Think Day Trading is for You? It’s Not
Want to be rich? Follow these day trading tips and you’ll be making $5,000 a day in no time! Sound familiar? This is what you see in spam emails, finance ads, and scattered around Google while you’re trying to find real advice. I fear that internet scams will never go away when it comes to day trading because people always follow the “get rich quick” schemes.
Let’s do this slowly: Day. Trading. Is. A. Bad. Idea. Period.
I added the extra periods for emphasis. You will not make a living day trading. You’ll take excessive risk without the proper research or technical analysis. Even banks lose money trading and they have hundreds of millions of dollars to devote to research, expensive analytics tools, and experts.
But What About the Hours?
The hours! Get in the office at 9:30 am, make a trade at 10:00 am and then cash out at 10:15 am for a $5,000 profit. What a life? Hardly. Sure the markets are only open from 9:30 until 4:00 pm; so theoretically, those are your business hours. What about all the market research you need to do? How many stocks will you follow and how will you keep up with those while you’re supposed to be trading? It’s far more involved than most people realize. For an individual to do this, their hours would be more like 12 hours a day, at least 6 days a week and they probably still wouldn’t have the knowledge that a trader at a large institution has.
You Can’t Predict the Future
Here’s a perfect example. Putin and Russia have escalated the Ukraine crisis at every turn causing the German DAX to dive 11%. All of a sudden, today, it looks like the Russian’s are backing off a bit and markets rally. It would be impossible to time these geopolitical events.
What about trading earnings, you ask? I’ll admit, I trade options from time to time but I do so with very small percentages of my total portfolio. I will always risk less than 1% of my portfolio when trading short-term or trading options. But how do I pick if a stock is going to the moon or the gutter? Gut. You can’t predict financial performance based on the historical performance and there are only so many analyst reports we normal people can get our hands on.
Risk vs Reward
I am a very aggressive investor. To prove it I’ll let you in on a secret, half of my private IRA is in a Biotechnology fund. Biotechnology is of course very volatile. This of course is not for everyone. I’m 24 years old with minimal debt and zero credit card debt. I can afford to take the risk.
How do you measure the risk you’re taking on any given day for a particular stock? Sure I know technical and fundamental analysis helps but I find it impossible to measure the risk I’m taking relative to the potential reward. After all, I’ve seen friends trade options on volatile stocks only for the stock to hardly move after earnings which shreds the volatility component of their option and sends the price tumbling.
This is something I’ve seen first-hand. If you make a trade at $10 a share and the market dips, many investors throw more money at the trade thinking “no, I’m right, this will rebound.” The market is not wrong. The downturn, even if only for a day or few days, is the correct move. You were simply wrong. If the market moves up, many people feel the need to book profits, even if they’re small. Conversely, these same people will assume things will get better if a trade turns bad and will end up booking a large loss. Frankly, most common investors lack the understanding and discipline to day trade. What would your strategy be?
The Bottom Line
You want to day trade because you want to be free from your job. You want to earn money quickly. You crave the rush that day trading brings. All of these are likely accurate if you’re considering it. You can do it from anywhere, you choose your hours, and you answer to nobody. I definitely understand the draw.
The thing is this: many people think they’re smarter than those guys on Wall Street. The same guys who have access to some of the smartest economists on the planet. The same guys who have access to tens of millions of dollars’ worth of research.
If you insist on day trading after reading this, then start small. Trade small amounts and take years to research and learn from the more skilled day traders out there. Don’t jump in with two feet or you will likely regret it.
As always, look forward to hearing your thoughts. Did I miss something? See any errors? Discussion in general is always welcome!