There is over $480 trillion in the markets worldwide (Walker, 2008)! Many people try to find their piece of the pie learning to day trade; but the risky connotation and the reportedly low long-term success rate makes one question if day trading is really all that it is made out to be, or is it a scam?

Day trading is the buying and selling of various financial instruments with the goal of making a profit from the difference between the buying price and the selling price (Milton, 2008). Such financial instruments include futures contracts, options, currencies, and stocks. It is really no different than if you were to purchase a home for a reasonable price and sell it ten years later for more then you paid, except that when day trading, transactions can take as little as a few seconds. Most criticism comes from the fact that day trading has the potential to make a lot of money very quickly. Many see this as a get-rich-quick-scheme; others accept the risk and eventually learn that this presumption appears to be true. Only a select few learn to win trading and find long-term success. So, what makes these select few different from the majority who end up losing money? The answer, “probabilities”.

You see, those who are able to learn to win trading know something about the markets that many people do not understand. This well-kept secret is a simple rule of probabilities, and successful traders have become proficient in using it for their profit. The rule of probabilities simply states that events that have probable outcomes can produce consistent results, if you can get the odds in your favor and there is a large enough sample size.

Let me illustrate how this can work. I don’t know if you’re familiar with the uncertain, unpredictable games of gambling. People play it because they feel they have a “chance” to win, however slim that chance may be. If gambling is so “uncertain”, then how is it that casinos can be so profitable in a game of uncertainty? Well, casinos have applied the rule of probabilities to make it work for them. Fore example, the game of Blackjack is a highly unpredictable game; however, the rules of the game give the house a 4.5 cent edge on every dollar that crosses the table. With the odds in the house’s favor, they aren’t concerned about which hands they win and which hands they lose. Taking into account all the big and small wins and losses, if $100 million dollars crosses all the blackjack tables in a casino during one year, the house would net $4.5 million.

Trading is literally a game of probabilities because there are so many different variables affecting a given price at a given time that it leaves the market essentially unpredictable. However, the very same rule of probabilities can be applied to day trading with similar results as that of the casino. Most people do not understand or learn how to make probabilities work for them, which is why so many end up losing money. The key is to figure out what gives you an “edge” on the market. What is it that can put the probabilities on your side? It may be a certain pattern in market movement, an indicator, reaction to certain types of news, or following momentum or volume. Whatever it is, it should be tested first. Learn to trade the signal on a simulator calculating its statistics over a large number of trades. Once you find the signal that works for you, you can relax because the rest is easy. Trade the signal “every time” you see it. You may win, you may lose… but the key is where you end up over the long run. If you trade a live account the same way you tested your signal on the simulator, you too will profit because you’ve found a way to put the “odds” in your favor.

Learning to win trading is not as difficult as the majority of people think it is; and maybe that is what disguises so well the underlining difference between the few successful traders and the many unsuccessful ones. Of course there is more to trading than just probabilities, but if you can learn and apply the rule of probabilities, you will be well on your way to a successful future in day trading.

By: Jared P Erni