The Misunderstanding Of Trading Skill Development

By Lawrence

Many people have learned that top day traders can make a lot of money. The idea of being able to day trade and forget about the markets by the end of the day is very sexy. It is also toxic like an addictive drug to most of the people who give trading a try. It has driven many aspiring traders to chase the dream of day trading for a living.

Now, what if I tell you that it is impractical to even imagine that you are capable of day trading successfully?

How about you have to be someone else in order to perform better in trading?

It may sound very cruel but I found that it is often next to impossible to convince newcomers and inexperienced traders that the ways they trade are wrong. Wrong as in dead wrong and their approaches will not lead to consistent profitability down the road. It is frustrating because they seek for guidance yet not able to take criticism and advice seriously. One distinct feature of trading success is its dominating dependency on a person’s character as oppose to analytical skills and trading experience. This difference from other skills make trading unique in many ways comparing to other career choices.

Note: This is 1st Part of the eBook Is Day Trading For You


In this three part series, I will first explain the mistakes made by many traders in assuming what the learning process is in trading skill development.

In the second part of the series, I will show you how to visualize your trading performance development in a novel way that helps you understanding what it takes to improve trading performance over time.

Last part of the series will focus on understanding the psychological hurdles in day trading  and techniques to overcome these barriers to better performance.

I find that it is much easier to illustrate many concepts related to trading skill development and trading performance progress through graphics instead of words. The pictures should help you understand much better what I have in mind on the subject.

This series is created to help traders of all levels in understanding the epistemology of trading skill development.

Incorrect Beliefs In Trading Performance Progression

Following is the mental picture of what majority of traders believe when we talk about trading performance.


Unluckily, the assumptions made by majority of traders about trading are wrong. Hence they arrive at the wrong conclusion on the path they are going to take that will eventually lead to profitability. The mental picture above completely misrepresents the trading skill development process.

One may ask, "How wrong can they be?"

Short answer to the question is that they are so wrong that they do not really stand a chance to make money from trading.

Long answer is that if these traders can correct their fundamental beliefs about trading, or that they are lucky enough to be one of those who started out with the correct attitude, they stand a chance to trade profitably.

How about this, "Isn’t it possible to become marginally profitable without as much psychological issues?"

Short answer is yes. It also requires the trader to trade outside of the day trading timeframes.

Long answer is that majority of traders have to accept the fact that they are not capable of managing their personal emotions and beliefs. They tend to keep making the same trading mistakes with no hope of correcting them. If they are lured to day trade, they will lose their shirts eventually. To quote one study on Asian retail traders, only 1% of day traders are really profitable at day trading. However, 10% of short term traders (outside of day trading) can achieve profitability quite consistently.

Now you have all the answers. If you are one of those who are not happy with your trading results and refuse to accept the answers above. Read on.

Trading Is Not A Job

If you get a job, you will be paid for the time and effort you spent, but trading does not reward you with a salary. You are rewarded with a profit only when you manage to extract that from the market. This fundamental difference of trading from a job is ignored by almost everyone who give trading a try.

Trading is a form of business operation. Trading is running your own business thus it inherited the risk taking natural of running a business. You do not know when you are going to get paid. You do not even know if you are going to get paid at all.

When you have no control of when and how you are going to get paid, it takes someone who are comfortable with uncertainty to be able to handle the situation. Hence trading as a side business works for those who has a regular job that pays the bills. It also works when there is no worries about living costs at all for those who worked hard (or are fortunate) enough. These privileges are great advantage to have for someone learning to trade but they are also deadly if one day the security blanket is taken away.

In short, any person who are not comfortable with uncertainty of their well being or short term future living condition, which is at least half of all the people who give trading a try, will very likely fail in their pursuit. Since human as a species follows the normal distribution quite well (unlike the financial markets), it is safe to say that at most 1/3 of all people learning to trade can really handle uncertainty well under adverse conditions.

Note that it does not matter if a person has superior ability in handling uncertainty in absolute terms. All it takes is that the person is better than majority of the competitions to win.

In another words, only 1/3 of all people who ever try to profit from trading will stand a chance to succeed in trading.

Putting the numbers in perspective:

  • 1 out of 3 traders has the potential (i.e. comfortable in dealing with uncertainty) to make money from trading (exclude day trading)
  • 1 out of 10 traders is profitable trading
  • The chance of someone with potential in becoming a profitable trader is 1 out of 3

Day Trading Is In A League Of Its Own

Out of all the traders who give day trading a try, it is safe to assume many of them are undercapitalized. Trading with less than sufficient capital is the main risk of ruin for most of the traders.

There are several other factors specific to day trading that implicitly shave the chance of success from the retail traders. The one that stands out is overtrading. According to the various studies, it is the signature signs of traders likely to lose money.

Another well known issue with day traders is overleverage, maxing out position size with very aggressive use of leverage. Such risky plays can blow out an account in just one trade.

Assuming each factor would cut off 1/2 of the traders from being profitable and that these factors are independent. We can estimate that the number of traders left who stand a chance to make money in day trading is immediately dropped down to 1/24 ( 1/3 x 0.50 x 0.50 x 0.50 ), or about 4%.

Putting the numbers in perspective:

  • 1 out of 100 traders is profitable day trading
  • 1 out of 25 traders has the potential to make money from day trading
  • The chance of someone with day trading potential in becoming profitable day trader is 1 out of 4

Not only is day trading much harder to achieve profitability in general, it is also harder in terms of the chance to make it from having just the potential to being a profitable day trader.

I think I have convinced you now that day trading is one tough career choice.

Read Part 2 – Visualization of Trading Performance Progression


1. The Cross-Section of Speculator Skill Evidence from Day Trading by Brad M. Barber, Yi-Tsung Lee, Yu-Jane Liu, Terrance Odean

2. Do Individual Day Traders Make Money? Evidence from Taiwan by Yi-Tsung Lee, Yu-Jane Liu, Terrance Odean

3. The profitability of day trading: An empirical study using high-quality data, Investment Analysts Journal, by Doojin Ryu


  • melvyn May 2, 2014 at 6:14 am

    You are indeed cruel hahahah…. besides the character and psychological aspect which is the state of mind (oscillating between over and under control – in the recent video posted) – dominating dependency on a person’s character as oppose to analytical skills and trading experience as you mention is distinct in this occupation. Can you cite by examples what you mean and how it actual affect.

    I mean if it really is dominantly dependant on character – then within reasons people should and will be able to accept and ‘know their place’ and then move on …. but as you mentioned that you may need to be another person or adopt a persona to trade, or to be someone else in order to trade better, will be really interested to hear you expound on this.

    I had always thought that given the understanding and skills and know-how on how it works, with persistence and patience, it should bring you somewhere. What is it in daytrading that makes it different from non-day trading. Although I am not exactly new there are day trades I make and there are those I lost, and as I began to understand there are certain ground rules to follow strictly to stay in the game.

    • Lawrence Chan May 3, 2014 at 12:48 pm

      Read the whole series first. Let the concepts sink in.

      There are ways to improve the chance but it is also important to know that it is a competitive game, thus your ability has to be among the best in relative terms to win.

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