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.
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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.
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High-Speed Wealth?
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.
High Anxiety.
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).
Horrendous Losses.
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.
Time Intensive.
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.”
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The Last Word on Day Trading.
If you have the money to invest, I recommend value investing. If you don’t know how to invest and wish to start, read How to Invest.
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If you found this article helpful or have experience with day trading, please leave a comment below. Thank you!
Hi, Gary. Very interesting read. I had tried day trading before and it really does get the adrenaline pumping. Gain lots but lose lots. Thereafter, I never wanted to touch that again. Value investing is something I would go for now. I have heard lots of people gain through value investing. For affiliate marketing, I am not sure how much it takes to invest and how long it takes to gain. Some have left after 3 – 6 months of not seeing any results. Do you have any tips?
Hi, rmjia!
There is a bit of a learning curve with value trading, but once you understand it, value trading does not take much time at all and the returns are typically 15% or higher. My article on Rule One Investing is a good place to start.
In my opinion, Affiliate Marketing is the easiest and most lucrative business to start. Like any business, it takes time to get established. 3 to 6 months is not enough time for a newbie to truly test Affiliate Marketing. Making money with Affiliate Marketing is a process. It takes time to learn the skills and to gain experience.
To go from not knowing anything to making money can take time. That’s true with any business. The people who succeed with Affiliate Marketing and eventually make 6 figures or more, are people who are committed to making Affiliate Marketing work for them. They stuck it out and invested the time to nurture their Affiliate Marketing business until it was earning the income they wanted. Make no mistake, it takes commitment, patience and proper training to succeed with Affiliate Marketing, but the rewards are phenomenal.
People who think they can dabble in it and make money will be disappointed. They might say to themselves, I’ll try this and if it works, I’ll commit to it. It doesn’t work that way. You have to commit BEFORE you succeed. You have to make it happen. The place to start is the Online Entrepreneur Certification Course.
Thanks for stopping by,
Gary
This was a very informative read. I have always stayed clear of day trading, and don’t even want to imagine the stress of watching every single fluctuation! Plus, the risk of investing in those fluctuations is far too high. However, I have become quite interested in value investing within the past couple years. As a long-term investment, I don’t think you can go wrong as long as you are diversified enough. I don’t have the capital for that yet, but I’m working toward it!
Hi, Leah!
Value investing is the only sane way to invest in stocks. Phil Town in his book Rule One Investing, makes it easy to understand and manage. Incidentally, one of the principles of value investing is not to diversify. I know that sounds contrary to what most people teach about investing, however, it has proven to be more profitable not to diversify, if you follow all of the principles of value investing. This is the same strategy Warren Buffet and Charlie Munger have used to amass billions.
Essentially, instead of investing in fractions of hundreds of companies you know very little about, value investing focuses on only a handful of companies you get to know very well. This is easier than you might think. I encourage you to learn more about Rule One Investing. Once you understand it, I think you’ll be excited and motivated to find money to invest.
Thanks for stopping by,
Gary
I am not a day trader but I must say it is great risk.. I think it comes with some sort of greed except you have mastered the way it works which cannot be 100% mastered. So much are in line with day trading, it is either you are loosing or you are winning. It is scary and it doesn’t look like something I will even want to go close to. The article is very informative.. Stating so well what I never knew about day trading.
Hi, John!
There is a clear connection between day trading and gambling addiction. This alone is enough to recommend people steer clear of it. There are so many things I do not like about day trading beginning with the stress and the lack of control. Compared to value investing, day trading is like rolling the dice and hoping for the best.
Thanks for stopping by,
Gary
Hi. This article really tells it how it is, when investing in stock trading. You need to risk so much money for extremely insignificant returns.
Trading in stocks really is the definition of money makes money or the rich become richer. For a hard working person, just trying to gain traction on the road to financial freedom, investing in stocks is another slow paced method to eventually make some small returns.
Thanks for this article, very helpful.
Hi, Snow!
The only way I would recommend investing in stocks is value investing. Phil Town teaches an easy to understand method for buying stocks with high return potential. Value investing is not fast in the short term, but it is possible to retire after ten years using value investing. I recommend reading my article Rule One Investing.
Thanks for stopping by,
Gary
Great article Gary,
And thanks in kind for creating and sharing it with us all. Day trading, weekly or even yearly trading is something that I would not touch with a barge pole!
…And I retired at the ripe old age of 34 thanks to investing in companies…long term! (very long term!). By far, in humble experience is to look for 5-10 year strategy or in my case a forever strategy!. when we buy shares we are buying a part of an existing business! Would you invest in a business and close it or sell up after 3 months? a year or two? no? well why do that with stocks?
I swear by dividend paying shares and reinvesting the dividend back into buying more shares thus augmenting your holding for “free” and increasing your future divident amount. Key, is to go for dividend paying kings or aristocrats seek a p/e ratio of less than 15 and dividend of 3.5 to 4% minimum (depend on other details such as market capita and so on).
Hi, Derek!
I agree, I wouldn’t want the stress of day trading. It seems insane to me that anyone would willfully chain themselves to a computer and make their welfare dependent on the mood swings of the market.
Congrats on retiring at 34. Thanks for bringing up the importance of holding stock long term. As Phil Town mentions in the video, market swings are insignificant when you hold a stock long term.
Thanks too for sharing your formula for investing. That’s priceless.
All the best,
Gary