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The Psychology of Day Trading

He bears the seed of ruin in himself.

matthew arnold

Day trading is, at the same time, less psychologically demanding and more psychologically demanding than position trading. Or the one hand, day trading requires more discipline and self-control than does position trading; on the other hand, there is a certain peace of mind that comes with the knowledge that you are "clean and clear" at the end of the day. When people have asked me why I prefer day trading to position trading, I quickly reply that "I like to sleep at night." While this may seem at first blush tc be a flippant response, there is much truth to it. The good news about day trading is that it permits the trader to walk away from the markets at day's end knowing that there is nothing that can happen overnight to affect his or her account balance other than a total economic collapse or bankruptcy of the firm that carries the account.

Position traders, however, will argue that by limiting one's trading to the time frame of 1 day, potentially significant profit opportunities are lost. And this may very well be the case. But trading opportunities are very much like paying taxes - it's not what you make, it's what you keep that's important. Note also that there is nothing to prevent a day trader from being a position trader as wellа (although I advise you to separate these methods of trading by having a different account for each). In the long run, the choice is an individual matter that must be made on the basis of several distinct and equally important variables. These are reviewed below.

Patience, Impatience, and Temperament

If everyone in the world had the same personality, life would be terribly boring. The fact that we all have different perceptions of reality, in some cases, radically different perceptions, is the essence of creativity and the backbone of diversity. Perception and personality are to a large extent responsible for the existence of the securities and commodity markets. Different traders interpreting the same information in different ways is what makes for opinions, and opinions move markets.

Some traders are patient, methodical, premeditated, focused, and organized. They have the ability - whether inherited, acquired, or a combination of both - to sit and analyze markets, to enter orders, to wait patiently for their orders to be filled, and to hold a position as dictated by their system(s). Such traders are more suited to trade for longer periods of time. Hence, they have chosen position trading as their preferred method. Provided they can remain disciplined and organized, they will fare well as futures traders in the long run.

Other traders are anxious. They have limited patience, limited tolerance, and limited organizational skills. They react quickly and prefer to enter and exit their trades based on very short-term changes in market trends. Provided such individuals can remain disciplined and committed to a particular system or method, they can do well as futures traders in the long run and perhaps even in the short run. But in order to achieve even the slightest degree of consistent success, the day trader will need to follow a set or rules that may, at times, run contrary to his or her impetuous nature.

A third category of traders is positioned somewhere within the extremes of the position trader and the day trader. I term this category the "short-term trader." In most cases the short-term trader will hold a position for several days but rarely for only 1 day (unless a trade is closed out at a stop loss). I have already discussed the topic of short-term trading in my book Short-Term Trading in Futures.