What Are The Pros And Cons Of Day Trading (Is It Worth It?) – Quantified Strategies – Trading Systems , Indicator, Backtest, Technical Analysis, Data Driven Statistics

Last Updated on June 19, 2022 by Quantified Trading

Day trading is popular and many are dreaming of striking it rich. The chances of striking it rich should be better than ever before, right? Free commissions, crypto trading, plenty of news, bell, and whistles make sure of that? You can even put up much less money than if you do swing trading or long-term investing. Is it any reality in this? Let’s look at some of the pros and cons of day trading.

The pros of day trading are high turnover of capital, potentially fewer and smaller drawdowns than investing, you can utilize leverage, and you can exploit the law of large numbers to your advantage. Sadly, there are cons of day trading too: you can’t participate in the long-term upward drift in most assets, commissions and slippage can be ruinous, and you need to devote a lot of time (opportunity cost).

The chances of striking it rich as a day trader are very slim. Most likely, you’ll end up poorer than you started unless you have a clear plan of how you are going about it. You need a defined trading plan, a strong work ethic, a systematic mindset, and you need to devote a lot of time. If you can manage all that you might avoid being among the great majority who lose money day trading:

What percentage of day traders fail

Table of contents:

Why do you want to day trade?

Before you start thinking about day trading you need to ask yourself why you want to day trade in the first place.

When I talk to the publisher about the books I have written, he says people are crazy about day trading. I am also fascinated by this fancy for day trading. Is investing too boring? Do we like to “gamble”? Do we need excitement? Punishment/SM (for those who lose)?

Personally, I like day trading better than investing, even though I do both (but I have scaled down day trading over the last five years). I am certainly not a “gambler” – I consider myself very rational. If I saw a bigger potential in investing for the capital I allocate to day trading, I would certainly switch. Both day trading and investing have their pros and cons. If you are unsure, please read our article called trading or investing – what is best?

However, to help you get started I think anyone considering daytrading should have a look at the pros and cons of day trading underneath:

The pros of day trading:

Let’s start by looking at the pros of day trading:

High turnover of capital

A good day trader is capable of making insane returns on the capital invested (if he or she is good). This requires a high turnover of capital.

How much?

Probably at least once a week your total equity should be turned over. For example, if your capital is one million USD, you’d buy (or sell) at least one million per week. The best traders probably turn over their capital once per day.

Why is high turnover a requirement? Because of the law of large numbers:

The law of big numbers in day trading

If you have a positive expectancy, you would want to turn over your capital as much as you can. This is pretty obvious.

Despite this simple fact, a lot of traders focus on psychology and risk management. Yes, risk management is an important part of trading, but first of all, you need to find a trading edge that has a statistical positive expectancy “naked” before you start thinking about management and any gain by knowing yourself.

However, my experience is that most traders don’t have a positive statistical edge in the first place. No psychological advantage can ever replace that. How can you utilize the law of large numbers if you have no edge?

Is focusing on psychology overrated in trading? Do this instead

Day trading involves smaller drawdowns

Drawdowns are what make most traders and investors quit. Seeing your capital shrink by 50% is gut-wrenching, to say the least. My experience is that most people start questioning their strategy even at drawdowns much smaller at 20%. Then you start doing behavioral mistakes.

Even if you have the best strategies and edges you can possibly have, they will not make money all the time. Traders stop trading good strategies because of drawdowns:

Day trading can reduce drawdowns. If you are good and trade your edge(s) by using the law of large numbers, you might have significantly smaller drawdowns.

For example, during the great financial crisis in 2008/09, I had my best period as a day trader. Perhaps counterintuitively, I made most of my money on the long side,

By day trading you have less risk of having adverse news going against you (most news comes outside market hours). This could be an advantage, even though you don’t ride the tailwind from rising asset prices.

Day traders can use leverage

If you have an edge and you are confident you know the risks involved, you would want to use leverage – perhaps even lots of it. Leverage for day trading is basically free. Prop trading offers you some serious leverage if you can prove you are any good.

Day trading offers mental and intellectual challenges

Day trading is difficult, but that makes it more rewarding when you are successful!

My own personal opinion is that the best part of trading is sipping coffee while testing out new ideas. The execution of trades is not particularly interesting, and besides, it’s all automatic.

The cons of day trading:

Unfortunately, there are many cons and drawbacks involved in day trading. Here are a few of them:

Day trading doesn’t take advantage of the long-term upward drift:

I have documented the overnight edge in the stock market (and the gold price). By day trading, you are not taking advantage of this “low hanging fruit” that exists in many asset classes.

The chart below shows the return by being invested only from the close to the next day’s open in the S&P 500:

The edge is massive.

Opposite, the average gain from the open to the close is negative over the last 30 years. Day trading is basically a zero-sum game.

Day trading requires time and commitment

If you are serious about day trading you need to commit both time and capital. This has an opportunity cost:

Perhaps you would be better off just buying some index funds and focusing on your day-to-day career in a regular job?

Most day traders would certainly be better off if they focused on their day-to-day job.

Also, there are too many trying to day trade while having a job at the same time. I say: forget it.

You cannot day trade and work at the same time. There is just a small chance that will work, and you end up having an angry boss. You need to treat it as a profession and have a solid plan. Having a completely mechanized approach might work, but you still need to allocate time in the evening to do research.

Commissions and gearing can be ruinous

Gearing can be an advantage, but losses multiply if you get it wrong. Commissions are also ruinous in the long run.

Many believe zero commission might help the day trader, but we can argue otherwise. The most likely result is that you overtrade because it costs “nothing” to buy and sell.

Market noise is a big con in day trading

Most of the action intraday is just plain noise. Most of the headline news is published before the opening bell, and most of the trading day is just noise. The reasons why traders and investors buy and sell are endless, and it requires a great intellect to find any real patterns that can stand the test of time.

You need software resources

You also need to pay for software and trading tools/data. It all adds up in the long run.

The pros and cons of day trading – ending remarks

My opinion is that most day traders underperform the market, even go belly up. Lack of consistency, time, resources, weakness of the methodology implemented, commissions, connectivity, automation, etc. makes things very difficult. And last but not least, you need to have a real passion for trading to make it work for you.

However, for those willing to put in the time and effort, there are great opportunities if you truly understand the concept of having a statistical trading edge (we have a day trading course that might help you get started).

At the end of the day, only you on your own can judge whether day trading is the right option for you. Nevertheless, I hope that this brief discussion about the pros and cons of day trading has given you some leads.