Is Trading Stocks For Dummies?

If you spend any time channel surfing in the middle of the night, you might notice that there's no shortage of infomercials where people are claiming that any idiot can trade. Or maybe you've watched one too many episodes of that Mad Money, and you think you too can push buttons, and pull levers, jump up and down and scream and shout, and money will magically fall into your trading account. Maybe you've even gone down the the bookstore, or more likely, over to Amazon, and purchased Day Trading for Dummies, and you think you've got the knowledge and skill set required to day trade. Unfortunately the truth of the matter is that the only people who will tell you any idiot can day trade are people selling you some crappy product that will "do all the work for you," but in reality 90-some-odd percent of the people who attempt to day trade will fail.

There are some fundamental reasons why "dummies" fail at day trading. This is really not a reflection of intelligence, but rather of the trader's level of patience, temperament, and their money situation.

A lot of people who first learn about day trading, especially if they've learned it from someone who not only makes it look easy (due to many years of experience) but also sells you some product based on the reasoning that you can do it easily too, end up jumping in with both feet without actually learning how to trade. The process of trading is indeed quite simple, and you can learn this from books and courses. You learn a couple chart patterns, how to use charting and trade execution software, and that's it right? Wrong. Without proper experience, you're going to fail at this. What constitutes proper experience? Hours and hours of watching the market, the charts, and the tape, and executing trades - and then learning from executed trades, win or lose. Evaluating your performance is a key part of this process.

You also have to start with smaller position sizes. Just because your Youtube "mentor" posts videos of himself making trades of thousands of shares at a time doesn't mean you have to do this too. You're not there yet. You should start out with much smaller position sizes, like 100, 10 or even 1 stock. If you've got a proper day trading broker - one that charges by quantity of stocks traded, not a flat fee per trade - then the commissions shouldn't kill you. Even if you're using a flat-fee broker, the commissions you're paying will pale in comparison to the losses you'd take if you scaled up to larger positions and starting taking the losses you will inevitably be taking.

With all of this lack of experience comes a complete inability to plan trades properly. Failure to plan trades, not only the entry of those trades, but both exits (losing and winning) is a sure way to lose a whole bunch of money really quickly. Without that plan in place, you are relying on what to tell you when to exit? How the stock "feels?" Some random intuition that your trade is going to work out for the best? You need to learn how to fully plan a trade before executing anything, and considering how fast the market moves sometimes, you have to be able to create this plan quickly and effectively.

Let's get into your crappy temperament. If you are the sort of person that hates losing, then day trading is not for you. Maybe you've seen the videos on Youtube of traders freaking out because they're losing trades, and they end up blowing up their whole trading account.

[[ Side rant: I attempted to find these videos to post here, but people are filling Youtube with so much garbage, that I was unable to do so. All I found was a bunch of dickheads who've edited the videos I was looking for with (probably stolen) music or a minute of pointless credits at the beginning of the video, or whatever, which I refuse to post. Why they do this, I dunno. OR, there are the fake and staged freak outs, which are obvious and boring. - If you can find the real videos for me, I'll stick them up here. In the mean time, here's a generic picture of some stock charts.]]

Anyway - back to the point at hand. Losing is a part of trading. It's a BIG part of trading. As a matter of fact, it might take you years before you are winning more trades than losing. If you can't handle being wrong, then you are going to fail big time. You will start doing foolish things like doubling down on a losing trade - Why? - Because then it only has to come back half as much for you to break even. Wrong. Well, technically rightish, but oh so stupid.

The real trick is to take the losses in stride, and to keep your losses as small as possible, while really letting your winning trades run. With a proper risk/reward ratio you can lose several trades in a row, and turn your whole trading day into a positive with one solid winning trade. You just have to be there when it happens - don't walk away from your computer to blow off steam for a losing trade - and you have to keep a straight head when you're down for the day.

If you're here, you probably already know of the Pattern Day Trading rule imposed by the SEC. If not, briefly, it means you have to have $25,000 or more in your trading account if you plan on doing more than 3 round-trip trades (aka day trades) a week. This is not the minimum you want in your account though, because one loss puts you below that mark and you're screwed. At a minimum you should have at least $30,000 and even that's a bit slim if you plan on making a living at this while using a proper risk/reward ratio that won't get you into trouble. A more reasonable starting point is $50,000, and of course more is better.

You also want to ensure that this is not your retirement fund, or what you plan to live off of for a solid year of day trading. This should be a lump sum of money that, if you lost it all, it wouldn't put you in an uncomfortable position. Why? Aside from the many obvious reasons, it will affect your trading psychology. Dealing with your own psyche is one of the most difficult things about trading, and if you have money on the line that you can't stand losing, you will already be at a huge disadvantage. If you are really trying to make a go of learning how to day trade, then you should have enough money to live off of for a year (at least), and this should be completely separate from your trading account. You shouldn't have to rely on your trading to be profitable for at least a year. This will put your mind at ease, and while you might still have huge sums of money on the line at times, it would be 1,000 times more difficult to deal with if losing that money means you or your family don't get to eat, or pay the mortgage.

If you're really serious about learning how to day trade, then you'll have to do a bit more than read a book about "Trading for Dummies," or buy some cheesy over-priced product sold by someone who's never traded a day in their life. Day trading is not for dummies, though you don't have to be particularly intelligent to succeed. You just have to work hard, be in the right mind set, and have the right amount of funding and then MAYBE you'll be in the very small percentage of people who make it in this business. You might just fail either way. Who knows.