Is day trading a good idea? At odd intervals, usually after the markets have risen for an extended period of time, day trading seems to get a lot of attention. 2021 seems to be one of those years.
And we can’t blame people for dreaming about day trading: the markets seem to go only one way, and that is up. All is easier when it keeps going up! And who doesn’t get tempted when they see green profit and loss diagrams published on social media?
But you have to ask yourself:
Is day trading a good idea? Is it worth it? Unfortunately, for most people, it’s not. We explain why.
Is day trading a good idea? Is it worth it?
We were purely day trading stocks for about 17 years, but have since stopped almost all day trading.
The reason is simple: the risk and reward got worse, and the easy prey was gone. We are agnostics and we stick to strategies where we can make money with the least risk and effort. We are not day traders for the sake of day trading, that doesn’t make sense.
You have to ask yourself:
Why do you want to day trade?
We assume the answer is to make money.
But what makes you think you can make money day trading?
We suspect it’s the lure of social media and the fear of missing out (FOMO). Many traders put huge pics of their profits (seldom losses), and many get the impression it’s doable.
Of course, it’s doable. But what are the odds? The problem is that you see the winners, not the losers – we fall prone to survivorship bias. No one likes to publish losses and admit defeat. However, you might like to read how I made money day trading.
What percentage of day traders fail? Statistics indicate that 90% lose money. In the long run, most day traders fail and make no money. A lot of research indicates that. As a matter of fact, you face a much bigger chance of losing than making money.
How many succeed? The research we have seen indicates less than 2% make any significant amount of money.
Why is day trading popular?
Because of Covid, many are sent home to work remotely and have idle time to fill. Brokers are experiencing a dramatic influx of new account openings, and many of those are dreaming of striking it rich by day trading.
We are currently setting up a new account with Interactive Brokers. After three weeks of waiting, we got this reply:
We are experiencing a large influx of new applications. As a result, it may take longer than expected to complete the review of your account application.
From 1Q 2020 to 1Q 2021 Interactive Brokers increased the number of accounts by 74% to 1.33 million!
There is no doubt we’re in a speculation frenzy. In any speculation frenzy, the numbers of day traders increase.
If you want to day trade, do this:
Before you start, make sure you have an idea of how you’re going to make money.
Unfortunately, we don’t have any explicit answers on how to make money day trading, but we shared some advice a few years back:
We believe this article is still valid if you’re serious about day trading or trading in general.
If you want to day trade, don’t do this:
Social media is abundant with traders showing huge P/Ls. Ignore them. Most of them have been lucky and will later give back some or all of the profits. Yes, it shows it can be done, but you have no idea how they managed to make the profits. Most of them are simply riding a bull wave. When it ends, they make no money.
If you want to day trade, only use the money you can afford to lose:
You’ll most likely encounter headaches and desperation as a day trader. Make sure you are trading money that is not important to you and that you can afford to lose.
And always make sure you set aside some money for long-term appreciation in mutual funds: trading or investing – what is best?
No commission and an abundance of bells and whistles are a bad combination
You might think low or no commission is good. Most likely it’s not. It gives you incentives to trade more.
Trading apps on your phone and zero commission set the bar low to open an account. Inexperienced and naive traders can start trading in minutes, and this is unlikely to end well. Some argue it’s “democratized”, but is it really? We suspect this good business for the few, but not for the many.
Make sure you don’t get tempted to do anything foolish with your hard-earned money. Again, make sure you have a plan before you start. Don’t let the fear of missing out make you do things you will regret.
Is day trading a good idea? Conclusion:
We have explained why we believe that day trading is a bad idea for most people and is most likely not worth it.
If you’ve never traded before, day trading is not the place to start. Without experience, you are most likely an accident waiting to happen. This, of course, applies to all kinds of trading strategies and styles. However, with day trading the speed can make you a lot poorer faster.
