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Day Trading - An Online Way to Fortune or Disaster?

Everyone knows the term "day trader", but have you ever actually met a day trader?  Taking large positions every day in the stock market, watching money come and go in seconds, making huge percentage gains, working from home and finishing work in just a few minutes a day!  Sounds pretty exciting right?  Well, here is our view on online day trading.

What is day trading?  Day trading is a form of trading whereby securities are bought and sold in short time periods, and all positions are closed before the end of the trading day.  The securities traded can be stocks, options, currencies, futures, ETFs or any other exchange traded asset.  Some day traders hold securities for a few seconds while others hold them for a few hours, however, they all make short term trades.  Some make hundreds of trades per day and others make only one.  Since the online investing boom in mid 1990s, day trading has become very widespread and has moved out of financial institutions so that anyone can attempt it.  Furthermore, the historic rise of the stock markets in the late 1990s where fortunes were made every day (until the bubble burst) added to the glamour of the job and also greatly increased the number of day traders.

What are the strategies employed?  Day traders take on many different strategies.  Some look for stocks in the news or that have momentum in them, and then trade them based on that momentum.  Another strategy is to put in nearly simultaneous buy and sell orders at slightly higher and lower prices than the current bid and ask, whereby a fraction of a cent can be made in just a few seconds.  Although minimal in nominal terms, multi-thousand share trades can be quite profitable.  Some day traders follow technical analysis techniques to try to predict moves and then trade in and out quickly to try to profit.  There are dozens of different techniques that can be used to try to profit through very short term trades.

Can you make a living day trading?  This point is worth arguing.  Because the market is seemingly efficient and unpredictable, day trading seems unlikely to generate long term positive returns, however it is also easy to point out that stocks follow trends and have momentum.  Also, I've heard people talk about knowing and seeing day traders that do very well.  We've known a few day traders, but none of them are still day trading today.  In fact, we don't know of anyone that was able to stick with it for very long.

Is day trading investing?  Day traders might disagree, but day trading is not investing.  Investing is when you purchase something for its financial merits and hold the investment to capitalize on its value.  Day trading is often buying and selling stocks of companies that they know nothing about, hoping to capitalize on a short term movement in the price, not on the companies merit.

Does day trading work?  Despite claims to the contrary, we don't believe that day trading works.  By definition, the stock market cannot be predicted.  If someone could predict it with just 51% accuracy, then that person could become a billionaire with their trading.  It may be possible that some methods of day trading work for a short while, but as soon as the secret is shared with someone else, the benefit is gone.  And because when the markets change momentum, day traders are also caught in their trades.

 


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