Market Overview

The Pitfalls Of Day Trading For Income


Equity markets have been on a one-way winning streak for over a decade. It is easy to compare today’s conditions with those leading up to the dot-com crash of 2001. During that time, every tech stock was a “buy.” This created certain conditions that made trading appear “easy.” After all, what do you have to do but click buy in a one-way market?

As with the dot-com bubble, this bullish trend has persisted for so long that many self-appointed “expert” day traders have popped up, selling their systems to an eager public that wants a piece of the pie. The problem is, these experts have only operated in a one-way market, which will eventually change. When it does, like with the dot-com bubble, their profits will disappear, as will their followers. For now, this situation has created an unhealthy view of how day trading works.

Day trading is a skill, and skills must be developed and honed over time. Today, we'll review a couple of misconceptions about day trading and detail how professional firms are successful.

It’s Not About the Charts

Charts will only tell you part of the story. NN² Capital Director Gary Norden, a professional trader for 30 years who began his career at 18 as the youngest-ever trader for Yamaichi Securities, says it best: “I have never found any edge from using charts and have found them to be unreliable shortcuts to analyzing market behavior.”

A chart only shows the last traded price. To trade consistently, professionals understand the causes of price moves. These can be scenarios such as "stuck traders" exiting their positions or an overall trend that pauses and then continues—or a news event that has created excitement and direction. The key to exploiting these moves is watching the actual trading activity on order flow tools like Depth of Market (DOM) and related tools. These enable you to understand where traders may be offside, to see which side the majority is trading, or to notice when a move starts dying out from lack of interest. This is known as order flow analysis.

Ignore the News at Your Own Risk

Many traders who have been taught only to focus on charts will say, “I don't want to trade the news.” This is understandable, but I've yet to hear an answer to the following: How will you prevent market-moving news from occurring while you are trading? News can break at any time, although regulatory agencies restrict the release of certain news during market hours.

We advise traders to not only be aware of these but also to write down which markets they think will be impacted by a surprise to the upside or downside. Repeating this each day will help you build an edge over time as you become more news-aware. For sudden news, as we saw with Brexit and COVID-19, and is becoming ever more frequent in U.S. politics, the key is to understand if a sudden move may be driven by news. A news-driven market move will usually last longer than a sudden move because of traders being caught offside.

Pro Tips: DOM and Order Flow

Although it varies from firm to firm, intern traders at professional trading firms are immersed in programs that can last up to 12 weeks and are 25 percent theory and 75 percent hands-on. The hands-on is a combination of drills and trading. Initially, the focus is a narrow range of tools and techniques. The trader must then earn their live account. The most important parts of getting to that point and beyond are reviews and journaling. Traders will journal their trades, and many will also record their screen.

At the end of each day, they will review their trading, looking for strengths and weaknesses. Problems like closing winners too early are resolved here. Much of the time, problems exist simply because you didn't notice something at the time that you see in the review. This process of constant improvement is the cornerstone of becoming an accomplished trader. It is generally acknowledged that the main tool for trading is the DOM. The common refrain from traders, when they first see and understand order flow, is that it feels as if they had been trying to trade blindfolded.

"Our biggest technical day trade strategies cover the full spectrum of plays generated from our three main tools—market profile, footprint, and DOM," says Alex Haywood, Axia Futures Co-Founder and Head of Strategy.

How the Pros Make Money

Different strategies suit different people. Here are the main day trading strategies used in the professional world:

  • Outrights: Buy to sell higher, sell to buy lower. Also known as directional trading. Often based on other traders being out of position, but basically, this strategy is about looking for reasons others would trade after you. Most people just call this trading.
  • Scalping: This is non-directional trading. Trading the “now.” Trades are very short term, higher frequency, and lower risk. Price does not have to move in order to profit from a scalp.
  • Spreading: Trading one or more instruments that have a relationship that has gone out of sync. Also in options, spreads are created to trade, for example, if volatility stays within a certain range.
  • Trading the news: News tends to create larger (and more volatile) moves. Many people see this as risk, but news trades also represent the moves with the greatest opportunity.
  • Momentum trading: This is Newton’s first law: An object moving in a certain direction will tend to continue that same way in the short term. Most retail traders are trying to predict highs and lows and trade against them. This is the number one cause of retail traders losing money.


Peter Davies is CEO & Founder of Jigsaw Trading. Davies is an active order flow trader in S&P 500 futures who founded Jigsaw in 2010 because he was frustrated with the modern trading platforms available to investors. His mission is to create tools that present order flow information in a more logical and understandable manner. Jigsaw Trading offers investors unique analytical trading tools and software to monitor order flow in global futures markets. Please visit for more information.



The preceding article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.


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