Let’s face it, it’s tough to make money when you start trading. You likely don’t have any defined strategy, rules, position sizing, or risk management. You’re flying by the seat of your pants with dreams of getting rich (read: getting insanely lucky). Likely your account, depending on size, will die a quick death due to poor planning, poor execution, and lack of attention.
Even if you have a lot of these in your toolbox, you can still fail because you have unrealistic expectations of what you’re going to win in a given trade.
We frequently see day traders make seemingly huge sums of money using very small accounts, most often using giant leverage and then people using $500 accounts WITHOUT leverage will blow themselves up trying to copy them. Why? Because the leverage that makes day traders with small capital accounts successful is either not available or not being used by the people who follow them, yet these novice traders get in their head that they can make the same amount of money in the same time frame as the traders they follow, when they can’t.
You’re trading with too little capital on a too little of a time frame.
I’m a good example of this. I started trading on the daily chart years ago with a small account, got impatient, and started trading on smaller and smaller time frames until I got down to 1-minute and tick charts. Believing I could execute trades better on smaller time frames just ended up cutting me down quicker than I could ever imagine. It’s a sobering experience.
Inappropriate Account Size
The number one problem I have when trading is trying to score big account-sized profits with small account capital.
Think about it. You’re trading on a short time frame, say the 1-minute, with $1k. Ross over at Warrior trading doubled his money today and made $2k. But you’re not trading small caps and you’re not using leverage. Why do you expect to be able to do the same? To make that money you’ve got to use a longer time frame or a larger account and guess what? We’ve already stipulated that you don’t have a large account, so it’s back to the daily chart, buddy.
If you insist on taking day trades, which I still do occasionally, you need to reexamine your trading and pick realistic profit goals. Look at what the average intraday move is on the 5 minute or 1 minute and make that your target to take the trade off, rather than hoping for it to go to the moon every day. If you see frequent 3% moves in whatever instrument you’re trading, then think about taking profit as soon as you get half of that. Seriously.
Now, you could use something like the hour, two-hour, four-hour time frames as well. Again, it depends on your account size and your strategy/edge. What realistic amount of profit can you make on a given time frame with your strategy? HINT: It won’t be an entire move from bottom to top.
It’s Better to Trade on the Daily Time Frame
When you have a smaller account, it’s better to trade on a longer time frame such as the daily. Why?
Big Moves are Even Bigger
Moves on the daily are many times bigger than intraday moves for the simple reason that there’s more time and price movement over a few to several days vs a few to several minutes. You might catch a 5% move in the middle of the day but you’ll miss the 20% move on the daily.
It’s Easier to Catch These Big Moves
On the minute charts, price might move a relatively incredible amount very quickly before you place your order, making your trade even riskier. On the daily time frame, this isn’t a concern at all. Simple put in your order at the beginning of the day or end.
Your Strategy Might Work Better
In many instances, your strategies win rate may go up on the daily. Coupled with bigger moves, this can spell $$$$ for your account.
You Don’t Need to Worry About the Spread (As Much).
The spread between the bid and ask prices of stocks, ETFs, and ETNs can be larger than normal given volume and volatility. This means you may be at a loss sooner than later in your position and will account for a bigger piece of any move you could possibly capture on the low timeframes than it would on the daily.
The PDT Rule Is Limiting
The Pattern Day Trading rule, which stipulates that margin accounts of less than $25k cannot make more than THREE day trades (In & out) in a rolling five-day period, is very hampering for small accounts. This trade limit means you have to pick your spots extremely carefully to maximize your ability to grow your account. Even in this new era of $0 commissions on trades, small accounts are handcuffed this way. You can very much do a mix of both, but you are missing out a lot if you are not trading on the daily as well.
You Probably Don’t Have the Time
If you’re trading such a small account, it also might mean you are human like the rest of us and work for a living and don’t have a lot of free cash. You can’t spend your mornings watching every tick for the perfect opportunity. You’ve got a job. The daily chart is great for this. You no longer need to stare at charts for several minutes to hours at a time, though you probably still will try to anyway. Trading on the daily works better with day job schedule.
The allure of day trading is making amazing amount of money in a short period of time. The not-so-secret but hard-to-internalize secret of that is that traders who make an amazing amount of money in a short period of time have a much larger amount of money to do it, whether in account size or ability to leverage. The daily time frame provides a better experience for small accounts from capturing big moves to being very manageable with an 9-5 schedule.