How Day Traders (or anyone) Can Increase Wealth
You don’t need a big day trading income to start increasing your wealth. Whether you have a big income or a small one, start building wealth by taking a few steps in the right direction. These steps include building consistency (in trading or your other incomes), investing, and creating additional income streams.
Improve Trading Consistency to Increase Wealth
Strive for consistency in your income. If you have a good idea of what you will make from month to month it makes it much easier to plan ahead. It also reduces stress, as big fluctuations in income (especially to the downside) typically increase stress. For day traders, if you make money one day but lose it the next, you’re treading water financially.
It’s hard to save or invest when this is occurring because it is always feast or famine. Even if you have the odd big month, if you don’t know when your next good month will be hard it is hard to tie up that capital in something productive (because you may need it soon if you aren’t making consistent income).
Create consistency in your income by focusing on executing each trade perfectly. Make your day, and each trade, about routine. If you create a consistent routine and process, then more consistent income will follow.
You also need a good strategy (see How to Day Trade Stocks in 2 Hours or Less), but a strategy isn’t the problem for most struggling day traders. You can have the best strategy and still be inconsistent if you aren’t able to adapt to current market conditions, or if you only follow the strategy some of the time (lack of discipline).
Consistency produces a more stable income, while still providing bigger months when the market is providing a lot of opportunities. This is because a consistent trader is focused on the process of trading, and is simply taking advantage of what is out there. A whim-like trader who doesn’t have the discipline to trade under normal conditions will likely lack the skill to capitalize when the big opportunities arise, or will lose the money as soon the opportunity disappears.
If lacking consistency, practice, practice, practice. This means taking screenshots of every day you trade, and then reviewing all your trading days and trades at the end of each day, week, and month. Look for recurring patterns that you have been missing out on. See common mistakes you make, and what you could do to fix them. For example, if you notice you get stopped out frequently right before the price moves in your direction, there is really only two things to consider: use a bigger stop loss (I am not a big fan of this), or realize that you getting into trades too early and consider how you can get into the trade a bit later so you are getting in after the fake-out move, instead of before it. Analyze your exit points and see if you are leaving a lot of money on the table (over many trades), or if targets are too ambitious and you end getting out at a crappy price because the trend reverses against you before hitting your lofty target.
None of these are easy things to fix, because trading is not easy. It takes constant dedication and work, but this continual process of refinement (and it never ends) and adapting to current market conditions is likely to make you a far more consistent trader.
Invest to Increase Wealth
When I started day trading as my primary income in 2005 I scoffed at investing. Why would I invest, doubling or tripling my account every couple years, when I could day trade and double my account every couple months! I now know a few things I didn’t know then.
I found out that as my day trading account grew my percentage returns could not keep increasing with it. The reason was position size. As a day trader I have to get in and out of the market quickly, meaning I am highly impacted by the volume available at those exact moments. Volume is not infinite, and therefore my position size can’t increase infinitely either. You eventually hit a point where your day trading income becomes capped. Yes, you could create new strategies, take more valid trades or trade for longer each day, but I choose to invest instead.
Day trading can provide a consistent income, and investing is just another avenue for generating income and wealth. Your money accumulates slower, but you can utilize a lot more of it. For example, when I day trade futures I only need about $50,000 to trade 10 contracts, and I don’t have much reason to take a bigger position than that. Therefore, any capital in my futures account, over the $50,000, I don’t have use for (you can start day trading with a couple thousand dollars). Withdraw the profits each month and invest it.
Investing has no cap…you can utilize millions of dollars because you can buy for days, weeks and months. Volume is not an issue (for a private individual) when buying multiple stocks over the longer-term.
Learning to invest is important. It is different than day trading. In day trading we look to capture quick bursts of momentum and short-term trends. With investing, one of my strategies is to buy solid companies at depressed prices, with a lot of upside based on historical precedent.
Another investing strategy I like is to buy high-quality companies that are growing relatively quickly. In this case, I am holding the stock for as long as the company is growing, expecting to make 20%+ per year over many years. Although, I typically do this in the early to middle part of a bull market. Once a bull market has been in effect for 6 or more years, and the S&P 500 P/E ratio is well above 20, I become more leery of investing heavily because a major sell-off is likely around the corner and I will have the opportunity to buy most stocks a lot cheaper.
All that said, investing is a skill. If you don’t have time to learn to invest, or find that your returns are less than if you bought an index fund, then just buy a few index funds. Split some money up between SPDR S&P 500 (SPY), SPDR Dow Jones Industrial ETF (DIA), Powershares QQQ (QQQQ), and iSharesRussell 2000 ETF (IWM). You could also add in a few more indexes as well, such as some foreign stock market indexes for exposure and diversification benefits outside of the US. Then, simply hold them for the long-term. Don’t try to trade in and out of them. Let the long-term uptrend of the stock market do its magic. That is not to say these index funds won’t fall at times. They may fall 50% during market crashes, but over the long-run the stock market has continued to recover and move to new highs.
For more on investing strategies, see Best Trading and Investing Books.
Utilize Multiple Income Streams to Increase Wealth
Another big stream of income for me, since I like to trade anyway, is swing trading. It is a different approach than day trading, mainly in that it takes up less time (about 20 minutes in the evening 2 to 4 nights a week) and I am focusing on bigger trends occurring on the daily charts in stocks, for example. Swing trading is taking trades that last a few days to a few months. The primary goal is to catch a major price wave of momentum in a stock (or another asset) and then get out.
If you are interested in learning a complete method of swing trading stocks, including how to find trades, how to manage risk, where to enter, and where to exit, then check out my Stock Market Swing Trading Video Course. More than 12 hours of video show you how to swing trade efficiently and profitably, in about 20 minutes per day.
Dividends are another possible stream of income. Since one of my investing strategies is to buy dividend-paying stocks at depressed prices, that means the dividend the company pays often provides a high yield, such as 6% or more. For example, if a company pays a $1 dividend per year (per share) when the stock is trading at $40 that provides a yield of 2.5%…not great. But if you buy the stock during a big sell-off at $20, your dividend yield is 5%. You make 5% just for being a shareholder. Also, while the stock could drop more, buying at $20 is certainly better than $40.
The trick is then to take your dividends and invest them in other dividend-paying stocks. Soon, you have a lot of cash trickling in from all over the place. Not to mention you still have the capital appreciation of the stocks you own.
Dividends are one income stream, but there are many others.
Almost every personal finance book you read recommends multiple streams of income. Not that you may need it, but it is good to have. Do the stars of TV shows like Shark Tank or Dragon’s Den need more income? No, but they enjoy what they do.
Create another stream of income based on what you like to do. I love to trade, but also love writing, swing trading, and investing. These all create additional revenue streams. I also played online poker for a number of years, another revenue stream. I am getting into rental properties and real-estate.
I just happen to be interested in these things and they offer income potential. So if you are interested in or doing something already, why not put in a bit more time to get good at it and turn it into a revenue stream?
As a day trader, one of the huge advantages to having a secondary (or multiple) income stream(s) is that it takes the mental pressure off your trading. You can trade in a calm state, and not have to worry about being profitable today to keep the lights on. For new traders, that is always a big fear.
Also, day trading doesn’t take up much time (for me, two hours or less a day), so there is lots of time to work on other projects.
Final Word on Increasing Wealth
Small changes have a big impact over the course of a couple years.
Most people are saddened by what they accomplish in only one year, but are astounded at what they can accomplish in 5 years if they keep at it.
Think about exercise. If you exercise hard for 1 year you will certainly see some positive changes. You may start to do well in some races and notice your body transforming. But if you exercise hard for 5 years, with the same fervor you started with, you will be blowing away most of the competition.
Day trading is the same way. The first year is usually just the tip of the iceberg. While most people aren’t profitable in their first year, those who are are just starting to see the potential.
To start generating wealth, first create consistency in your trading (or your job) so you can start putting money in your investment account each month, or direct some capital towards other streams of income.
Once you have about $500, buy some investments. When you have another $500, buy some more. Don’t deposit $100 and buy stock, then deposit $100 and buy stock. Only buy stock in at least $500+ blocks, so commissions don’t erode your capital right out of the gate.
Like day trading, investing involves risk. Research what you are doing before jumping in, and consult a professional if needed.
Generating multiple streams is great for providing peace of mind, and increasing wealth. If one income source dries up, then there are other streams ready to pick up the slack. Also, the capital generated by the multiple income streams can be invested or used to create other streams.
By Cory Mitchell, CMT
Check out my Forex Strategies Guide for Day and Swing Traders eBook.
Over 300 pages of Forex basics and 20+ Forex strategies for profiting in the 24-hours-a-day Forex market. This isn’t just an eBook, it’s a course to build your trading skill step by step.
Trading involves risk. This is not personal investment advice, nor a recommendation for you to buy or sell anything.