<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Day trading may seem like an easy path to wealth, but here's what you need to know before trying your luck.
Source of the image: Getty Images."data-reactid =" 11 ">Day trading may seem like an easy path to wealth, but here's what you need to know before trying your luck.
Source of the image: Getty Images.

A man using a computer with three different monitors filled with charts and graphs.

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When many people hear the term "day trading," they have visions of people trading equity positions and earning millions of dollars. You may have even seen advertisements for software, courses, and other day trading products that promise to be able to quit your job and gain market activity.

Let's clear things up here. Most day traders lose money. It's not because they chose the wrong business coach, read the bad books or something. The reality is that as a day trader, the chances of success are simply not in your favor.

But we are ahead of ourselves here. Here is a definition of day trading, some of the reasons why becoming a profitable day trader is usually a lost battle, and the safest path of wealth in the stock market.

What is day trading?

There are several possible definitions of day trading, depending on who you ask for. For example, some people consider anyone buying stocks in the hope of mounting them over a relatively short period of time as a "day trader".

For our purposes, a day trader is a person who regularly buys and sells equity positions during a single trading day, hoping to make a modest profit on each transaction by selling the shares. for a little more than what they paid for.

As a simplified example, here is the general objective of day trading. A day trader can identify a trend in the price of a stock and buy 1,000 shares for $ 20. A few minutes later, when the shares rise to $ 20.10, they could be sold, generating a profit of $ 100. The day traders aim to produce several times, even several hundred, this type of result every day.

Problems with day trading

On the surface, day trading can seem fun and exciting. After all, how difficult could it be to buy stocks, wait for them to increase by a few cents, sell them and repeat the process?

In the end, it is easier to say than to make profits with day trading. Although there are many reasons why most day traders do not end up winning, here are five of the main reasons why odds pile up against new day traders.

Commissions can kill your profits

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "The first major problem of day trading is the commissions. sure, some brokerage platforms offer commission-free transactions, such as Robin Hoodbut as a serious day trader, you will probably want a online broker which offers more advanced trading tools. For example, TD Ameritrade offers the thinkorswim platform highly rated to active traders. "Data-reactid =" 34 "> The first major problem of day trading is that of commissions.Of course, some brokerage platforms offer commission-free transactions, such as As Robinhood, but as a serious day trader You will probably want an online broker offering more advanced trading tools, for example, TD Ameritrade, a highly rated thinkerswim platform for active traders.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "However, for a multitude of features brokerage accountyou will have to pay commissions. Continuing with my TD Ameritrade example, the broker earns commissions of $ 6.95 for stock trades. "Data-reactid =" 35 "> However, for a feature-rich brokerage account you have to pay commissions.To continue with my TD Ameritrade example, the brokerage charges commissions of $ 6.95 for stock trading.

That's why it's a problem for day traders. Suppose you run an average of 15 round-trip transactions per day, which means you open and close so many stock positions to try to make small profits. Well, that means you run an average of 30 transactions a day, which represents a commission of $ 208.50. During the 250 trading days a year, this represents $ 52,125.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "The fact is that your trades will have to earn a profit of 52 $ 125 just to make his expenses. In other words, you may be right more often than you are wrong and sell your shares for a total of $ 50,000 more than you paid for those shares. always lose money. "data-reactid =" 37 "> The fact is your trades will need to generate a profit of $ 52,125 just to make his expenses. In other words, you may be right more often than you are wrong and sell your shares for a total of $ 50,000 more than you paid for those shares. always lose money.

The story continues

Bid-ask spreads put probabilities in favor of the house

In addition to having to overcome the hurdle of commissions, day-traders are already at a disadvantage in the form of the buyer-seller gap.

If you do not know it, the stock price you see quoted when you view a stock price is simply the price of the last transaction made. In fact, share prices are a bit more complex and are based on what is known as the buyer-seller spread.

<p class = "canvas-atom-canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "This is how it works. offer is the highest price that someone is currently willing to pay for a given stock. the request is the lowest price for which a person is willing to sell a given stock, and is usually a few cents higher than the price offered. The more a stock is actively traded, the narrower its spread, but there will always be a spread, no matter how popular. "Data-reactid =" 45 "> That's how it works. offer is the highest price that someone is currently willing to pay for a given stock. the request is the lowest price for which a person is willing to sell a given stock, and is usually a few cents higher than the price offered. The more actively traded a security is, the narrower the gap, but there will always be a gap, no matter how popular.

As a concrete example, the current price of Tesla shares indicates a price of $ 369.24 at the time I write this, which means that it is the price at which the last transaction executed was performed. Looking a little further, I see that the current bid price is $ 369.11 and the asking price is $ 369.50. This means that the lowest price you can realistically expect to pay for the stock is currently $ 0.39 higher than what everyone is willing to buy you.

In other words, if you buy Tesla shares as a day trade in this scenario, you will need the bid price to increase by $ 0.39 to not lose your money when you sell. You actually start with a loss that will have to be overcome before you start making a profit.

To be complete, this is a simplified example. As a day trader, you can offer a slightly more favorable price than the current asking price and enter a sell order for a price slightly higher than the current bid. And, there is a good chance that your orders will be executed. Nevertheless, the general functioning of the market is that there is always a gap between what buyers are willing to pay and what sellers are willing to accept.

Even if you earn money, taxes can be brutal

In the context of the discussion, let's say that you overcome the disadvantages inherent in commissions and bid-ask spreads that I have already mentioned and that you manage to profit from day trading stocks.

Mb (0) – sm Mt (0.8em) – sm "type =" text "content =" Now you will have to pay taxes on your income. Day trading income meets the IRS definition of a short-term capital gain, so they're taxed as ordinary income.This can be a particularly important problem if you perform daily transactions. in addition to another job because your profits on day trading could propel you into a higher tax bracket. "data-reactid =" 51 "> You must now pay taxes on your profits Day trading income is in line with the IRS definition of the short-term capital gain, so it is taxed as ordinary income , which can be a particularly serious problem if you trade by the day in addition to other jobs because your profits on day trading could propel you into a higher tax bracket.

The emotions of a trader can be their worst enemy

Human beings are emotional creatures. And unfortunately, our emotions are not necessarily related to the success of stock trading.

Here is the problem. When stocks rise and have a lot of momentum behind them, it's human nature to try to participate and throw money into the market. Conversely, when the situation starts to go wrong and the stocks go down, human nature asks us to take out our money before the situation worsens. In other words, it is common knowledge that the interest of investing is to buy low and sell high, but our instinct tells us to do exactly the opposite.

Technological disadvantages

This discussion is about people who want to trade daily. There are certainly traders who work for big Wall Street companies and who are always profitable.

In fact, one of the problems in daily trading at home or in a mall is that the big Wall Street gamblers simply have a huge technological advantage over you. They have the ability to react more quickly to market fluctuations and you will probably not detect patterns or irregularities better than some of their algorithmic trading systems, even with the best trading platforms offered by online brokers.

Think of it like that. If you are a phenomenal driver, you will not try to drag a Ferrari for a minivan. Your talent is not a big advantage if you use a lower technology.

Most day traders lose money

Between these factors, day trading is apparent to the game in a casino. Even if you control your emotions, the odds are definitely against you and, over time, your disadvantage becomes more and more difficult to overcome.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Four university professors published a report of research in May 2011 in which they analyzed long-term day traders' success rates and found that every year, only about 13% of day traders realized profits. 1% of day traders are always profitable year after year. "data-reactid =" 61 "> Four university professors published a research report in May 2011 in which they analyzed the success rates of day traders in the long term.% of day traders make profits. , less of 1% of day traders are always profitable year after year.

The surest way to make money on the stock market

Fortunately, there is a proven way to make money with stock, but it is not day trading. Long-term investments with purchase and maintenance are by far the safest way to access wealth.

With a solid long-term investment strategy, you will not double your money in the next few months and you will probably not be able to quit your job and make a profit from it sooner. However, over time, the results can be quite impressive.

Keep in mind that the S & P 500 has consistently had an annualized total return of 9% to 10% over long periods of time, depending on the exact number of years you are reviewing. If you invested $ 5,000 in a S & P 500 Index Core Fund 30 years ago and you invested $ 5,000 more each year in your investment, you'd be sitting on a near-death pit. $ 750,000 today. And that's if you simply match the market performance.

<p class = "canvas-atom web-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "If you're thinking about entering the stock market, I strongly encourages you to consider open an account with an online broker and adopting a sustainable buying strategy. Data-reactid = "66"> If you plan to go public, I advise you strongly Encourages you to consider opening an account at an online broker and adopting an investment strategy with purchase and retention. Let the day trading professionals.

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