How to day trade stocks successfully | Traders POV
Wondering why you are reading how to day trade stocks successfully on a micro brand watch website? It's not to teach you how to make money to buy a watch although you could easily do that if you are successful at trading. We just happen to know some awesome people doing great things and think our community would find value in this interview about day trading since we know several of you out there dabble or are considering giving it a shot.
Introducing Mitel Shah, he's been a full-time day trader for over 12 years and has 15 years of industry experience under his belt. This would look awesome on a resume. However, this successful trader will likely never submit a resume again. He has created his own job and flexible lifestyle through day trading and here's a little more behind the scenes on a conversation we had where Mitel outlines what it takes to day trade stocks successfully.
How did you get started in day trading?
In my third year of college, I took an internship at an investment bank. This led to an internship with an internet firm during my senior year. Post-graduation I accepted a full-time position with the internet firm.
I worked at the internet firm for 8 months post the tech bubble burst in 2000. Then I started to think trading was something I could do on my own.
Around the same time, I was approached by private investors who were looking to invest in real estate. They wanted to buy properties and flip them for profit. He hinted they needed someone young like me to help them execute. Although I was keen on trading I was still hesitant as there was no guaranteed paycheck in it.
Being young, inexperienced and out of college, I felt I needed the security of a paycheck. I went ahead and started working with these investors and was with them for a year and a half. We flipped a couple of properties. Financially they didn't realize their expected returns so we parted ways on good terms.
Soon after, another opportunity came my way. This time it involved a medical business. Although my passion was still trading, I had always wanted to diversify my investments, and it came down to the security of a paycheck once again.
I accepted the offer to work with these new investors and managed a new medical facility. I worked there for 4 years. Due to regulations, amongst other things, they made the decision to sell the business to a local hospital and we parted ways.
I realized I delayed my passion for trading full time for five and a half years. After this happened I decided there would be no more excuses. I was going to dive into investing full time. It was my time.
Do you consider yourself an entrepreneur?
I don't. My definition of an entrepreneur is somebody who innovates a product or service. I consider Walt Disney, John Paul DeJoria, Andrew Carnegie, John D. Rockefeller, and Steve Jobs among others as entrepreneurs. They created something that never existed as a true commodity.
I’m someone who has always wanted to do business and be my own boss. I tried working for other people and never felt comfortable. It’s not to say I wouldn't feel comfortable working with other people in businesses. It would be more from the standpoint as an investor vs. a managing partner.
How much did you struggle during the first few years?
I dove right into the deep end and struggled to stay afloat. I didn't seek any mentorship. I figured with my experience at the firm I could master trading on my own. I learned quickly it’s a tough, stressful and difficult business.
When you don't have a paycheck you have to make money from your own money. If you don't have a lot of money to start with, it's difficult. I had years where I broke even. In other years I made a lot of money. Overall I felt I got lucky more than anything else.
There’s a well-known rule in the industry called the ‘90-90-90 rule’. It means 90% of day traders will lose 90% of their account value within 90 days of starting.
Some people do well in this business, they have the backing. State of the art software, algorithms, I’m talking multi-million dollar tools. Few people have these resources. We're talking 1%, if not less. These are the people you are competing with. To say you're unmatched is an understatement.
Do you sleep well at night with all the instability?
I do. In the beginning, it was tough but I’m optimistic. I definitely experienced a few nights in which I lost a big chunk of money during that day. It was hard to sleep on those nights, to say the least.
This is an unforgiving business. Anyone not prepared to handle the unpredictable nature of the market should think twice before diving in. Keep in mind the stock market trends 20% of the time. The other 80% of the market is a trendless beast, it doesn't do much.
If you enter this business you need to understand you will lose money. If you can't handle losses this is not the business to be in. I sleep well knowing I’m comfortable and confident in what I do. I'm more consistent. That's the key, consistency.
What does a day traders ‘9 to 5’ entail?
They do multiple trades. It varies from 15-20 upwards to 100 trades per day. They close each day in cash and don’t carry any positions overnight. A day trader is someone who looks to scalp the market. They try to make quick money every day. It’s difficult to do and why the 90-90-90 rule applies specifically to day traders.
Do all traders follow a specific methodology?
One of the problems with unsuccessful day traders is they don't have a plan or a process. You have to have a concise way of looking at the market. Your gut will make you money once in a while but you need a system. You must understand how the market works in order to have an edge. As with anything, you have to educate yourself.
Many things make a stock price move. At the root, it boils to the basic concept of supply and demand. People pick and choose what works and don’t work for them. Unless you have a system that works and you consistently profit, you're not going to make it in this business.
Trading stocks without understanding the markets is like going to a casino and picking 1 of 36 numbers on the roulette wheel. The odds are stacked heavily against you. You'll likely be disappointed.
How has your strategy evolved since the days of few responsibilities?
Family is always first on my mind and my objective is always low risk. It evolved from a lack of having a system in the beginning. I lacked the discipline, patience, and understanding of money management within the markets. Over time I became educated as I reflected on my losses. You have to look at every trade you lose money on and understand why.
The first thing I ask myself when I lose money is what I did wrong. 99.99% of the time I’ll have an answer as to why and how I could’ve prevented it. The market is dynamic, a lot of times you can't predict it. As my responsibilities increased it developed my patience and attraction to low risk and high probability trades.
What key lesson have you instilled over the years building your system?
‘Keep it simple stupid’ aka KISS.
There are too many indicators, data, and information available. If you don’t know how to filter and manipulate it properly then you are at risk.
I got caught in the glamour of trading with the fancy charts and realized I couldn’t focus on anything. I started understanding what made trading simple and what made it easy for me. It’s as simple as buying low and selling high.
It's about price action. You need to understand when to enter a trade and when to exit. I simplified my system and focused on moving averages and volume. Volume tells you what’s going on with a stock.
What was the tipping point towards smarter investing?
I realized I needed to stop acting like a retail trader and start thinking and acting like a professional money manager (hedge fund). They are the ones who make big money and none of them day trade or trade sleeping or trendless markets.
The shift started when I became more patient and focused on the 20% of the time the market was trending. There are two to three times a year where you have an opportunity to make a lot of money in the markets. These are your major tops and bottoms.
The same rules apply when you narrow it to a smaller time frame. In my experience, there are usually two to three lucrative opportunities in a given week.
I came to the realization I had to evolve from being a day trader to being a swing trader. It's where you are position trading. You look for opportunities to ride a trend, that's where you can make the big money. It’s what the professional money managers do. They patiently wait for these opportunities and strike big.
What is the toughest part of a typical day?
Outside of the obvious (losing money), it’s boredom.
A lot of days you stare at your screen and sit on your hands. You don’t do as much as the media or Hollywood portrays in movies (chaos and high stress). When you start to trade out of boredom that's when you’ll start to blow up your account. Trading for the sake of it, to feel important or busy, is dangerous.
If you find yourself in this situation you need to walk away and do something else. I used to trade a lot. Those were the years I lost money, broke even or barely made anything. It's a rat race and the people making real money are the brokerage firms collecting commissions from your trades.
When bored, just walk away. It will save you more in the long run.
What is the most important concept to understand to become successful with trading?
In your first year, the goal shouldn’t be to double your account or make a million dollars. Your goal should be to not lose any money, make a 0% return.
Sounds crazy right? If you can achieve this you’re far ahead of most people in this business.
Set small goals. For example, we aim to make $50 per day. New traders might laugh and question what they would do with $50 day but you need a consistent and sustainable positive cash flow.
If you're looking for the quick buck I promise you're going to blow up your account. It doesn’t matter if you made a lot of money on one trade. If you can't tell me how you made that money you’ll likely lose it as quickly.
The market is open 20 days on average per month if you make $50 per day that's ~$1000 per month. If you can do $50 per day profit for a whole year consistently you have developed a working system.
To make the money you really desire, increase your capital and position size. If your system works, you can bump your goal to $200 per day. Now you’re making ~$4k per month!
As your system evolves and you become more confident, making big money is about increasing your position size, making those large bets. People who make outsize returns make them because they have bet an outsize amount of money.
Can the average person come off the street and hit the ground running?
Not a single day trader will tell you it’s easy by any means. I don't want to make it sound like it's impossible though, it's not.
You need to get educated, have the right mindset and understand how the market works. You have to pay your dues and in trading. These are known as losses incurred from the many mistakes you’ll make. There’s a huge learning curve.
What industries do you invest in?
I used to be very diverse, I have since simplified. The thing with trading is you’re constantly learning, evolving and trying to adapt as the market is always changing. We're not a domestic market anymore. We're an interconnected global market. When something happens overnight it can affect how our markets will open the next trading day.
Through KISS I’ve come to realize the importance of simplifying trading. You don't have to invest in every single sector or product to make money. If you pick one or two products and apply your principles and concentrate your capital you'll do fine.
When I started I was trading options and stocks. Over the last year, I got into futures contracts trading indices, metals, energy, housing, etc. Unlike stocks and options, futures trade close to 24 hours a day. I still trade a few tech stocks but focus on ones that have a lot of price swing. These are stocks that move $10 to $30 on a given day.
I have brought my list down to 5 stocks I focus on. That's about 30% of what I do. The other 70% is strictly futures where I concentrate on the SP500, Gold and Crude Oil.
I’m transitioning into futures more as of late as there is a higher probability of my stop losses executing limiting my downside to my desired drawdown.
Explain the concept of a stop loss and why it’s important.
First, recognize stocks don't trade 24 hrs a day.
Let’s assume a stock closed at $100. I'll enter a stop loss in place to protect me from a 5% drop in price. Meaning if the price drops to $95 during trading hours it should automatically sell my position at $95 and stop any further losses should the stock dive below $95.
When the market is closed at night news can come in from across the globe or locally which can have a negative impact on the stock price. It can drive it down $50 or 50% for example
What happens when the market opens for trade the next day and the stock opens at $50? My 5% stop loss is null and void and won’t execute. The stock price drops to whatever price the stock opens at. All of a sudden a tolerable 5% loss can become a 50% loss and I don’t have control over it.
What I realize with futures is because they trade around the clock there is a lot of liquidity. The future contracts move in 1/4 point increments. When you put a stop loss in, chances are slim to none you’ll take a surprise loss.
99% of the time you will take a loss at your desired stop-loss price. There’s a lot less stress in futures and less chance of losing money if you have a working system.
It goes back to capital preservation, when I traded stocks I would wake up to a stock that dropped 30% to 50%. If you lose 50% of your account your need to make 100% back to breakeven. If you lose 90% you need to make back 900%.
I don't know a lot of people who can make 900% back, those kinds of losses to your account can be detrimental.
Describe the Pros and Cons of your lifestyle.
The financial rewards are uncapped. It can be extremely rewarding once you have confidence and a consistent system in place. You can wake up and if you don't want to trade you don’t have to.
If you had a good month, you can take a month off. You can travel anywhere as long as you have an internet connection. The beauty is you can do it anywhere at almost any time. You’re not constrained by much.
Sure, futures contracts require me to be up at 2AM, 3AM or 4AM to place trades. It's part of the business and I’m OK with it. If I make a trade at any of these odd times and it goes my way I don’t have to trade the rest of the day. It offers you a tremendous amount of flexibility.
You don't make money unless you show up to work. I don't have vacation, sick days and can't take a day off and still get paid. If I don't work I don't make money.
The pros significantly outweigh the cons as long as you can get over the initial hurdles.
Are there aspects to this business that still surprise you?
Some people take this business for granted. They try to make quick money and get emotionally involved with their trade which puts undue stress on themselves. A lot of people put "being right" on a trade over making money.
That's the wrong way of thinking. This business is about making money. That's what trading is about. You can't focus on being right.
Your goal is to make money every day and if you lose money on one trade take your losses and move on. There will be opportunities to make your losses back.
No trader bats .1000. The average good trader probably has a 70% win rate and the top might have an 80% win rate. Every trader endures losses.
You can do 10 trades of which 9 lose money. All you need is one trade to make it all back. It’s important to have a system of limiting losses, to risk-manage the trade.
Top traders separate their personal feelings on the market from what the market is actually doing. The market does not care how you feel. It has one goal and it’s to take your money. You are not playing against the market you are playing against yourself.
What should the average person off the street know and what is the safest route to enter trading?
If you don’t have the time, seek out a firm or a money manager to invest on your behalf. For those interested in a career you have to educate yourself. Pick up books, there’s a lot out there on basic investing and develop your knowledge.
Once you have a grasp on the fundamentals you may want to start paper trading to test your system. Get comfortable before you invest your own capital. You have to decide whether you are looking to be a day trader, swing trader or a long-term investor. It will be critical in determining how you approach the market.
My advice to someone who is looking to get involved at the basic level is index investing. You dollar cost average into it every month. Every once in a while increase your position by applying more capital when the opportunity presents itself like a correction.
Look at past ones like 2008, 2009, 2011 or this past January where it fell ~13%. These kinds of drops don't happen often. They are the opportunities you want to capitalize on. If you're someone that cannot invest or follow the markets every day try to do some quick reading.
If you see major dips you might consider adding more capital to your index funds. When you can buy something to a discount at what it was the day before it’s always a positive. Index investing is a great way to grow your money over the long run without actively being involved.
Historically, markets tend to move from the lower left to upper right. No matter how many bumps or obstacles the market endures, it typically resumes the trend higher. If you want to invest in individual shares of specific companies stick with solid companies that generate demand consumers seek.
When is the best time to buy and sell?
Ultimately, when there’s panic you want to be buying. When there’s a sense of euphoria you want to be getting out of the market. We've gone through many crashes and corrections. The 29 depressions, 87 crash, tech bubble, real estate bubble, Greece, China, Coronavirus (Covid-19) etc. The market has always found a way to get back on its feet and work higher in the long run.
The worst thing anyone can do when everything tanks is sell everything. You're selling everything at a deep discount to what it was the day before. That’s when you should be buying. This is hard for the retail investor to deal with emotionally.
What is the one thing you would tell yourself on day one if you could go back?
Limit, if not avoid losses. That‘s 99% of what it will take to make it in this business.
Would you go back to working for someone?
By choice, no. I'm one of those people who enjoys doing things on my own terms. I feel lucky, I fell into something I love and have a passion for.
Would you manage other people’s money?
I have been approached about managing investor money in the past. Investing others' money brings a whole set of new responsibilities. At this point in my life, I value the work-life balance I have.
As a trader, I am continuing to evolve and see this being a future option to further my career.
What will your legacy be?
Philanthropy was a lesson taught to me by example from my parents and grandparents. For every dollar they earned, they would give a certain percentage to those in need. I have continued this practice in my adult life and want this to be my legacy. I want to teach my children by example to be productive citizens.