Why Day Trading Is a Terrible Idea
Investing success is built upon the idea of buying an asset at a discounted price, and then holding it for a long period of time as the value of the asset steadily rises due to the expected risk premium inherent in holding your capital in a risky asset. Eventually, over many years, the asset will be worth much more than the initial purchasing price, and the investor can liquidate the position at a very profitable price.
Trading is different, because there is no expected risk premium. It is inherently very short-term and, in effect is a zero sum game. What one trader gains, another loses. Trading involves buying or selling an asset with no consideration of value. Typically, traders are making buy and sell decisions based on some form of technical analysis.
Every year, thousands of Americans try their hand at the day trading gig, and each year, thousands of Americans lose a ton of money day trading. The reality is that day trading is a terrible idea, and it gets worse the longer one does it and the more capital that one foolishly employs. There are numerous reasons that day trading just doesn’t make rational sense. For example, transaction costs erase profits on a regular basis, the stress level is incredibly high, and it is virtually impossible to succeed over the long-term. It is just a game of luck and luck is increasingly likely to run out the longer that one plays.
Although each of these reasons is substantial, they still are not the primary reason why day trading is a terrible idea. The ultimate reason is because the very nature of day trading virtually dooms a person to guaranteed failure over the long-term because the old cliché, “Cut your losses short, let your winners run,” is completely ignored.
But I Just Want To Be Rich
There are quite a few financial market professionals on the Forbes list of America’s wealthiest individuals. Most got rich selling products and services. A few folks like Warren Buffet, George Soros, Paul Tudor Jones, John Henry, Ray Dalio, and John Paulson—just to name a few got rich through investments. Now, some traders get all pumped up when they hear that real traders, such as Tudor Jones and John Henry are on some of these lists. Those guys started in the trading pits, and now are rich.
The truth, however, is that these guys are not day traders because they realize that the absolute key to trading success is to capture huge winning trades from time to time that are able to compensate for and outweigh the significant costs of trading (losing trades plus commissions). More importantly these traders really got rich trading “OPM” (other people’s money) levered up with debt, which always extracting fees – whether the assets of other people actually made or lost money.
Day traders are doomed because the very nature of their trading style (all positions are closed each day in order to avoid overnight risk) makes it impossible to ever catch a sustained trending trade. This significantly reduces the profitability potential of a trader, and it makes wild financial success very difficult. It’s akin to trying to run a small business and not contracting the best merchant services online. Paying high fees for no reason just does not make sense.
If one wants to take an active role in managing one’s own money, then it is essential to consider ditching any idea of day trading and stick to never trading unless one actually needs the funds. The correct holding period for an investment is forever. Day traders attempt to capture short-term trends, but have no information. They just get eaten alive by professional traders with more knowledge. Day traders lose their lunch money to the financial bullies of greater Wall Street one day, and then bring more money the next day – never figuring out that the bully will be there every day. Any good day for a day trader is a day when Wall Street professionals were busy lightening the wallets of a slew of other day trading suckers.
Tags: investment expenses
Personal Financial Planning
- Develop Your Own Personal Financial Planning Skills – Step 1 of 10 Financial Planning Steps in the Right Direction (You are completely responsible for your financial and investment success or failure. Delegating investment decisions to industry advisers largely on naive faith and hope without adequate personal knowledge, attention, and control can be very risky to your personal and family welfare. The only practical solution is for you to increase your personal investment knowledge and [...])
- The Investment Returns You Lose to Investment Sales Loads (VeriPlan automatically tracks returns lost to investment sales loads
Many justifications for investment sales load charges might be offered by financial advisors during the sales process, but once a front-end load is charged, your diminished portfolio will 'forget' about the load charge for the rest of your life.
Loads become 'phantom' assets, which are rarely spoken of [...])
- What is a Well-Diversified Investment Portfolio? (A well-diversified portfolio contains a very large number of individual stocks and/or bonds that are selected without bias toward particular economic segments.
A fully diversified portfolio will approximate the global publicly traded securities markets.
The question about diversification most frequently asked by individual investors is “how many stocks or bonds do I need to be well-diversified?” While [...])
- The most effective strategy to increase your mutual fund and ETF investment returns (
What is the most effective strategy you have to increase your long-term mutual fund and ETF investment returns?
Just reduce your investment fees to rock bottom and buy directly to eliminate all sales loads. This strategy is both simple and entirely within your control. You do not have to be smarter than all those other smart [...])
- American Funds – The Investment Company of America – Class A Shares (AIVSX) net a +3 Fund Authority Score (Fund Authority Scores rate mutual funds and exchange traded funds (ETFs) on the most important economic factors that influence individual investors' net long term diversified investment fund performance. The Skilled Investor developed the Fund Authority Score system to provide individual investors with concise and objective summaries of mutual funds and ETFs for comparisons within investment [...])
- Be Wary of New Investment Asset Classes (
Hear ye, Hear Ye, individual investors: Be wary of new investment asset classes - A Tip from The Skilled Investor
Many promoters in the financial services industry have shown a strong proclivity in recent years to invent and to market supposedly "new" investment asset classes. Industry advocates will claim that these new asset classes deserve some [...])
- Diversify fully within asset classes – Step 4 of 10 Financial Planning Steps in the Right Direction (CLICK HERE TO READ THE SKILLED INVESTOR's OTHER ARTICLES ABOUT THESE "10 FINANCIAL PLANNING STEPS IN THE RIGHT DIRECTION."
Diversification is genuinely an investment “free lunch,” and it is a key contributor to improved investment risk management.
Diversification has become an axiom of personal investing, because the specific risks of businesses and other investment entities can be [...])
- Excessive Investment Expenses Take 2% of Individual Investor Assets Every Year (Excessive investment expenses take 2% of individual investor's assets every year
Year after year, millions of people lose large amounts of money on unnecessary and unproductive investment costs and investment expenses.
The typical investor loses about 2% of portfolio assets every year by paying too much and getting too little in return.
This wasted 2% is not a [...])
- The Heavy Burden of Recurring Investment Expenses and Fees (
The heavy burden of recurring investment fees (Part 1 of 2)
Recurring investment costs can significantly impact the long-term value of your retained investment portfolio assets.
Recurring fees, such as asset management fees, 12b-1 marketing fees, and advisory/asset custody fees are charged periodically, as a percent of your investment assets. The relative cost-efficiency of your investment portfolio [...])
- Assess your personal investment return and risk preferences – Step 3 of 10 Financial Planning Steps in the Right Direction (CLICK HERE TO READ THE SKILLED INVESTOR's OTHER ARTICLES ABOUT THESE "10 FINANCIAL PLANNING STEPS IN THE RIGHT DIRECTION."
Investors with different levels of risk tolerance are more satisfied with investment strategies that are better aligned with their risk preferences.
Differences in investors' personal risk tolerances mean that more risk-averse investors are personally more satisfied with a [...])
- Commentary on How Many Mutual Funds are Needed for a Well-Diversified Portfolio (
For holding periods of many years, diversification improves dramatically, when you hold multiple actively-managed mutual funds in an investment portfolio.
In "How Many Mutual Funds Constitute a Diversified Mutual Fund Portfolio?," Professor Edward O'Neal of the University of New Hampshire at Durham tackled the important question of how much an investor could improve on diversification by [...])
- Analyze Multiple Personal Financial Planning Decisions Simultaneously with VeriPlan (VeriPlan allows you to analyze multiple personal financial decisions simultaneously
Personal financial and investment decisions are complex, because so many different factors are in play simultaneously. When an integrated financial software application like VeriPlan is developed by people who understand scientific financial projection methods, all these different factors can be measured and automated on a modern [...])
- Objective Personal Finance Answers Are Hard to Find (The Problem - Straight answers about personal financial planning and investment management are difficult to find
In this article, The Skilled Investor summarizes some of the significant problems faced by ordinary individuals, when they attempt to plan their family finances. This is the first in a series of articles that will provide scientifically grounded decision rules [...])
- The Quality and Cost of Advice Paid by Investment Sales Loads – Part 2 (
Can you really get free and objective investment advice, when you pay investment sales loads? (Part 2 of 2)
Excessive investment costs and investment expenses are a plague on your lifetime personal financial planning.
Excessive investment expenses are one of the most significant barriers to lifelong family financial security. While financial services industry sales people tell you [...])
- Does it matter how financial planners and investment advisors are paid? (
Yes, it can matter significantly how a financial advisor is paid.
The heart of the compensation issue is an advisor’s potential "conflict of interest" with respect to payments from third parties. Does third party compensation change the quality of the recommendations that the advisers make? If an advisor works on sales commissions or accepts other third [...])