There is more than one way to approach the stock market and many different schools of thought exist on how to best make money buying and selling securities. One such method that often gets a lot of attention is day trading.
On one hand, day trading is lauded as the best way to get rich quickly and on the other hand, there are countless warnings about the dire risks of day trading. With so many conflicting viewpoints around this method of investing, day trading can seem almost mysterious at times. So, let’s try to dispel some of that mystery by taking a close look at what day trading is and determining which is better, day trading or long-term investing?
What is day trading?
In day trading, a person is going to buy or sell a contract, stock, or Bitcoin in a single day i.e. move in and out in order to take advantage of the small fluctuations in price, leveraged over large investments to make a profit. Day trading can be done on the stock market but it is very common in forex where fluctuations are easier to manage and a lot easier to leverage.
For example, consider a security that fluctuates from $100 to $101 on a given day. For a long-term investor, this small temporary fluctuation is almost meaningless. However, if a day trader were to buy $50,000 of security at $100 and sell it later in that day for $101, he/she will make $500 for the day. This type of short-term profit is definitely alluring but it’s also far from a guaranteed result and the risks of day trading usually outweigh the rewards.
If you sit with a day trading expert who makes about a $1000 a day working four hours a day and watch everything he is doing, learn for a full week and execute the trades in a similar manner to how he executed them, he may still make a $1000 that day and you don’t make any money.
This is mainly because some people have a natural skill set that is hard to find. This expert is like the one in a hundred who is really successful at trading where most people are not. So, being successful as a day trader requires a lot more than just randomly picking some stock and hoping it goes up and down as you are trying to guess which way it is going.
Professional day traders are super experienced and about 99 out of 100 traders fail. They use expensive hardware, software toolsets, and news services to really learn how to trade. So, leveraging small fluctuations in price also requires you to invest a lot of money.
Day traders use a lot of leverage and Warren Buffett states over and over again that, ‘leverage is where you go to die. happens to be the truth with businesses, happens to be the truth with day trading and it’s definitely the truth in your own personal life.’
Finally, day trading is an addictive form of gambling and just like any other form of gambling it can lead to really terrible results in the long run. Ed Looney, the Executive Director of the Council on Compulsive Gambling New Jersey, linked day trading to crack cocaine. He states that this is the most addictive form of gambling in the world today. So, be very careful about getting involved in it.
Day-Trading v/s Long-Term Investing
Long-term investing allows you to manage your risk by evaluating companies you are investing in. Day trading on the other hand doesn’t offer any such risk management and no edge whatsoever. An average person engaged in day trading is putting his money on a roulette wheel than actually investing.
So, even for the top one percent of day traders like the people that have the hardware, the software, the experience, the funds, the connections, the leverage all of that, the risk is still extreme and the losses can very well outweigh the gains.
There is no doubt that some day traders do very well but so do some blackjack players. So, if you are truly interested in using the stock market to safely grow your wealth over time, you need a way to count the cards. You are going to be a lot better served by investing with the proper knowledge and direction to end up with a great retirement which is a lot better than risking it every day.