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The Perils Of Day Trading
Day Trading refers to the practice of 'scalping' for quick profits; entering and exiting trades on the same day - whether in stocks, futures, derivatives or commodities.
What's the easiest way to return from a casino with a Million Dollars? Simple - go there with Two Million! The closest stock market equivalent of a casino can be described in two words - "Day Trading". Essentially, Day Trading refers to the practice of 'scalping' for quick profits; entering and exiting trades on the same day - whether in stocks, futures, derivatives or commodities. Put simply, it's a perilous path that will lead to losses with a near mathematical certainty.
When well begun is not half done!
The journey of a Day Trader usually begins with what we can call "beginner's luck". Goaded by the prospect of making a quick profit (which will be available for immediate spending, wow!), stock market enthusiasts make a foray into Day Trading. Some early trades might in fact go off successfully, and believe it or not - this turns out to be more of a curse than a blessing! In that sense, early losses incurred in one's Day Trading career might actually be a blessing as they would deter the trader from participating any further in this dangerous hobby. The thrill of a quick buck combined with the heady euphoria of early success often keeps Day Traders in an "optimistic" frame of mind until they've wiped out their entire capital.
What are the odds?
Numerous studies conducted across global markets have returned a unanimous verdict - most Day Traders will end up losing copious amounts of money, while the odds of making money are paper thin. A report by the North American Securities Administrators Association (NASAA) found that "70% of day traders lose all the money they invest" and from our own observation, around 90% of Day Traders get 'washed out' within 3 months. It doesn't take Einstein to figure out that those are not great odds!
Why do most Day Traders lose?
Firstly, markets are extremely volatile and unpredictable in the short term. Even advanced technical analysis models are highly unlikely to be able to predict where markets are headed in the next half hour or two hours with any serious degree of certainty. This may lead to the Trader booking multiple loss making trades in the space of a few hours, leading to a disturbed and emotional frame of mind which surely isn't conducive to rational decision making. The result - more rash decisions, more losses!
Secondly, the inability to adhere to strict 'stop losses' often leads to Day Traders digging their own graves, as market may move up or down against their expectations with the velocity of a freight train. This often leads to the 'sunk cost fallacy' mindset clicking firmly into place - which sadly leads to total losses more often than not.
Thirdly, Day Traders incurs huge brokerages due to their unusual trade volumes (the side effect of leveraging). These brokerages eat into their cash and further exacerbate their trading losses. To top that off, even the profits earned aren't tax efficient.
Who wins? The broking house!
Ironically, Day Trading is a gamble for everyone but the broking house - which will make money irrespective of the profits or losses incurred by the client! Watch out for brokers who encourage you to Day Trade in order to pump up trade volumes for their own benefit.
Can anyone really succeed at Day Trading?
In short, it's highly unlikely. The odds are stacked against you big time. There are a small handful of Professional Day Traders who have perfected their models after years of burning cash; and they adhere very strictly to trading plans and stop losses. You'll be far better off widening your trading timeframe (to a few days or weeks). Or even better - why not evolve into an investor instead of being a trader?