A look at stock-market action as a day-trader across various market cycles.

After five years of day-trading I’ve seen some absolutely crazy markets where I’ve witnessed day-trading friends making millions to the long-side and to the short-side. I’ve also witnessed traders make a million in the micro-cap world in a single trade.

I’ve also seen many day-traders turn a few 100 dollars into 6 figures in a short-period of time and have also accomplished this myself. It’s all about being prepared for a hot market.

It’s worth noting that a lot of my trading has been and is still with Trade Zero, a short-selling specialist broker.

But the goal of a day-trader ultimately, is to not have a good month or year, it’s to end their career consistently profitable over a life-time.

I think the age-old saying around money: ‘easy come, easy go’ specifically relates to day-trading for those who are not careful.

Keeping this in mind, I thought I’d reflect on a few learnings I’ve had over the years, based on personal experience of hot and cold markets.

There’s a time to attack and a time to defend in day-trading

Famous day-trader Jesse Livermore coined this quote many years ago in the early 1900s. This was before the invention and boom of commission-free retail-trading which created significantly more market opportunities.

Times were definitely a lot different back then, but the premise of his point is still relevant.

When day-trading, there’s definitely a time to be more aggressive in the markets and a time to be more defensive to protect gains.

Generally, when I see 10 new stocks on a top-percent gainers scanner each morning, up 30+%, it’s usually a time to be aggressive and to actively take a number of trades.

When I see 1 stock over 30%, it means there’s less opportunities, and a time to be less aggressive and more defensive, to protect capital.

January and February have definitely been months for playing defence a little more but it’s a matter of time, now, before we can turn the aggression up.

Making easy money Vs hard money day-trading

When markets are hot, there’s a lot of opportunity. When you have a lot of choice, there are often a number of trades which you could consider high-probability success set ups or easy/easier money than your average trade.

As a short-seller, when there’s 15 stocks gapping up, like an animal looking for its prey, you can search for the weakest one to pick off from the bunch.

In colder markets, the easy money comes around a lot less often and it’s much harder to make money.

Hot markets can encourage traders to think they’re great traders as they’ve managed to accumulate a lot of money during a volatile period.

The best traders though, know how to keep that money during colder markets, too. Something I’ve had to learn the hard way.

Day-trading set ups also work in some markets and don’t in others. Multi-Day/week/month breakouts were an incredible set up in the first half of 2021 but they have little success now.

It’s about taking size on the set up when it works and dropping it from your arsenal when it doesn’t.

So, in effect, you need to be a well rounded trader to survive in all markets.

Just to make it clear, I don’t think any money is ‘easy money’ in day-trading but the term helps to better-illustrate the point.

Cold markets create good habits for day-traders
In a cold market, there is less opportunity, so you are forced to be disciplined as a trader or you’ll quickly fail as your weaknesses are exposed by the market.

You also have to cut-losses when wrong because there might not be an A plus trade immediately after your last loss to make the money back.

Patience can ultimately be tested as you accept you might not be able to make the money you once did because day-trading is about taking the opportunities presented to you, as opposed to forcing the market to make opportunities for you.

So, if you’re learning to trade for the first time this year, great stuff, there’ll be some great times ahead for you. You should be able to capitalise on them with good patience and discipline.

The opening lines of this quote, by author G. Michael Hopf, couldn’t summarise things any better.

Hot markets can encourage bad habits for day-traders

In contrast to a colder market, hot markets present day-traders with a lot of opportunities. Sometimes, with an abundance of opportunities, you can let good habits slip, without having your weaknesses exposed.

The worst thing that can possibly happen, is an average day-trader develops endless bad habits in a hot market then gives back his/her gains in a colder, less forgiving market.

We’ve never had to exercise much patience in hot markets, so one can lose the ability to demonstrate restraint and patience when needed. This can lead to bad trading.

In summary.

Hot markets can produce easier money, which allows traders with bad habits to survive and thrive. Ultimately, hot markets can be followed by cold markets which painfully reveal a poor trader’s bad habits and weaknesses.

The best traders can survive and thrive in all markets to reach their goal of making money consistently across a lifetime, not just a hot market.

If you’re new to trading you can get started with TradeZero today, a short-selling specialist broker.

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