Successful Day Trading – The Mindset of a Profitable Trader

By DonShook


I have traded my own account for many years, trying most styles before finding my particular niche – day trading grain futures contracts. What seemed important in those early days now seems largely irrelevant. Instead, I focus exclusively on a few powerful trading concepts. This article summarizes what is important to me now.

People day trade for many reasons, two of which are especially important to me.

The first is that the day trader is less exposed to event risk than a long term trader. I get in and out of the market as quickly as possible. I am in the market during primary trading sessions, so my stops are normally filled at or near the specified price. A long term trader may find that an unforeseen event triggers big moves when primary markets are shut, forcing price to gap way beyond protective stops when markets re-open. Minimizing exposure to event risk while 70trades office leveraged instruments is a key benefit of day trading, and why I think it is one of the least risky forms of trading when done properly.

Another reason I prefer day trading is that I can work through losing spells more quickly. All trading methods encounter drawdowns when traders have a losing spell. If a typical drawdown for your system spans a period of 10 trades, and the average duration of each trade is 2 weeks, you face drawdown periods averaging twenty weeks. But if you are a day trader completing one trade each day, your average drawdown period is just 10 trading days. If you complete more than one trade per day, the drawdown period is even shorter. It is never pleasant being in drawdown and it is easier to stick to your system if drawdowns are short. Twenty weeks, or more, in a loss situation tests the resolve of any trader.

Day trading is a broad term, encompassing many trading styles. The one thing all day traders have in common is that they are out of their positions at the end of the primary trading session. No open positions are held overnight, at weekends, or even during lightly traded electronic sessions outside primary trading hours.

The typical image of a day trader is of a person glued to a screen during long market hours, possibly entering several trades during the course of a day. That is true of many traders, but there are other styes. For example, my own approach is quite different.

The biggest problem in day trading is trading costs. A day trader takes many more trades than a long term trader, so obviously costs are higher. Typically trading costs are a combination of brokerage fees and trade slippage. In my experience, trading costs can get out of control if you take too many trades, so I limit myself to one trade per day.

Day traders work in short time frames, so trade profits are smaller. Where it might be reasonable for a position trader to target 100 points of profit over a period of several weeks, the day trader may realistically be limited to targets of 5 – 10 points. If trading costs for each trade are fixed at, say, 2 points, you can see that they constitute just 2% of the long term target profit, but may be 20% – 40% of the short term target profit. Unless a market has sufficient volatility for a trader to target profits significantly larger than trading costs, it is not suitable for day trading. Fortunately many such markets exist. Soybean and wheat futures are good examples.

Suitable markets often have another advantage. Their periods of volatility frequently occur at specific times, typically short periods near the open and close of trading sessions. For example, I can usually enter my daily trade during the first thirty minutes of the trading session.

An early entry is especially good if the exit strategy can be automated. I can set up an OCO (one cancels other) group to implement my exit strategy without having to monitor the market after the trade is entered. Thus, after watching the market for up to 30 minutes to find an appropriate trade entry, I can set up the OCO group and just leave the trade to work. As I live in Australia and trade at night, this means I can go back to bed!