The opinions of contributing entrepreneurs are their own. </p><div>
Key Takeaways
- A detailed trading diary reveals your personal edge faster than any external strategy.
- Accuracy, win-loss ratio, frequency and consistency together determine the success of sustainable day trading.
- Your most profitable patterns are already hidden in your data; mine them ruthlessly.
In the past, a famous speech was delivered more than 6,000 times; it was called: “Acres of Diamonds.” You can look it up for all the details, but the gist of the speech was this: a man welcomed a traveler into his home, who told him of fantastic riches. The man then sold his house, traveled the world and died broke. It turns out that it was later discovered that the property he was selling was on diamond-rich land.
In an earlier article I talked about the importance of keeping a trading journal. I can literally trace my success in day trading to having a journal that records all my trades. In a moment of desperation—when I was going to make it or go bankrupt as a day trader—that journal saved my bacon.
Related: I Wasted So Much Money Making These 3 Mistakes as a Day Trader
Before we can talk about how to sift and sort your stack of numbers into diamonds, let’s look at how I define success in day trading. It’s certainly not the loudest mouth on social media, bragging about the latest murder he claims to have committed on a stock. Funny how you don’t hear these guys talk about the times they got slaughtered in a trade. And I’m here to tell you – with over 25,000 trades under my belt – that we all have some really bad days.
The first measure of success in day trading is your accuracy. How many of your last 100 transactions made money? It’s a basic question, just like your baseball batting average. How many times have you scored a hit in all your at-bats? Accuracy is crucial. If you’re mostly wrong, you won’t last long.
But accuracy is only one dimension; just as important is your profit-loss ratio. How big are your winners over those 100 trades (or any other period) compared to your losers? You can have fantastic accuracy and still lose a lot of money! How? Because your 90 winners were small, and those 10 losing trades broke the bank. This happens when traders make a few bucks, get nervous and come out, but ride their losers up and down. Accuracy and win-loss ratio can cancel or reinforce each other.
But let’s say you have excellent accuracy and your winners outweigh your losers; Does this mean you’ll be filthy rich in no time? Wait a minute, because there are two other dimensions at play: You need to consider trading frequency. If you’re really talented and have both accuracy and a good win-loss ratio, you still can’t go anywhere if you can’t bring yourself to pull the trigger. Hey, I know all about the sweaty palms and dry mouth as I watched the trade flow by, and it was up to me to take the plunge.
I do jumps these days. In one year I will make almost 7,000 transactions. That’s 28 per day. Please don’t get the wrong message: When you’re starting out, focus on making a single, high-quality trade every day. If you can achieve that, it will be quite an achievement. And besides, your purpose is as a trading cub not to make a lot of money – it should be to learn the trade. If you don’t, you will be eaten alive. If you practice the profession steadily and hone your skills, the fruits of your labor will come soon enough.
The last dimension I will mention is consistency. Do you feel hot and cold all the time? You may still make money that way, but it could be an indication that you don’t have a solid strategy that can deliver results over time. Everyone has ‘red days’ or even red weeks; the mark of a professional is long stretches of green weeks, punctuated by stretches of humiliating red.
Okay, now that we have those measurements success in day tradinghow do we apply them to our magazine? Fortunately, software can split your data in any way you want, and that’s what you want to do.
Related: How to Keep the Right Perspective as a Day Trader
In my case, I filtered my trading data to answer this: How did the stock price of my successful trades fall? In other words, what was my performance compared to price? It turns out that my sweet spot was between $2 and $10, and not just a little bit. What an eye-opener! Now I had a clear guideline to follow, based on my own history.
I did the same analysis with relative volume: how did I perform when the stocks I was trading rose by different percentages from yesterday’s closing price? Turns out I did best when they were up at least 10%. I also did best when relative stock trading volume was 500% higher than the recent average. That may sound like a lot, but day traders are used to seeing astronomical relative trading volumes on a few stocks on any given day.
My data mining produced more wealth: I did best on stocks with a float (how many shares are theoretically available for trading) under 20 million shares. And a common denominator for almost all the stocks I successfully traded was a catalyst, in the form of breaking news that first caused algorithms to push the price higher, making traders sit up and take notice.
There is no need to travel the world looking for that diamond mine. It’s buried under all the trades you’ve made – hopefully in one simulator while learning this trade. Once you have recorded hundreds and soon thousands of trades, you can assess your accuracy, win/loss ratio, frequency and consistency. You can then determine the factors most closely related to your best performance. And you’ll be able to mine that baby for years to come.