Most aspiring day traders imagine trading from a beach or in their underwear. They imagine making millions of dollars in a short amount of time as they have seen in movies and online advertisements.
New day traders are told that they can be their own boss. They don’t have to dress up and show up at work at 8 am. They will have no bosses and no annual performance reviews. There will be no office politics to deal with.
With almost every brokerage firm offering zero-commission trades, the cost of trading has become lower in recent years. While most traders still have costs associated with trading platforms, software, and taxes, the cost to trade has never been lower. This tempts a lot of people to start day trading.
The basic day trading skills such as reading charts and company financials, understanding news flows and mastering trading platforms are easy to learn. More data is available for free from brokerage firms compared to 10 years ago.
Why Almost Everybody Fails in Day Trading
While the heading above may sound provocative, it is actually true. Consider the following trader statistics.
- Research shows that more than 75% of traders quit within 2 years. After 3 years, 85% quit day trading.
- Less than 2% of traders are profitable. In other words, 98% of traders are never profitable. Many traders don’t just lose money, they bust their entire trading accounts in a few months.
- Traders with a 10-year negative track record continue to trade. These traders are either addicted to trading or have a false notion of their ability to trade profitably.
- Traders tend to sell winners and keep losers. This doesn’t help their bottom line.
- While most traders underperform the markets, active traders underperform by the market index by more than 6%.
- Most traders prefer stocks with lottery-type features. This behavior towards high volatility stocks is especially pronounced during recessions. (Research)
- Investor overconfidence (especially after a string of profitable trades) causes them to over trade, resulting in losses.
Challenges in Day Trading
The psychological aspect of trading is hard and comes only with time. Most day traders quit or burn out before then, and never make it in. You can learn some parts of psychological trading from a book, but most of the learning happens in practice.
Most traders don’t have good mentors and take a do-it-yourself approach. They also don’t realize that trading advisory services don’t make money from trading themselves. They make money selling courses, newsletters, and other services.
In a market dominated by high-frequency traders, and hedge funds, a small trader is at a significant disadvantage. They simply don’t have the coaching, and the tools to succeed.
Day trading is lonely and very tiring. Looking at a monitor for even a few hours a day can be exhausting.
While your $65,000 job may be boring, it is better than day trading. It’s a tough one for most people to accept. You will survive at your job for much longer than you will survive day trading.
If you are hell-bent on day trading, don’t quit your job. Set aside a small amount of money, and trade for fun. But keep your job or try another work from home side-hustle that is more sustainable than day trading.
Have you made money day trading? What is your return over a 5-10 year period?