It takes money to make money — another cliché. This maxim doesn’t mean, however, that you should spend money willy-nilly on any nifty gadget or fancy video seminar that comes your way. Instead, it means that an ongoing, thoughtful investment in your trading business will pay off in a greater likelihood of long-run success.
Evaluating and revising your plan
One component of your business plan should be a plan for revising it. Things are going to change. Since the first edition of this book came out, exchanges have merged, the market has crashed, and high frequency trading has become the norm. You may be more or less successful than you hope, market conditions may change on you, and you may simply find out more about how you trade best. So set a plan for updating your business plan to reflect where you are and where you want to be as you go along. At least once a year, and more often if you feel the need for a change, go through your business plan and revise it to reflect where you are now. What are your new goals? What are your new investment plans? What are you doing right, and what needs to change?
Setting Up Your Trading Laboratory
Twenty-five years ago, you would have had to pay millions of dollars for the equipment and telecommunications networks that you can now have in your own home for under a thousand bucks or so.
You may be thinking, “I can do it for free!” I have an iPhone, so what else do I need? Ah, but you need plenty. Remember, successful day traders approach trading as a professional activity. That means starting with an adequate workspace and dedicated equipment, as the following sections explain.
Where to sit, where to work
First, you need to find an area to work. If you can’t give up an entire room in your house, find a corner or hallway where you can put a desk and a computer just for day trading. Going to an area dedicated to day trading will clear your mind so that you can focus on the work at hand. Instead of borrowing a chair from the dining room, get a good desk chair that swivels and that you can adjust as necessary while you work. You also need a shelf and a cabinet of some sort to hold your files and documents.
Although no rule stipulates the proper layout of your equipment, the more you can see and do without getting up from your chair, the better off you’ll be. If you find yourself getting sore at the end of the day, investigate ergonomic products such as special keyboards, contoured mice, wrist pads, and foot rests, all of which are readily available at office supply stores.
Counting on your computer
You can’t day trade without at least one computer, and some traders use both a desktop and a laptop computer. Almost every personal computer on the market today has the power to handle day trading activities, so you don’t need to sweat over the details. In general, faster processing speeds are better than slower ones, and more memory and storage are preferable to less.
What about the manufacturer? Well, you may not want an Apple computer for day trading, because you may discover that not all the software packages you need will be Mac-compatible. If you are one of those die-hard Mac heads, though, be sure to ask brokers and software vendors about compatibility. Other than that, the manufacturer doesn’t matter much.
Seeing it on the big screen
Do yourself a favor and spend money on at least one big flat-screen monitor. If you need to look at more than one window at a time — to see charts and Level II quotes at the same time, for example — consider using two or more monitors hooked to the same PC. This arrangement gives you a clear view of necessary data. Most traders work with at least two monitors, often extra-large ones, because the information they need is too valuable to be hidden by overlapping windows during a work session.
Connecting to the Internet
If you’re day trading, hook up to the Internet with as much bandwidth as possible. Ask around to find out the fastest time in your area. Your Internet service provider may charge more for faster performance, but most day traders find the extra cost worth it. If market prices are changing quickly, a delay of half a second can be costly.
You need fast service, but don’t base your strategy on speed. Even if you pay up for the fastest service in your area, the brokers and hedge funds of the world will probably have faster service. NYSE Technologies, the data-services business of exchange-operator NYSE Euronext, allows brokerage and trading firms to put their servers on the floor of the exchange. This colocation can reduce trade execution times to fractions of a second, allowing more trades to be executed in less time than if the server were in, say, midtown Manhattan. NYSE Euronext colocation isn’t cheap, but if you make thousands of trades a day, it may be worth it.
Consider connecting your trading computer to the Internet service provider’s wire. If you decide to go wireless, shop around for a good wireless router. If other people in your household want Internet access, consider getting two Internet lines so that your child downloading videos in the family room doesn’t slow down your data feeds.
A great source of information about the performance of different broadband Internet providers is Broadband Reports, www.broadbandreports.com.
Staying virus- and hacker-free
Most operating systems have built-in firewall and virus protection that can handle most likely threats with aplomb. You can also subscribe to different virus protection services. No matter which way you go, be careful how you set these up. Some pointers:
- Check compatibility. Check with your brokerage firm to make sure that its system is compatible with the virus protection package you choose; some are not. (That potential problem increasingly makes the built-in options more practical.)
- Determine whether there’s a trade-off in access speed. Some types of antivirus software protect your system at the expense of data speed, which will hurt your trading execution.
- Keep your system updated. Operating-system companies send out updates all the time. It can be a big hassle, too — you turn on your computer and it takes 30 minutes to get everything set up. It’s tempting to skip these updates entirely, but doing so can lead to problems down the line. You may not have time to update when your system sends out the notice, but do so as soon as possible.
- Set your system to upgrade outside of market hours. Whether you go with the built-in software or buy an outside package or are a Mac or a PC, be sure to set automatic downloads, software upgrades, and background scans to take place after market hours. You don’t want to be slowed down because of an operating system update.
The department of redundancy department: Backing up your systems
When you day trade, you’re intentionally looking at volatile markets and fast-moving securities because that’s where you have the most opportunity to make money in a short time. If you’re in a position that moves against you and you can’t get out, you’re sunk.
Not being able to get out because the markets are melting down due to some kind of global catastrophe is bad enough. But suppose you can’t get out because the batteries in your wireless mouse have died and a member of your household absconded with the AAs in the junk drawer? What if you spill your drink and short out your keyboard — or your PC? What if the developer building a McMansion next door accidentally knocks out your phone line and your DSL service? All these little workaday calamities have happened to me — and they’re downright annoying even if you aren’t trading. If you are trading, they can be ruinous. If you’re serious about making money as a day trader, build in redundant systems as much as possible:
- Load your broker’s mobile app on your phone so that you can switch to it should something odd happen to crash your computer.
- Keep extra batteries on hand.
- Invest in an uninterruptible power supply (UPS) backup for your PC so that if the power goes down, your computer stays up. The backup doesn’t have to last for hours, just long enough that you can close out your positions. You don’t need a backup generator, though — unless you think that you’d still want to trade after your town was devastated by an earthquake or a hurricane. (Hey, crisis creates opportunities!)
- Back up your computer regularly. You don’t want to lose your tax records! Several services let you do online backups, either to the cloud, to a proprietary server, or to an external hard drive connected to your PC. Most backup systems can be set up to work automatically — but don’t back up during trading hours! It’ll slow you down.
Getting Mobile with the Markets
A growing number of brokerage firms and software developers are coming up with applications that let you trade from a smartphone or a tablet computer. At the time I’m writing this, I think these options are a bad idea for most day traders. Even with 4G service, mobile networks can be slow and drop out, and you can’t get enough information on a little screen to trade well.
However, technology changes fast, so maybe by the time you’re reading this, mobile speeds have become as fast as wired ones. This may be especially true if you live in a rural area without reliable high-speed Internet service. The different brokerage firms (including those listed in Chapter 15 and others) are adding new and better mobile capabilities, and the mobile providers are investing in 5G upgrades.
Still, I remain skeptical that mobile trading is a good idea for an active day trader. If you’re a business traveler who gets a great idea on the road and who wants to place one order to buy and hold, then great! Use your phone. If you are a swing trader or an investor who trades more than average, using a mobile device when exit or entry points happen to be great but you are out of the office may be fine. But if you’re going to be a day trader, get traditional service, a big screen, and an actual keyboard.
Controlling Your Emotions
You can’t plan your emotions, unfortunately. They crop up in response to whatever is happening in your world. And yet, the key to successful day trading is controlling your emotions. After all, the stock doesn’t know that you own it, as equity traders like to say, so it isn’t going to perform well just because you want it to. This can be infuriating, especially when you are going through a drawdown of your capital. Those losses look mighty personal.
Traditional financial theory is based on the idea that traders are rational. In practice, however, most of them are not. In fact, traders and investors are often irrational in completely predictable ways, which has given birth to a growing area of study called behavioral finance. It’s a hot area generating Nobel Prize winners, and it may eventually help people incorporate measures of investor behavior into buy and sell decisions.
If you can’t figure out a way to manage your reactions to the market, you shouldn’t be a day trader. Almost all day traders talk about their enemies being fear and greed. If you panic, you’ll no longer be trading to win, but trading not to lose. That’s an important distinction: If your goal is not to lose, you won’t take appropriate risk, and you won’t be able to respond quickly to what the market is telling you.
Controlling your emotions is all much easier said than done. Human beings are emotional creatures, constantly reacting (and sometimes overreacting) to everything that happens in their lives. Knowing the emotions that affect trading and having some ways to manage them can greatly improve your overall performance.
Dealing with destructive emotions
In trading, the big emotions can take over and mess up your strategy and your returns. The enemies are doubt, fear, and greed; like any bullies, they have their toadies, including anger, anxiety, boredom, and depression. At this point in your life, you may already know whether you have tendencies toward any of these moods. If so, trading can exacerbate them. If you’ve never experienced them, you may for the first time. The following sections explain these emotions as they relate to day trading so that you know what you’re up against and can plan accordingly.
I include some tips that can help you deal with destructive reactions, but if you are really in the throes of an emotional crisis that affects your trading, seek professional help. And by all means, walk away from the trading desk.
Doubt
Day traders have to act fast. They have to place their buy and sell orders as the opportunities present themselves. The market doesn’t give anyone time to second-guess the decisions, but many traders start to do just that. Did the signal really flash? Is this pattern going to continue or reverse? Will waiting a few seconds lead to a better price? Would closing out for the day just be better?
I don’t know. And neither do you. That’s why traders need to stick to their plans, which isn’t always easy. Backtesting (refer to Chapter 13) can help build confidence in a plan, and the use of automated trading tools (refer to Chapter 10) can help overcome the tendency to hesitate before clicking on the mouse button.
Most brokerage firms that offer services to day traders have automated trading capabilities to help you follow your plan. And all brokers can execute stop and limit orders, which can help you get out of positions based on your plans rather than your emotions.
Fear
Fear is one of the worst emotional enemies of the day trader. Instead of trying to make money, the fearful trader tries hard not to lose it. She is so afraid of failing that she limits herself, doesn’t take appropriate risk, and questions her trading system so much that she no longer follows it, no matter how well it worked for her in the past.
By the way, failure isn’t the only thing that traders fear. Many fear success, sometimes for deep-seated psychological reasons that I am in no position to address. A trader who fears success may think that if she succeeds, her friends will treat her differently, her relatives will try to take her money, and that she will become someone she doesn’t want to be.
One way to limit fear is to have a plan for the trading business. Before you start trading, take some time — maybe half a day — to sit down and think about what you want, what will happen to you if you get it, and what will happen to you if you don’t. For example, if you lose your trading capital, then you’ll have to live on your walk-away fund (see the section “Watching your walk-away money” later in this chapter) until you find another job. If you make a lot of money, then you can pay off your mortgage, and your friends will be none the wiser.
Greed
Greed seems like a silly thing to have on this list. After all, isn’t the whole purpose of day trading to make money? This isn’t charity; this is capitalism at its purest. Ah, but there’s a popular saying down at the Chicago Board of Trade: “Pigs get fat, but hogs get slaughtered.”
Traders who get greedy start to do stupid things. They don’t think through what they’re doing, and they stop following their trading plans. They hold positions too long in the hope of eking out a return, and sometimes they make rash trades that look an awful lot like gambling. The greedy trader loses all discipline and eventually loses quite a bit of money.
If your goal is simply to make more and more money, you may have a problem with greed. Sure, everyone wants to make more, but there are also a basic need-to-make number (enough to cover your costs and your basic living expenses) and a want-to-make number (enough to cover costs, basic expenses, and extras that are important to you). Your want-to-make can be open ended (as in “as much as possible”), but your need-to-make should be a key component of your risk management. If you know what those numbers are, you’re well on your way to preventing the problem.
Limit orders, which automatically close out positions when they hit set prices, are one way to force discipline in the face of greed.
Anger
The markets can be maddening. They don’t do what you want them to, and that often costs you real money. And no one wants to lose money. Your rage at the markets can cause you to stop seeing straight.
When anger makes it impossible to think clearly, your best bet is to call it a day, close out your positions, and go somewhere far from your trading screen. Leave your phone at home if you’re using your broker’s mobile apps, too! Take a long walk and wait for your anger to subside. Otherwise, your rage will interfere with your plans and your profitability. The only way to psych out the market is to be just as mechanical and unemotional as the blips that cross your screen.
Anxiety
Anxiety is the anticipation of things going wrong, and it often includes a physical response: perspiration, clenched jaws, tense muscles, heart palpitations, and so on. Anxious people worry, agonize, overanalyze, and generally stress out. And then they avoid whatever it is that makes them upset. That means that a trader may not make an obvious trade but instead hesitate and miss a market move. He may hold on to a losing position too long because he’s worried about the effect that selling it will have on his portfolio. He becomes too nervous to trade according to his plan, and his performance suffers.
Boredom
An ugly truth about day trading is that it can be really dull. In an eight-hour trading session, you may spend seven and a half hours waiting for the right opening. A flurry of trades, and it’s all over. To keep yourself entertained, you may start making bad trades, spending too much time in chat rooms, or letting your mind wander away from the task at hand. None of those things is conducive to profitable trading.
One way to reduce the temptations brought on by boredom is to block access to social media on your trading computer. Several companies make software that will keep you from using Facebook, Pinterest, or Candy Crush when you should be trading! A few to consider are Freedom (www.freedom.to), Cold Turkey (www.getcoldturkey.com), and Inbox When Ready (www.inboxwheready.org). Keep in mind that they may slow down your system — and that your phone may need a social media blocker, too.
Depression
Depression is a severe downturn in your mood, especially one that causes you to feel inadequate and lose interest in things you used to like. Although everyone is susceptible to depression, the ups and downs of the market can make traders particularly vulnerable. At best, depression can make it hard for a trader to face a day with the market. At worst, it can lead to alcoholism, alienation, and even suicide.
If you think you may be depressed, go to your doctor. Doctors have heard it all before and can give you a better diagnosis than Dr. Internet.
Having an outlet
Successful day traders have a life outside the markets. They close out their positions, shut off their monitors, and go do something else with the rest of the day. The problem is that a market is always open somewhere. Undisciplined traders work overnight and after hours through electronic communications networks and sometimes move the action to exchanges in other parts of the world. Without something to mark a beginning and an end to your trading day, and without other things happening in your life, the market can consume you in an unhealthy way.
So as you plan your life as a day trader, think about what else you’re going to do with your days. Exercise, meditation, socializing, and having outside interests are keys to maintaining balance and staying focused on the market when you have to be. The following sections go into more detail.
Exercise
Exercise keeps your body in fighting shape so that you can stand up to market stress and react to trends when you need to. Many times when you’re trading, you have huge rushes of adrenaline that you can’t do much about. You have to stay in front of your screen until the trade is over, no matter how much you want to run away screaming. But after the trading day, you can hit the track or pool or treadmill and burn off some of that adrenaline. Figuring out a regular exercise routine can pay off for your trading.
If you aren’t an exerciser now, call your local YMCA. It has introductory programs that can teach you how to use the equipment and help you design a workout that suits your current fitness levels and goals.
Meditation
When you’re trading, you may get upset and start thinking about everything else that has ever gone wrong in your life, instead of staying focused on the task at hand. Even after you close out your positions and shut down your monitors, your day’s trading may keep playing itself out over and over in your head, making it impossible for you to relax. Neither of these scenarios is good for you — or your trading.
Trading requires mental discipline. Good traders can keep their minds clear of everything but their trading system, at least when the markets are at their hairiest. One way to develop that discipline is to take up meditation. Yeah, it may seem goofy, being a big tough trader type doing something woo-woo like meditation, but if you have trouble keeping your focus, you really may want to give it a try. There are an almost infinite number of meditation styles, many of which are associated with different religious traditions, so you can surely find something that works. Research compiled by the Center for Complementary and Alternative Medicine at the National Institutes of Health (http://nccam.nih.gov/health/meditation/overview.htm) shows that many people report mental-health benefits from meditation.
Check out the instructions for the Buddhist mindfulness meditation practice at https://shambhala.org/what-is-meditation as a way to get started.
Friends and family
Day trading is a lonely activity. You work by yourself all day. It’s just you, your room, and your screen. This job is really isolating. If you don’t get other human contact, you run the risk of personalizing the market in order not to feel so lonely. That’s bad, because the market isn’t a person; it’s an agglomeration of all the financial activity taking place, and it has no interest in you whatsoever.
No matter what you do in life, you want to have the support of the people you know and love. And you need to make time for them, too. Start and end your trading day at regular times and be sure to make plans to see people who are important to you. Going to your kid’s ball game, having dinner with your spouse, and seeing your friends for a few beers on a regular basis can go a long way to keeping your life in balance — and that will keep your trading in balance.
If you like pets, consider getting one to keep you company during the day. There’s nothing like a dog that needs a walk to force you to close shop for the night.
Hobbies and other interests
A lot of people get into day trading because they have long had a fascination with the market. Trading goes from being a hobby to being a living. In many ways, that’s perfect. Going to work is so much easier when you have a job that you love.
But if the market is your only interest, then you’re going to be too susceptible to its gyrations, and you’re going to have trouble sticking to your trading discipline. Plus, whatever upsets you during the trading day is more likely to carry over. So find a new hobby if you don’t have one. Maybe it’s a TV show, a sport, or knitting, but whatever it is, you need to have something going on outside of your trading.
Trading is just one part of your life.
Setting up support systems
Exercise and friends and family and hobbies and the like are all well and good, but they don’t directly address the mindset of trading. Fortunately, a veritable industry supports traders, and you can tap in to it easily. Many day traders find that reading books, hiring a coach, or finding other day traders helps them get through the day.
Books
A library full of books has been written on the psychology of trading itself. In addition, many traders rely on other self-help and history books for inspiration and ideas. (I think every trader I’ve ever known owns a copy of Sun Tzu’s The Art of War, which is about military strategies and tactics. They find that this book helps them prepare their minds to face the market — or at least gives them something interesting to talk about.) I list several books in the appendix that may help you organize your mind and keep your enthusiasm for the market.
Counseling and coaching
Because handling big losses — and big gains — takes a lot of mental toughness, many traders find professional support. They use counselors, psychologists, or life coaches to help them deal with the challenges of the market and understand their reactions to it. You can ask other traders or your doctor for a referral, or check the online directory at Psychology Today’s website, www.psychologytoday.com, or the International Coach Federation, www.coachfederation.org. When interviewing coaches or counselors, ask whether they have experience with traders or others who work in finance.
Many day trading training and brokerage firms also offer coaching services that specialize in helping people learn and follow day trading strategies. Some day traders find these people to be invaluable, whereas others find they are just glorified salespeople.
Finding other traders
To offset the loneliness of trading alone, many day traders choose to join organizations where they will meet other traders. These may be formal or informal groups (I list a few in the appendix) where traders can socialize, learn new things, or just commiserate.
Many day traders also get together through Internet message boards and chat rooms. I discuss this option in more detail later in this chapter and list a few in the appendix. These groups are less formal, more anonymous, and sometimes as destructive as supportive.
Most day traders lose money and give up their first year. You may find that spending too much time with other traders is more depressing than supportive.
Watching your walk-away money
A lot of traders have a secret that lets them get through the worst of the markets. It’s something called walk-away money, although traders sometimes use more colorful language to describe it. Walk-away money is just what its name implies: enough money to let the trader walk away from trading and do something else.
And just exactly how much walk-away money does a trader need? Well, the exact amount varies from person to person, but having enough money to pay three months’ worth of expenses on hand and in cash is a good place to start. If you know that you can pay the mortgage and buy the groceries even if you don’t make money trading today, you’re better able to avoid desperate trading. You won’t have to be greedy, and you won’t have to live in fear.
The more money in your walk-away fund, the better. Then you have more time to investigate alternative careers should day trading prove not to be your thing, and you can relax more when you face the market every day.
Most day traders quit after a year or so. There’s nothing wrong with deciding to move on and try something else. If you have some money saved, then you’re in a better position to control when you stop trading and what you do next.
If all your trading capital is gone, you may be tempted to tap your walk-away fund to stay in the game. Don’t. That’s the exactly the time that you should use your walk-away money to walk away, if only for a short time to clear your head, rethink your strategies, and build up some new trading capital. Otherwise, your trading losses may become financial ruin.
One way to get your confidence back while still staying in the market is to trade in very small amounts so that your profits and losses don’t really matter. Trade 100 shares, not 1,000 shares. You give up the upside for a time, but you can also get out of the cycle of greed and fear that has destroyed many a trader.