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Investors often look to experts and experienced traders for their predictions on how the market will trend. For example, I am often asked to predict where the Down Jones Index will be at any given time. The truth is, I have no idea how to answer these questions. Predictions on the market are like throwing a dart. Most traders would be thrilled if they could predict where the Dow will be just minutes from now, and, as the recent extreme fluctuations prove, no one knows when huge movements will occur.
Day traders often seek out stories of people who have had amazing success in the markets for guidance. They flock to biographies of financial celebrities hoping to gain insight and tips to get an edge on their own careers. One such celebrity, Warren Buffet, is often seen as a role model, and a recently released book on him, The Snowball: Warren Buffet and the Business of Life, will no doubt increase his influence. But while Buffet has plenty to teach us about investing, his lessons are less applicable to day traders because of the kind of investing strategies that he uses.
I am a day trader, and yet people sometimes ask me questions about the market that go beyond my area of expertise. They assume that since I am successful at one aspect of the market, I should have insight into questions of national and international economics, particularly as it relates to large scale political events.
People who want to profit from the market often ask experienced traders how they come up with their trading strategies. Newcomers are often overwhelmed by the amount of available data and are a bit mystified about how to navigate through it.
Sometimes, searching for the perfect strategy can lead to more losses than gains. This is what happens to traders who search for what I call the “Holy Grail of Day Trading.” This is loosely interpreted as a trading system or strategy that cannot fail. As I hope to convince you, looking for it will lead to frustration rather than success.
I wake up at 7:00am in the morning, and I rarely expect to learn a new lesson in day trading before heading to the office. This morning, however, was different. I often join my kids in the living room watching Sesame Street, and, today, while sitting on the couch with my coffee trying to wake up, I was greeted with a bit of wisdom that all day traders should keep in mind: a lesson about the value of practice and persistence.
Our goal as day traders is to make money, not to lose it. However, when we do have losses, and we all will no matter how successful we usually are, there are ways to make those losses less costly. One way is simply to learn from the knowledge we gain from an error or a losing strategy. But there is another, more concrete way to soften the blow from trading losses, and it’s something every trader needs to know about come tax time: “Net Operating Losses.”
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