Day trading sounds like a lot more fun than my job. Does it work?
“Day trading” refers to trading stocks, options, bonds and other investments multiple times a day. Purists day traders never hold an investment, or a “position,” as they call them, overnight. Day trading has a romantic appeal for people who like
“Day trading” refers to trading stocks, options, bonds and other investments multiple times a day. Purists day traders never hold an investment, or a “position,” as they call them, overnight. Day trading has a romantic appeal for people who like the idea of picking stocks and getting rich, or even just making a living without doing anything else. As a practical matter, it’s a pipe dream that doesn’t work.
If you really care about providing for your family, here’s why you shouldn’t quit your day job and start day trading.
There are many people and organizations in the market who teach people how to follow complex mathematical rules using expensive software to make better trades. The organizations make money by training people how to trade — not by trading. If you go to medical school, the teachers are doctors. If you go to many of these organizations who teach you to trade, the teachers do not now and most have not ever made their living from trading their own money. At best, some were traders who worked on Wall Street using other people’s money and failed to make the cut. The training is expensive — up to $10,000 — and it won’t guarantee you success.
Day trading is also painfully boring. If you are serious, you’ll spend hours every day watching screens for almost imperceptible, fleeting trends you’ll try to exploit. Even if you ignore the fact that guys with millions of dollars under management and much faster computers and internet connections are watching the same trends a fraction of a second before you and beating you to the trade, the work is mind numbing.
Stock investments, on average, rise over time. When you shorten the holding period to minutes or seconds, that effect vanishes mathematically. The odds of a stock rising or falling in the next few minutes are virtually equal. Options are worse. Options are a zero sum game and never have a theoretical expectation of winning on average. They are purely a coin toss with commissions guaranteeing that everyone who plays long enough will lose. Options are Wall Street’s slot machines.
Commissions Add Up
You’ll pay a commission on both the purchase and sale of each trade. If you are fortunate enough to have a large account, it may seem inconsequential to pay a $10 commission on a $10,000 trade, but it isn’t. If you’re holding the position for only a few minutes or hours, you’re likely hoping to make only $100 and (if you’re smart) you’ve decided to limit your downside to a similar or smaller amount. If the trades are equally likely to make a profit or loss, you’d make zero dollars at the end of a long run of trading — but for the commissions. The only mathematically expected change in your portfolio value from frequent day trading is the cost of the commission. You’re going to lose money.
As a function, of the random walk of the markets, actual returns will vary. Some people will lose a lot. Some will lose everything. Some will lose exactly as expected — the sum of their commissions. Some will make enough just to cover commissions and end up with what they had in the beginning. A few will make money, but less than the markets earn. A tiny number over long periods of time will beat the markets over the long haul. They’ll think it is because they’ve figured out the system. They’ll probably start teaching other people to trade, the vast majority of whom will not be able to repeat the feat.
Bottom line: Day trading is for Wall Street firms populated by guys with MBAs, PhDs and super computers. Competing against them is a sucker’s bet.
Devin Thorpe, husband, father, author of Your Mark On The World and a popular guest speaker, is a Forbes Contributor. Building on a twenty-five year career in finance and entrepreneurship that included $500 million in completed transactions, he now champions social good full time, seeking to help others succeed in their efforts to make the world a better place.