Thread by @corymitc

The Math & Concepts Behind Making Big #DayTrading Returns

It's certainly feasible. It relies on 4 things:
- Number of trades (a couple a day)
- Position size (well-controlled)
- Reward:Risk (doesn't need to be huge)
- Win Rate (doesn't need to be high)

Here's how to do it 👇🧵

Trading on a 5-minute chart or lower time frame, a decent price action strategy should be able to find on average 2+ trades per day (40 per month) in under 2 hours of trading.

That doesn't mean exactly 2 every day. Some days there are no good trades, other days there are many.

Risk up to 1% of your capital per trade. 1% is the goal.

If starting out, risk 0.1% per trade and increase 0.1% per month of profitability.

If your account is $100, risk $1 per trade (1%). If your account is $35K, risk $350 per trade.

More details: tradethatswing.com/the-1-risk-rul…

That doesn't mean you only put 1% of your capital into a trade. You can use all your capital, even leverage it, but you set a stop loss order so that if the price goes against you the order gets you out so you don't lose more than 1% of your account balance on that trade...

Utilize a reward to risk of 2:1. A little more or less is fine.

If you're risking $100 per trade, set a target at a $200 profit.

To risk $100 requires a $10k+ account (1% rule).

If the target is hit, it's a 2% gain on the account if you win.

Target must be within typical movement.

Prices only move so much. My target must be within typical movement. If price moved $0.50 in one direction before a big pullback, my target must be less than $0.50...maybe $0.25 to $0.40...unless I'm willing to hold through a pullback.

Reward:risk means nothing if the target is unlikely to get hit.

Take your stop loss size (difference between entry and SL) and multiply it by 2.

That is how far the price must move to reach your target....

Look at recent price moves. Based on your entry, does the price move enough to reach that target EASILY?

Look at how long it took price to move that far in the past, and how price moved.

Are you willing to hold this trade that long, and through similar conditions?

Wait for trades where the price is moving enough to easily reach your 2:1 target.

This will allow you to fulfill your reward:risk, win rate, and trade requirements for making good returns.

If you win 50% of your trades
+
You make 2% on the trades you win and lose 1% on the trades you lose
+
Average 2 trades per day
=
Monthly profit is near 20%.
((20 wins x 2%) - (20 losses x -1%))

If you win 40% of your trades
+
You make 2% on the trades you win and lose 1% on the trades you lose
+
Average 2 trades per day
=
Monthly profit is near 8%
((16 wins x 2%) - (24 losses x -1%))

If you can take more trades with the same reward:risk & similar win rate, your $ profit increases.

If your reward/risk stays the same and win rate goes up or down, profits go up or down.

If reward vs risk goes up or down, and win rate stays the same, profits go up or down.

That's the math of how it works. But there's a problem.
-You can't infinitely compound. Position sizes get too big eventually and slippage erodes the return.

-The fix: you don't need to be the richest person in the world. Make a good return and withdraw your profits. Enjoy life.

Start with more capital to produce bigger dollar returns quicker, but the focus is on keeping the stats the same.

No matter the account size, you need the favorable reward:risk, decent win rate, and a decent number of trades each month...

If you enjoyed this, give me a follow @corymitc & check out loads of trading articles on tradethatswing.com as well as full courses.

I've been a trader for almost 20 years & regularly share my insight (on day trading, swing trading, investing) on Twitter & on the website.