Why most people lose money in day trading?

Summary

  • Trading has evolved a lot in the last couple of decades, as the Internet created an opportunity of using automated trading systems.
  • The automated systems have attracted a significant number of new investors that previously did not know about the marketplace, but were promised big money, quickly.
  • Day trading, considered a controversial way of trading, allows ‘shareholders’ to make multiple purchases and sales in one day, with a potential to earn impressive returns.
  • However, according to a research study, more day traders lose money than those that make a profit from it, as it involves a considerable amount of risks and additional fees.

Nowadays, the stock market and share trading do not need to look like a scene from The Wolf of Wallstreet.

Trading evolved a great deal since the last century with the appearance of Internet and automated trading apps – that way, shareholding became more available even for laymen, not just experienced people that have spent years learning about the market volatility.

ALSO READ: Six Tips to Improve Your Trading Skills

However, even though trading in stocks may seem like an extremely profitable business over a short period, it brings a significant amount of stress and losses as well if the cards are not played correctly.

That said, some investors may choose to follow a career in day-trading because they would want to earn a lot of money easily and quickly. However, a research study has shown that more than four-fifths of day traders do not make profits over one year. The study also highlighted that nearly three out of four day traders quit trading in less than two years.

What is day trading?

When one mentions day trading, one usually describes active trading that represents buying or selling assets within one day. It often means making multiple transactions throughout the day. This type of trading is usually done in stock markets and the foreign exchange, even though it can occur in any market.

Day traders, in general, have considerable knowledge of the stock market and have a lot of funds to support day trading. Their strategies are concentrated on short-term situations while investing high sums of leverage. Day traders’ main focus is high-liquidity currencies and shares.

Following daily news about the marketplace is a popular tactic that day traders use for trading, as it appears to be the best way for understanding short-term events. However, day trading does not equal investing in stocks.

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Day-trading strategies

There are four day-trading strategies that are popular among day traders:

  • Scalping – making many small profits out of small prices that change the stock value within one day
  • Range trading – day traders decide whether to buy or sell depending on resistance levels and support
  • News-based trading – as previously mentioned, day traders like to follow the news for the newest updates on the marketplace
  • High-frequency trading – as known as HFT, complex algorithms determine all the short-term risks that could potentially happen after buying or selling

ALSO READ: Your Ultimate Guide to Online Share Trading!

Investing vs day trading

When shareholders invest in shares, they expect to gain profit over time from a company or a business they invested in. Before deciding where to invest, investors tend to do their homework about the firm, especially if the firm’s debts are paid for and if the business has a good growth strategy.

On the contrary, day traders try to pay a low price for stocks or currencies and then sell them at a higher price. Buying and selling occur in high-liquidity markets over a short period. When compared to other investors, day traders are not looking into the business or the strategy – their only goal is to make a quick profit and not get attached to the company.

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An Australian example

If Australian day traders decided to buy a specific value of stocks, e.g. in the morning, they would hold on to the shares until the demand gets higher. By doing so, day traders are expecting to earn a lot more money than they previously “invested”.

Within a short span of 10-15 minutes, that situation may occur, and day traders will sell the shares. When the final profit is calculated, day traders need to give up some of it on the brokerage fee and tax.

In Australia, the average fee for online brokers may vary between A$20 and A$100, depending on how much money the sale brings.

But most importantly, the Australian government introduced capital gains tax (CGT) that is also applied to the amount of money made from selling the stock and the time that the stock was held on. That said, calculating the tax rate beforehand might be the most crucial part when day trading.

Even though the presented situation may seem like a waste of time because a lot of money is lost on additional costs, it is important to stress that day traders make multiple transactions through the day. So theoretically, they will make a lot more money than an average Australian makes on a 9-5 job.

Is day trading profitable?

Despite how attractive day trading appears in theory, it is risky to get involved in it. The strategy is also one of the most debated trading strategies on Wall Street.

There have been many infamous Internet scams that fooled day traders, promising loads of cash, quickly. A possible reason for falling for this kind of a scam is not having enough knowledge about how real trading works.

However, day traders that have great expertise in the marketplace do exist and seem to make a substantial profit out of this particular strategy.

Day trading involves significant risk of loss and is not recommended by economists and financial advisors. They claim that this type of trading is not very profitable because of many additional fees and possible scams.

As mentioned in the article earlier, nearly 75% of the day traders back out and exit the industry in less than two years. This is primarily because a considerable number of traders fail to make profits in the initial phase.

According to the research, day traders tend to be overconfident, hence why most of them lose all or most of their money. For example, day traders will believe bad luck has gotten to them so they will try and buy or sell another stock. That situation is also called overtrading and is considered as having a lack of discipline, which is one of the essential traits an investor should have.

DID YOU READ: Are Behavioural Mistakes Common to The World of Investing?

In conclusion, day trading is not for everyone. Every day trader needs to be prepared for potential risks that may occur and needs to understand all the strategies that the marketplace requires. While some claim they earnt a lot of cash while day trading, statistically, there are a lot more who lost more than they earnt. So just in case, be wary of all the difficulties day traders may experience before getting involved in day trading.

GOOD READ: Pros And Cons Of Intraday Trading  

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