How to Stop Chasing Market Riches When You Day Trade

Back in the day, there was a famous speech 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 guy welcomed a traveler into his house, who told him of fantastic riches. The guy then sold his house, traveled the world and died broke. It turns out that the very property he sold was later discovered to sit on diamond-rich ground.

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 with all my trades logged. At a moment of desperation — when I was going to make it or wash out 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 pile of numbers into diamonds, let’s look at how I define success in day trading. It’s definitely not the loudest mouth on social media, who brags about the latest killing he claims he made on a stock. Funny how you don’t hear these guys talking about the times they got slaughtered on a trade. And I’m here to tell you — with more than 25,000 trades under my belt — that we all have some real bad days from time to time.

The first measure of success in day trading is your accuracy. Out of your last 100 trades, how many of them made money? It’s a fundamental question, like your baseball batting average. Of all your at-bats, how many times did you score a hit? 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. Over those 100 trades (or any other time period), how large have your winners been compared to your losers? You could have fantastic accuracy and still lose a lot of money! How? Because your 90 winners were tiny, and those 10 losing trades broke the bank. This happens when traders make a few bucks, get jittery and bail out, but they ride their losers down and down. Accuracy and profit/loss ratio can cancel or amplify each other.

But let’s say you have excellent accuracy and your winners are larger than your losers; does that mean you’ll be filthy rich in no time? Hang on, because two other dimensions come into play: You need to consider trading frequency. If you’re really talented and have both accuracy and a great profit/loss ratio, you can still go nowhere if you can’t bring yourself to pull the trigger. Hey, I know all about the sweaty palms and dry mouth as I watched trades stream by, and it was up to me to take the leap.

Leap I do, these days. In a single year, I’ll take almost 7,000 trades. That’s 28 per day. Please don’t get the wrong message: When you’re starting out, you should focus on taking one single, high-quality trade each day. That’s a real accomplishment if you can pull it off. And besides, your goal as a trading cub is not to make a lot of money — it should be to learn the profession. If you don’t do that, you’ll be eaten alive. If you do steadily practice the profession and hone your skills, the fruits of your labor will come soon enough.

The final dimension I’ll mention is consistency. Do you continuously run hot and cold? You might still make money that way, but it could be an indicator that you have no solid strategy that can produce results over time. Everyone has “red days” or even red weeks; the mark of a pro is long strings of green weeks, punctuated with bits of humbling red.

OK, now that we have those measurements of day trading success, how do we apply them to our journal? Fortunately, software can slice your data every which way, 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: Of my successful trades, how did the share price break down? In other words, what was my performance measured against price? It turns out that my sweet spot was from $2-10, and not by just a little. What an eye opener! Now I had a crisp guideline to follow, based on my own history.

I did the same analysis with relative volume: How was my performance when the stocks I traded were up by various percentages versus yesterday’s closing price? Turns out I did best when they were up at least 10%. I also did the best when the relative trading volume of stocks was up 500% over the recent average. That may sound like a lot, but day traders are accustomed to seeing astronomical relative trading volumes on a few stocks on any given day.

My data mining yielded more riches: 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 some catalyst, in the form of breaking news that first made algorithms spike the price, which then made traders sit up and take notice.

There’s no need to travel the world looking for that diamond mine. It’s buried under all the trades you’ve made — hopefully in a simulator while you are learning this profession. Once you have hundreds and soon thousands of trades logged, you’ll be able to judge your accuracy, profit/loss ratio, frequency and consistency. You’ll then be able to determine the factors most closely associated with your best performance. And you’ll be able to mine that baby for years to come.

Back in the day, there was a famous speech 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 guy welcomed a traveler into his house, who told him of fantastic riches. The guy then sold his house, traveled the world and died broke. It turns out that the very property he sold was later discovered to sit on diamond-rich ground.

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 with all my trades logged. At a moment of desperation — when I was going to make it or wash out as a day trader — that journal saved my bacon.