Movies like The Wolf of Wall Street glamorize the role that day traders play in the investment world. The success of day traders makes many people stop and wonder, what is day trading and can I be successful at it too? Let’s stop and set the record straight. 90% of people who start day trading lose money and stop trading within a year of starting. Got it? They lose money not because they didn’t stick to their strategy, or got the wrong coach, or didn’t do enough research. The odds of succeeding as a day trader are just astronomically low for the average person who considers the prospect.
What is Day Trading?
Anyone who buys or sells a securities position within a single day is known as a day trader. Performing four or more of these trades in a five-day period will establish you as a pattern day trader according to FINRA regulations. Day traders aim to produce several profitable trades over the course of a day.
Is it Possible to be Successful While Day Trading?
Day trading sounds fun and exciting on the surface when you think all there is to it is buying low and selling high. Earning profits on day trading is of course, easier said than done, for many different reasons.
Mistakes Day Trading Newbies Make
Many newbie traders forget to calculate their commission fees for day trades, which can kill profits. Since day traders are looking at razor-thin profit margins, missing expensive broker fees can kill any trade you make. Commission-free brokers like Robinhood do exist, but they don’t offer any advanced trading tools.
Commissions can sneak up on established day traders who didn’t prepare for the eventual cost. Many brokers offer a commission-free period of 90 days or longer. After establishing a routine of making 15 round-trip trades per day (30 total trades) for 90 days, you may forget the broker charges $4.95 per trade. Suddenly a day of trading razor thin margins has an overhead cost of $148.5 per day of trading. Ouch.
Additionally, the bid-ask spread of a stock is continually working against a day trader’s favor. You will need to overcome the stock’s current bid price just to break even on a stock before you make a profit. Not accounting for this spread can result in losing money without realizing where it’s going.
Should I Start Day Trading?
Starting day trading should never be a solution to money woes you already have. You’ll need a sizeable account to be a successful day trader, which means you should already be comfortable with investing. If you want to start investing for the first time, consider long-term investing to learn the ropes before you begin your day trading adventure. Day trading is not for everyone. Executing a strategy flawlessly when emotions are running high is nearly impossible. But easing yourself into the world of investing with traditional investing is a good way to keep your head above water while you learn more about day trading.