For many people, day trading inspires visions of status and riches. It’s often praised as a quick route to extreme wealth. However, as is often the case, there is more to the story. Follow me to see the Devil in the details.
The Truth About Stock Market Day Trading.
Long before the internet, Wall Street brokerages hired experienced traders to watch the markets moment to moment. Their job was to find investment opportunities for a quick profit. These were the first traders to try to make money from daily fluctuations in asset prices.
Now, with the advent of the internet and instantaneous market reports, anyone with a personal computer, a spare $25,000, and a hankering to get rich quick can day trade.
Phil Town Discusses Day Trading.
It Costs Money to Make Money.
However, it costs money to day trade, a lot of money. The Securities Exchange Commission adopted rules in 2001 that designated any trader who makes more than four trades in a 5-day period as a “Pattern Day Trader.”
The SEC also requires day traders to keep a minimum of $25,000 in their brokerage account. Experienced day traders typically recommend a minimum of $100,000 in investment capital. Most brokerage firms require $100K deposit to open a trading account because they don’t want clients who can’t afford to lose money.
Online buzz promotes day trading as a high-speed avenue to wealth. However, a deeper look reveals severe warnings. To make things even more confusing, many sources distort the truth of day trading in hopes of selling expensive courses and software.
It is challenging to know what to believe. And, when it comes to investing, you must have the proper information before you can make a reasonable decision. In this post, I hope to give you the information you need to determine if day trading is right for you.
Profit from Small Fluctuations.
Day trading is the process of buying or selling a contract, a securities asset, stock or cryptocurrency in a single day during market hours. Investment decisions are based on technical analysis and not fundamentals. And, no position is held at the end of the trading day.
The day trader continuously moves in and out of the market to exploit small changes in the asset’s price to make a profit. To make reasonable returns, the day trader must risk large sums of money.
Day trading is often done on the stock market, but it is usually more common on the FOREX market. In the FOREX market, fluctuations are easier to manage and leverage. There is also a growing market for day trading cryptocurrencies.
$50,000 Will Get Your $500.
As an example, imagine a day trader buys $50,000 worth of a stock that sells at $100 when the market opens. During the day, the price of the stock increases 1% to $101. The day trader makes $500.
Making five hundred bucks a day by simply positioning yourself in the market may be very tempting. However, there are significant risks involved. Statistics and history show that the risks of day trading vastly overshadow the potential for profit. Most people are NOT successful with day trading.
Learning to Trade.
Learning to day trade successfully can take several years. Most day traders begin as employees in brokerage firms where they learn the ropes by trading other people’s money. Some day traders have large sums of money they are willing to risk as they learn.
Most Day Traders Fail.
Successful day traders have significant experience and perhaps a certain knack for what they do. Day trading requires expensive training, hardware and software, investment news sources and intense attention to detail. Still, with every possible tool and the best possible training available, most day traders fail to break even.
A Two Edge Sword.
Day traders use a lot of leverage and that’s a very dangerous thing to do. Leveraging an investment is the strategy of borrowing money to increase the potential return.
The danger of leverage cannot be overstated. Leverage cuts both ways. It can magnify gains, but it can also magnify losses if the market turns against you.
Leveraging small changes in an asset’s price requires the investment of a lot of money. In our earlier example, the day trader risks $50,000 to earn $500. If the price dropped, the day trader would not have made $500 and could have potentially lost thousands.
The emotional investment of day trading is huge. Putting big money on the line and expecting a quick return can be extremely thrilling for some traders and extremely stressful for others.
Like Crack Cocaine.
Also, the risk-reward dynamics of day trading can trigger a laundry list of psychological responses including the desire to win big at all costs or the subconscious self-destructive desire to lose. Not surprisingly, day trading can be addictive.
“[Day trading is] … like crack cocaine — it’s much more addicting than other kinds of gambling,” says Ed Looney. (New Jersey Council on Compulsive Gambling).
Because of its highly volatile and addictive nature, day trading can lead to horrendous losses.
In his book, “The Strategic Electronic Day Trader,” author Robert Deel writes that “Many day traders are addicted to the action…”
The link between gambling and day trading is so well established that Gamblers Anonymous advises members to hold assets for at least 18 months if they choose to invest in the market.
Taxes and Broker Fees
With each trade, a day trader must also account for brokerage fees. If the trade is successful, the gains will probably be taxed. Typically, short-term capital gains are taxed at a higher rate than long-term capital gains.
A day trader will typically spend 60 to 80 hours a week either trading or gathering information. Naturally, they are intensely focused on the market when it is open. When not focused on the market, a day trader must stay informed of news that may impact his trades or reveal possible opportunities for profit.
Slim Chance of Success.
The promise to quickly become extremely wealthy lures many people to day trading. However, it is a statistical apparent that the dreams of most day traders end with failure, financial loss, and depression.
Hedge fund manager and bestselling author, James Altucher, says, “Only around 5% of retail traders make money as full-time day traders. The probability of success is slim.”
The Last Word on Day Trading.
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If you found this article helpful or have experience with day trading, please leave a comment below. Thank you!