Running Head: THE REAL SECRET TO DAY TRADING SUCCESS 1

The Real Secret to Day Trading Success

John Miller

Thomas Edison State University

February 2017

Author Note

This paper was prepared for English Composition II, 2016DEC ENC-102-

OL010, taught by Professor Cody.

THE REAL SECRET TO DAY TRADING SUCCESS
2

The fantasy of leaving your nine to five job for a life at home at your

own desk as your own boss is an appealing proposition to millions of blue

collar workers stuck in the proverbial rat race. Couple this aspiration with

the opportunity to make millions of dollars and youve either found the

American Dream or youve stumbled across another get-rich-quick scheme.

For most people desiring to day trade the notion of setting their own hours,

working from home, and making millions is often all that it takes to plunge

money and time into a losing bet from the very beginning. Statistically

speaking, over 95% of Day Traders lose more than they invest in this

business or investment (Mitchell, 2016). However, there are exceptions to

every rule and statistic. Day trading, like any other business, can be very

profitable and successful, but it needs the same ingredients as any other

successful business needs to succeed such as careful planning, education,

starting capital, some luck, and most importantly a manager or CEO who can

proficiently manage risk.

After a lot of research into the success and failure of day traders as

well as the type of personality that most day traders have there has been

some clear general guidance I have personally come to understand after

sifting through all of the misinformation in the industry and piercing through

the veil of secrecy. If youre going to start day trading without proper

planning, preparation, and education you might as well spend your time and

enjoy yourself in Vegas. After all, if youre too stubborn to properly prepare

yourself and youre determined to lose your money you might as well do it in
THE REAL SECRET TO DAY TRADING SUCCESS
3

the company of bright lights, free drinks, and attractive people wanting to

party. Besides this unscientific advice, the true reality is that the odds are

often far better at the casino than in the financial markets for untrained

participants coupled with a lot less glamour than youll find in Vegas or even

your local casino.

While many might argue these statistics are more anecdotal than

scientific, the reality is just as startling. Surprisingly, these findings are well

founded in the very basis of some of the scholarly articles which have

investigated and written about the success and subsequent failure of most

day traders. According to Barber, Yi-Tsung, Yu-Jane, & Odean (2004), Our

results to this point indicate a large fraction of day traders, more than eight

out of ten, lose money, though a small fraction of day traders earn large

persistent profits. To put these numbers into perspective most casino

games only favor the house with an edge of 1% - 10% advantage over the

player and even the most risky of games rarely ever exceed a 20% - 30%

edge for the house (Sehlinger, 2014). While this provides a significant

quantitative analysis of the odds of day trading, further scholarly studies

focused on a more qualitative analysis of the habits and behaviors of day

traders which were also very comparative with most traditional gamblers. In

Taiwan, a market dominated with over 70% participants being individual

retail investors, high performing stocks and/or those with high volume

trading declined by over 7% when lottery jackpots exceeded $500 million

Taiwan dollars (Gao & Lin, 2011). A statistic like this on its own might be
THE REAL SECRET TO DAY TRADING SUCCESS
4

discounted because of the presumption that such correlation is not

necessarily causation. However, It was also found that much like gambling,

which has been observed to increase during economic downturns, so did

individual investor trading which was also correlated to stocks with lottery

like features (Kumar, 2006).

One of the primary reasons that the financial markets may resemble

gambling type features instead of assumed typical banking, lending, or other

financial behaviors might have more to do with psychology than any other

factor. This is because the very nature of the stock market and other

financial markets is actually based more on human psychology and behavior

than typical business or financial logic and behavior. According to recent

studies, the financial market is dominated by rational and intelligent

professionals, but the most attractive investments still involved guessing of

future market movements which uncertainty invoked feelings in both novice

and experienced traders (Williams, 2013). Stock traders have been observed

to often make decisions based on psychological factors placing undue weight

on emotions and specific information over other relevant data. Putting all of

these observations together in recent years, scientists have developed the

Human Emotion theory (HUEMO) which is a theory which flies in the face of

traditional stock market analysis. The HUEMO theory proves the market

relies more on human emotions and feelings rather than fundamental

valuations (Willaims, 2013).

THE REAL SECRET TO DAY TRADING SUCCESS
5

When you take a minute and step back to look at many of the

institutions and systems that make up our society they actually often

resemble many of the same features of the stock market. For example,

simply take a look at the political arena or even the judicial system which has

been around since the very foundation of the United States of America.

These are well-orchestrated institutions or bodies that come from long

standing rules and principals that are made up of both professionals and

scholars. One would think that such organizations rule simply on an ethos of

ethical, procedural, and logical behavior with limited room for human

feelings or behavioral flaws. However, upon further evaluation once you

consider that all of these institutions are made up of humans or typical

members of society who are all bound by the same similar strengths and

weakness that our biological and environmental upbringing has instilled in us

that the psychological influence start to become more apparent. It is here in

which we start to see the very flaws in human behavior that start to

influence and drive these very institutions we have grown up believing are

greater than our individuals flaws could portray. For example, in politics we

can find numerous instances of politicians, laws, and government programs

that are so illogical that one can only blame human fear, hate, greed, or

another emotion to have instigated such an action. These same behaviors

and irrational decisions are not limited just to politicians, but can be equally

traced back to the very constituents that elected them.

THE REAL SECRET TO DAY TRADING SUCCESS
6

Taking a look at another institution such as the legal system, one can

find the very same flaws. While the legal system is well founded in the

statutory code as well as the practice of common law, or also known as case

law, the system seems to be more about following procedures than relying

on human influence. The only real exception to this being the levity that is

given to prosecutors and the presiding judges or jurys subsequent

punishments or sentencing to allow for the appropriate rehabilitation to

serve the current needs of society. However, once again, it doesnt take

anyone long to unravel with a proper sampling of cases across both income

and racial demographics in nearly any courtroom or jurisdiction in this

country to discover that one case often doesnt look anything like the other.

Even with the very same basis of legal standard or circumstances covering a

case one can easily conclude that human emotion as well as bias play a huge

roll in the application and outcome of our legal system from one defendant

to another. Once we realize that even our most trusted institutions are just

as limited by our human psychological and biological makeup we can start to

easily see the comparisons to the stock market and that the true identity of

our financial markets is actually us. So it comes as no surprise that regret

and pride guide stock investors more than economic factsoften to their

financial detrimentaccording to a study published in the Journal of

Marketing Research by Brad Barber, a professor in the Graduate School of

Management at the University of California, Davis.

THE REAL SECRET TO DAY TRADING SUCCESS
7

Once we have appreciated and grasped the real motivating forces that

actually guide our financial markets it is then that we can find a solution to

properly mitigate our investment risks and develop a winning strategy.

While it is still impossible to predict the future in the stock market you can be

more successful and have a better chance at beating the odds if you have

the right ingredients, starting with you. Like any good investment you must

look at your approach much like running a successful business. Training,

experience, psychological control, and a realization that youre not invincible

or smarter than the market will lead you to success, (Deel, 2000). Taking

this into account and properly training and understanding your risks and

weaknesses is paramount to success. As a trader you are effectively the

CEO of your own business or trading strategy and must conduct yourself as

such. In addition to this its equally important to know your own weaknesses

or human psychological flaws and limit their influence on your investment

decision making. As a result of the findings by Lo, Repin, & Steenbarger

(2005), it was suggested that one component of successful trading may be a

reduced level of emotional reactivity given that emotional responses such as

fear and greed often trump higher-level responses such as logical

reasoning, numerical computation, and long-term planning. By doing this,

you can start to limit the non-logical decision making or rash decisions that

often plague unsuccessful traders. Some even take this a step further and

first develop their trading strategies that have proven to be successful. They

often find that it isnt their trading strategy that is flawed, but instead their

ability or lack thereof to properly and accurately execute their trading

THE REAL SECRET TO DAY TRADING SUCCESS
8

strategy as it is often clouded in emotional judgement that sometimes

causes them to trade or make decisions that was not a part of their trading

plan. Much like a business that drifts off course from their business plan

traders often find their results not as they expected when they drift from

their trading strategy.

One of the newest approaches by day traders to effectively remove

emotion from their trading strategy is to start algo trading or algorithmic

trading. Often this involves learning computer coding and programing and

then transcribing their trading strategies into computer programs. By doing

this, a computer code or script, lacking any emotional bias or fear of how

much money is on the line during a trade, executes buy and sell orders in

accordance with the computer script. You can really start to see the

potential and abilities of your trading strategy knowing that it is not limited

or unduly influenced by your emotions which are often a traders worst

enemy. With DIY algo trading A smart guy with a laptop will be able to start

his own hedge fund. It will be very challenging to the big incumbents. A very

simple idea can prove very powerful. Says Martin Froehler, an Austrian

mathematician who created Quantiacs (Wigglesworth, 2016). Algorithmic

trading has become one of the cornerstone tools used by some of the

institutional investment firms and is now taking off in the retail marketplace.

The real question with this new era is what will a stock market look like that

is no longer dominated by humans, but instead replaced with machines

making all of the decisions on both sides of a trade?

THE REAL SECRET TO DAY TRADING SUCCESS
9

One thing is certain after much research into day trading and that is

that it isnt for most people and you must be properly prepared and

knowledgeable of what you are getting into in order to limit gambling type

behaviors. While you may not have been born with what it takes to become

a successful day trader based on your own emotional or psychological

abilities, modern day advancements now allow even individual retail

investors to create computer based algorithmic trading programs which can

remove the traders biggest weakness, their own emotional bias giving their

trading strategy a real chance at success.

References

Barber, B., Yi-Tsung, L., Yu-Jane, L., & Odean, T. (2004). Do Individual Day

Traders Make Money?

Evidence from Taiwan [Scholarly project]. Retrieved December 22,

2016, from

http://www.econ.yale.edu/~shiller/behfin/2004-04-10/barber-lee-liu-

odean.pdf

Deel, R. (2000). What It Takes to be A Successful Day Trader. CRB TRADER,

9(1). Retrieved

December 22, 2016, from

http://www.crbtrader.com/trader/v09n01/v09n01a01.asp
THE REAL SECRET TO DAY TRADING SUCCESS
10

Gao, X., & Lin, T. (2011). Do individual investors trade Stocks as gambling?

Evidence from repeated

natural experiments (pp. 19-22, Rep.). Santa Fe, NM: The 46th Annual

Meeting of the

Western Finance Association (WFA).

Kumar, A. (2006). Who Gambles in the Stock Market? (Rep.). Boston, MN:

Boston Meetings

Paper; Journal of Finance. Retrieved from

https://ssrn.com/abstract=686022.

Lo, A., Repin, D., & Steenbarger, B. (2005). Fear and Greed in Financial

Markets: A Clinical Study

of Day- Traders. NATIONAL BUREAU OF ECONOMIC RESEARCH,

Working Paper 11243.

doi:10.3386/w11243

Mitchell, C. (2016, November 30). Why Most Traders Lose Money and Why

the Market Requires

It. Retrieved February 8, 2017, from

https://vantagepointtrading.com/archives/7665
THE REAL SECRET TO DAY TRADING SUCCESS
11

Sehlinger, R. (2014, April 08). Vegas gambling guide: Understanding the

odds. Retrieved January

14, 2017, from http://experience.usatoday.com/las-vegas/story/best-of-

vegas/2014/04/07/gambling-odds-house-rules/7417029/

Wigglesworth, R. (2016, April 16). Investment: Rise of the DIY algo traders.

Retrieved January 06,

2017, from https://www.ft.com/content/0a706330-5f28-11e6-ae3f-

77baadeb1c93

Williams, R. (2013, September 22). Emotion, Not Rational Logic, Determines

the Stock Market.

Retrieved January 06, 2017, from

https://www.psychologytoday.com/blog/wired-

success/201309/emotion-not-rational-logic-determines-the-stock-

market