The 5 reasons why day traders lose money in January, and 4 things you can do about it

January can be a tough month for day traders

January, especially the first few weeks of January, can be rough for a day trader. I observed this phenomenon in my trading and started to notice a pattern in other traders when I went on to manage trading teams and build Proprietary Trading groups.

In this blog post we will take a look at what might be causing this decline in your performance by examining the following:

• Background on why I see January as a particularly challenging month
• Some of the dynamics in play in the first month of a new trading year
• Why we might have unrealistic expectations
• The difficulties of returning after a break
• Being ‘out of sync’ with the markets
• “Real Money’s” influence on the market structure
• Why we are not ready for increases in volatility

And then we will examine what we can do to help us get through a tough January

1. Recognition of the problem
2. Pairing back expectations for January
3. Getting back to basics
4. Being patient

Background

I’ve been trading for 25 years, full-time professionally for 15, and part-time for 10 years, and I can honestly say that statistically, over those 25 years, January is my worst trading month of the year. It’s not every year that January is my worst month, but it does appear with more frequency than it should!

I always thought it was just me, but in 2010 I joined Mercury Derivatives and Futures First, one of the world’s largest day trading Proprietary Trading Groups, and I started to notice a pattern with some of the traders I was managing.

To be clear, as we know, there are no absolutes in trading, this doesn’t affect every trader, and some of you may be saying “What the hell is James going on about, I’m killing it in January!”, but if you are sitting on a loss, and wondering what happened to your performance, then you should know that you are not alone, and if you read on, this post might be able to help you…

The different dynamics at play

As we enter a new trading year there are certain dynamics at play that might affect how we perform in the first month of the year. These might be psychological (our approach), structural (the other market participant’s approach) or it could be a change in the volatility. It could be one, a combination, or all of these that impact how we perform. Let’s examine each of them.

Unrealistic Expectations

The end of the year, and the start of the new year, can be a period of reflection and introspection for many of us. It’s at this time we may start to formulate our goals and expectations for the year ahead.

For us traders, this can be setting profit targets (which may be unrealistic), setting up a belief that this coming year is going to be our year, the year our trading really takes off. This is the year we are going to show everyone (including the market) how good a trader we really are!

This shift in our psychology can shift our approach to the markets. We can become more aggressive as we try to fulfill our goals, taking bigger risks, and forcing trades. We can end up looking for opportunities that aren’t really there, and instead of waiting for the market to present us with a good setup, we take high risks as we try to pull money from the markets to meet the goals we set for ourselves for the New Year.

It never ends well when a  trader tries to force the markets to give them money

Returning after a break

Typically the markets go quiet in December, so we start to wind down our trading.

When I was a professional full-time trader, quite often I would take the period around Christmas and New Year as a holiday and go away for a couple of weeks, and when I was running Mercury Derivatives we would close the offices over this period to give the traders a break.

It’s good to take breaks, as a day trader the only thing you are relying on is your mind, so it’s good to keep it healthy and well-rested. However, this can also set us up for a difficult return to the markets.

As day traders, we feel an inherent need to make money every day, and if we have been off for some time, we can come back feeling like we need to catch up, make up for the lost opportunity to make profits.

This then can push us into the same psychological state I mentioned above – an over aggression in our trading, leading to losses.

Being out of sync with the markets

As a day trader, it’s also important to be in sync with the markets. If we have been away, we won’t be as attuned to the nuances of the current volatility and price action, we will be out of sync with how the market is moving, and as a result, our PnL will suffer.

Real Money has a different approach - wait and see

Asset managers, long-term hedge fund traders, bank prop traders, and those deploying large sums of money for longer-term trades, are collectively known as “Real Money” ( as opposed to day traders that are known as Fast Money). These are the players who set the trends in the market.

The large influx and outflow of cash can heavily influence price, and as day traders, we rely on these market participants to trade.

Without Real Money traders present in the market, it would be just a bunch of short-term speculators trying to make money from each other! Yet, the Real Money traders may not be actively present in the markets in the first couple of weeks of January.

There are a couple of reasons for this.

The first is that it’s a new year for their trading book.

The long-term traders’ performance is judged on a monthly, quarterly, and sometimes yearly basis, so they don’t feel the need to start trading and make money on the first day of January as day traders do.

Instead, they are more interested to see what the fundamentals are telling them before making a move. They may be waiting to see what the world’s central bankers are going to do, or look for the fundamental trends that are emerging before they start to put on trades.

The second reason, and it’s not a big reason (but worth mentioning), is that they haven’t been paid their bonus from the previous year yet!

Bonuses are typically decided on the prior year’s performance, but paid in February, so why risk your bonus in January when it still hasn’t hit your bank account?

Unexpected Volatility

Finally, I want to touch on unexpected volatility.

As I mentioned before, markets are typically quiet in December, especially over the period between Christmas and the New Year. So, if there is a spike in volatility in January (as we saw in 2022 for example), we are just not ready for it.

It takes a while to get used to markets when the volatility changes, this is normal. But if this market change happens in January when we are wrestling with the other issues outlined above, this can be a recipe for disaster for the day trader.

It’s not good to be aggressive in volatile markets, especially when you are not used to it, and out of sync with the market.

What can we do about these issues?

By now hopefully, you can see why January can potentially be a difficult month for day traders.

Here are four adjustments  that help me through this difficult month for trading, and I hope will help you:

Recognize your vulnerability

Understanding the potential for January to be difficult, recognizing the psychological vulnerabilities you might have, and acknowledging the causes for difficult trading conditions, are the start to being able to improve our trading, and hopefully do better next time.

Trim down our expectations for January

Rather than think of January as the “new you”, or an opportunity to really push yourself, just think of it as another month on your trading journey. Don’t go in with high hopes, or high expectations, instead approach it with caution.

Also, it’s important to remember successful day trading is not about making money every day, it’s about making money over time. It’s about preserving your capital when we are wrong, being disciplined with your stops, and recognizing quickly when you are getting into trouble.

It’s better to measure how well you did at the end of the month, rather than trying to make money every single day.

With this approach, you won’t feel so much pressure to make money in the first few days in January, when you are at your most vulnerable.

Get back to basics

As soon as you find yourself on a losing streak, slow down.

Because of the high expectations, you may have put on yourself, you might be over-trading, you might be being too aggressive, you might be trying lots of different things in an attempt to push yourself forward.

STOP! Slow down, think about how you made money in the past, and don’t overcomplicate your trading,

Get back to basics and trade simple. Wait for those high probability setups, even if it means having to be more patient than you normally are because you’re not seeing them as frequently.

Be Patient

Rome wasn’t built in a day!

No one is putting this January pressure on you, other than yourself.

Trade small size infrequently, work slowly to pick up the rhythm of the market, work slowly to build your trading confidence. It’s not about making $$$, it’s about showing yourself that you can trade.

Trade small (its easier to trade small size than it is to trade large size), show yourself you can call the market right, and you can capitalize on those calls, and when you have a couple of weeks of positive PnL under your belt, you can start to push yourself, but only then …NOT BEFORE.

Takeaways

At TradeDay we teach that trading is 80% psychological, 20% technical. Your psychological approach will determine if you fail or succeed. And, after this blog post, I hope you can start to understand why your trading psychology may have changed as you came into January.

For me, January is much more about capital preservation, and thereby by trading confidence preservation, than making money.

Good luck in the markets.

Have a great trading day!

James