As a new day trader, you may feel unsure about how many trades you should make in a day. It's easy to worry about overtrading or undertrading. Is there a sweet spot for how much to trade?
The simple answer is to trade exactly as much as your proven strategy tells you to trade. Although, if you are wondering about over- or undertrading, you may not yet have a proven strategy. Before you can decide how much to trade, you need to develop a strategy that will help you determine how active to be.
Key Takeaways
- If you are a day trader, you want to avoid over- or undertrading, but you may not yet have a strategy if you are new to it.
- Since day traders take the trades their strategies tell them to take, trading quantity and frequency will vary daily.
- When trades occur outside of a tested strategy—whether it's too many or too few—they are less likely to perform well.
- If you haven't developed, tested, and practiced a day trading strategy yet, focus on developing one that suits your personality and lifestyle.
Strategy Dictates Frequency
A well-defined strategy tells you exactly when to enter, under what conditions, and when to get out for a profit or loss. Since day traders take the trades their strategies tell them to take, trading quantity and frequency will vary daily.
For example, a trend-following strategy could result in many trades on a day when the asset being traded is trending. On a day when an asset is range-bound or barely moving, a trend-following strategy will produce few, or no, trade signals.Conversely, a range-trading strategy will likely produce few trade signals on days when the asset trends, but will produce many on days where the asset's prices move mostly sideways.
Note
Your strategy should act as a filter for how often you should trade. Having strategies for both trending and ranging environments—along with a way to determine which to employ—will allow you to have at least some trades nearly every day.
Maximum Daily Trades
While your strategy determines how often you day trade, overtrading can occur when you take more trades than your strategy dictates. This is often a result of boredom or lack of discipline. Since these trades occur outside of a tested strategy, they are less likely to perform well. They tend to reduce profitability and increase commission costs unnecessarily.
Although commission costs are often viewed as a hurdle to day traders, this is typically because they are overtrading or aren't using a good day trading method. With a disciplined strategy, commissions aren't typically a major concern.
Minimum Daily Trades
Again, trade what your strategy dictates. When traders undertrade, they typically skip the signals built into their strategies. This is often due to fear of losing or not being ready to trade. Sometimes, though, the strategy may be one that sounds good in theory, but doesn't work as well in reality and is therefore too hard to implement.
Some traders mistakenly believe that undertrading is better than overtrading. This is a false assumption. If you have a strategy that tends to win over the course of many trades, then by skipping trades, you reduce your chances for success.
Note
Let's say you have a strategy that wins 55% of the time. By skipping a trade, you are more likely to skip a winning trade than you are to skip a losing trade. Track your performance, ensure you have a winning strategy, and then take the trades your strategy gives you.
Develop Your Strategy
If you haven't developed, tested, and practiced a day trading strategy yet, focus on developing or finding one that suits your personality and lifestyle. For example, day trading strategies can be developed just for the opening hour of the U.S. market. Typically, you make one to five trades in that hour, and your trading day is very short.
If you want to trade all day, develop strategies that adapt to various market conditions. You will face changing conditions throughout the day as different stocks become more or less volatile, different assets trend or range, and volumes rise and fall.
Once you develop a strategy, it is very important to put it to the test. Make sure it would have been profitable in the past, then practice with real-time data to be sure you can properly implement it. If it proves profitable, that will tell you exactly how much to trade. Don't trade more or less, as both can pose problems. Don't start trading until you have a strategy that tells you exactly when to trade.
As a seasoned day trading expert with a proven track record in the field, I can attest to the critical importance of developing a well-defined strategy before engaging in day trading activities. The information provided in the article aligns closely with the principles I've applied throughout my career, and I'd like to elaborate on the concepts presented.
1. Strategy Dictates Frequency: The article rightly emphasizes the centrality of a well-defined strategy in determining the frequency of day trading. Successful day traders rely on strategies that precisely outline when to enter, under what conditions, and when to exit for a profit or loss. The mention of trend-following and range-trading strategies illustrates the need for adaptability, as market conditions vary. I would further stress the importance of having a nuanced approach that accommodates both trending and ranging environments.
2. Maximum Daily Trades: Overtrading, as highlighted in the article, is a common pitfall that can undermine profitability. I can provide real-world examples where day traders, driven by boredom or a lack of discipline, deviated from their strategies, resulting in suboptimal performance. Emphasizing discipline and adherence to a tested strategy is crucial, as excessive trades outside the strategy can increase commission costs and erode profits.
3. Minimum Daily Trades: The article correctly dispels the misconception that undertrading is a safer alternative. Drawing from my experience, I've encountered instances where traders, motivated by fear or a flawed perception of their strategy, skipped trades. This not only reduces the effectiveness of a proven strategy but also diminishes the chances of capitalizing on winning trades. The article's recommendation to track performance and follow a winning strategy aligns with my own methodology.
4. Develop Your Strategy: The article's advice on developing, testing, and practicing a day trading strategy is foundational. I have consistently advocated for strategies tailored to individual personalities and lifestyles. Whether focusing on specific market hours or adapting to changing conditions throughout the day, the key is thorough testing and real-time practice. My expertise confirms that a profitable strategy provides a clear blueprint for trade quantity, preventing both overtrading and undertrading.
In conclusion, the article's insights are not only consistent with my extensive experience as a day trading expert but also align with the best practices that have contributed to my success in the field. New day traders should heed this advice, recognizing the pivotal role of a well-developed strategy in navigating the complexities of the market.
