The Difficulties of Making Money by Day Trading
Why Day Trading Mostly Doesn't Work
When you look at a price chart—whether it be for a stock, foreign currency pair, or futures contract—it seems like it should be pretty easy to make money. Often, when day traders first get started, they focus their attention on the big moves and think, "If I had gotten in there, I could have made a fortune."
Adopting such a perspective can lead many people to think day trading is relatively easy and a quick way to riches. Day trading can provide significant income if you know how to go about it. However, for most people, the required amounts of time spent learning and practicing prevent them from gaining enough experience to become consistently profitable with their trades.
Day Trading Success Rate
It's a challenge to turn a profit through day trading, and although every day trader believes they can make money, most people who attempt day trading end up with a net loss. You can improve your odds of profitable trading by understanding the risks that can lead to losses and by getting past the assumption that day trading is easy.
Need for a Robust Method
One reason traders might lose money is the absence of a solid trading strategy. Simply looking at a chart in hindsight is not an effective way to create a profitable plan. If you develop a robust strategy, it can be used in many market conditions and can even inform you when to stay out of the market because the conditions are not favorable.
An effective strategy helps prepare you to take action before a profitable opportunity arises, not after. The goal of your strategy should be to uncover patterns and trends that point to trading opportunities that could deliver positive returns. Without doing that research, your results might be largely determined by chance.
Taking Time to Practice
Many novice traders fail to understand that day trading takes a good deal of time to learn. Putting in a few hours of research without consistently committing time to day trading won't make someone a successful trader.
You'll need to practice day trading while maintaining another job unless you have money set aside to cover your expenses for several months or more. It is highly unusual for day traders to produce income right when they get started. Most day traders don't see their efforts result in enough profits to pay themselves any type of income for many months.
Whims of the Market
Numerous issues and situations contribute to making the market difficult to gauge and navigate. Taking the time to learn and understand what triggers shifts in trading activity can better prepare you to respond to those changes.
- Learn to control your financial risk in case you make a wrong conclusion about the direction of a trade, by putting a stop loss on your trade. Think of it as setting a threshold to help mitigate the amount of money you may lose while pursuing trading opportunities.
- Understand that you can't always get the exact price you want when trading, especially with market orders. Heavy trading activity might push a price away from your precise target before you can react. You can choose to skip what might still be a good trade or accept the less-than-ideal market price. Both options will reduce your theoretical profit on the trade. Even if you use limit orders, you may get filled for only part of your order on winning trades (the market runs away before filling the whole order) but end up with full positions on your losers (the price is moving against you, so, unfortunately, you always get your full order).
- Understand that the market is composed entirely of other people trying to make money or fend off losses (hedgers). People who are very good at trading look to take advantage of the orders that are placed by inexperienced traders. Veteran traders look for prices they believe allow them to leverage some potential in the asset that others have overlooked and that will provide a good entry or exit point for them.
Greed and Fear
The individual desires and intentions of day traders can substantially influence the outcomes of their efforts. A bit of success can lead to greedy actions that stray from an established trading plan. These can include taking action too soon, holding on to a profitable gain for too long, or not cutting losses soon enough in a losing trade.
Fear can likewise cause day traders to hold back too much when an opportunity is in the making. They might also sell in a panic in response to breaking news without taking into account all of the other factors at play. Forming a solid trading strategy has the huge benefit of keeping you focused on your results without being swayed by emotions.
Journal of Financial Markets. "The Cross-Section of Speculator Skill: Evidence from Day Trading," Page 1. Accessed Jan. 29, 2020.
Journal of Finance. "Financial Speculators' Underperformance: Learning, Self-Selection, and Endogenous Liquidity." Accessed Jan. 29, 2020.
Securities and Exchange Commission. "Day Trading: Your Dollars at Risk." Accessed Jan. 29, 2020.
Securities and Exchange Commission. "Investor Bulletin: Stop, Stop-Limit, and Trailing Stop Orders." Accessed Jan. 29, 2020.
Securities and Exchange Commission. "Limit Orders." Accessed Jan. 29, 2020.