There has been an increased interest in day trading over the past few months and it is easy to see why. People have more time as we are all locked in our homes, and the stock market has risen a great deal since the initial crash in March. Anyone can get rich day trading during a boom period.
But financial experts warn about the perils of day trading for a reason. Tradeciety as one example states that “only about 1% of all day traders are able to predictably profit net of fees.” Being in that 1% is not just about being smart or clever, but requires its own dedicated lifestyle to be successful. Only the right kind of people can be successful day trading, and there is nothing wrong with admitting that you do not have these traits.
Working a Lot
A lot of the appeal of day trading is that it sounds like an easy way to make a lot of money for little effort You pick the right stocks, wait for its value to grow, and crack open a beer.
But that really is not what day trading is at all. Take a look at Amazon’s stock over the past five years, a company which has obviously been wildly successful during that time period. But if you look at the chart, you will notice various ups and downs which are tiny compared to its overall growth.
Day trading is trying to figure out whether those little bumps are going to go up and down. And it is made even worse because without the benefit of hindsight, it is difficult to tell whether that little downward bump is just a tremor or a larger sign of an existing trend.
Learning how to predict things like that takes work and research, and I do not just mean glancing at the Wall Street Journal or the Motley Fool. Furthermore, day trading requires that trades be pulled off at the perfect moment. You cannot sit in your office, decide at 1 pm that you will execute a trade, and then wait until 6 when you get home from work. In those five hours, other day traders will have taken advantage of the opportunity you noticed.
Day trading is not just a hobby. It is a real, full-time profession if you want to make real money. And even then, there is a good chance that you will fail.
Capital and Government
Being a day trader would be difficult enough under a completely free market. But the government and the SEC have further regulations in place to make things even more difficult, in part to make sure that traders do not end up running themselves into the ground.
Day traders, which is defined as those who execute more than four trades in five business days, are required to have at least $25,000 in their accounts per SEC regulations. Furthermore, gains on assets held for less than one years are taxed at a higher rate compared to long-term investing. As noted above, this is a further example of how day traders must carefully research their fields or find themselves facing unexpected challenges.
The reality is that for the vast majority, it is better to focus on the long term, buy and hold, and bet on the fact that the economy will generally continue to grow. Day trading may sound appealing and cool. But the day trading lifestyle is one where you must work long hours, do your research, and confront the reality that more often than not, you are going to come out behind. Sticking with long term investments is a safer and generally more profitable strategy.
George is the CEO of Expat Group Limited, based in Hong Kong.