The Day-Trader’s Credo & The Bagel List

Relying on day-trading as one’s sole means of daily income possesses several financial implications.  One of which is that your bank balance and daily/weekly/monthly cash flow can be highly unstable and uncertain.  I’ve only been day-trading for five months but have already been forced to endure lengthy down-stretches.  Statistically and historically, the models almost always tell you that your positions will recover.  But believing that –especially during huge rocket rides or death slides– and practicing the discipline to hold your positions in the face of unrelenting onslaught are two totally different things.

It’ll be useful before proceeding further to first clarify a few points though.  Again, these are simply the practices which have worked for me.  These are not recommendations, etc.

Since income from day-trading is always uncertain, it engenders both “save for a rainy day” and “if we got it, spend it” mentalities.  There is nothing more frustrating than being frugal and saving tons of money over a long period of time (say, many months) only to have those hard-earned savings all incinerated in a single swoop by an unexpected market downturn in a single day or week.  Conversely, because sudden plunges could happen any time, that’s also why I’m not extremely leveraged (2:1, at most, and only for short periodicities).  Remember, assuming you’re leveraged even at a modest 2:1, if your holdings decline by 50%, then you’re entirely wiped out.  (For reference:  LTCM was leveraged as 25:1 at the time of its collapse).  Also, generally speaking, even if you’re not leveraged, if you lose 50% one year, you’ll need to make 200% the next year just to get back to even.  Thus, whenever I see a hedge fund manager having a terrible run, losing 30% or even as much as 50% during a bad stretch, I’m never impressed when they rebound 40% the next year.  If you lose 30% in one year, you’ll need make 150% just to get back to even.  Only coming back 40% means you’re still down by a lot.

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