11 Good Reasons to Avoid Day Trading
Day trading is a bad idea for most people, and if I keep you from taking up trading because it’s the wrong thing for you to do, then I have done my duty. It requires a strong personality, someone who can face the gyrations of the markets day in and day out. And it also requires someone with enough attention to detail to run a business.
It’s a great career option for the right person in the right circumstances. But for people who have trouble keeping cool or who don’t have the patience to learn how to trade, and for anyone who has a gambling problem, day trading can be a quick road to ruin.
Here are eleven signs that may indicate day trading isn’t right for you right now. Take these signs seriously. Most day traders lose money, in part because a lot of people who aren’t cut out for day trading try it anyway.
You want to discover investing by day trading
Many people want to manage their own investments. Although doing so is certainly possible, you first need to take the time to learn about the basics of finance, such as the relationship between risk and return, proper diversification, and time horizons that are appropriate to your situation. In fact, there’s a great book called Investing For Dummies by Eric Tyson (John Wiley & Sons, Inc.) that can help.
Some people confuse investing with day trading, though, and these two disciplines are not the same. Day trading involves rapid buying and selling of securities to take advantage of small movements in prices. This can be a successful strategy for part of your investment account, but day trading with all your money isn’t a good idea.
Buying and selling securities on your own without being a day trader is entirely possible. Making money in the financial markets without being a day trader is entirely possible, too. And if you don’t know another good term for “self-employed person managing her own money,” just tell people you run your own hedge fund. You’ll get better tables at restaurants that way.
You love fundamental research
Fundamental research is the process of analyzing a company to see how good its business is and what the company’s securities are worth. Fundamental analysts crunch numbers, build forecasts, check out products, and look for stocks that are going to do well over the long term. They dream of uncovering the next Google or the next Walmart and holding the stock all the way up.
Fundamental research is antithetical to day trading. Day traders look for profit opportunities in short-term price movements. They often do not know what industry a company is in, nor do they care. If you love the fundamentals, you’re probably too analytical to be a good day trader.
You’re short on time and capital
Getting started in day trading is a lot like buying a small business. It takes commitment of both time and of money. If you don’t have enough time, learning technical patterns is difficult. If you don’t have the money, you won’t be able to work through rough cycles. And there will be rough cycles. That’s day trading’s only sure thing.
Some day traders are able to trade part time. If you are disciplined, you can be successful as a part-time trader. The key is to close out your positions at the end of your designated trading period as though the market day were ending. If your plan is to trade for two hours a day, then trade for two hours a day and no more. Use an alarm clock as your personal trading bell.
You like working as part of a group
A decade ago, most large cities had day trading offices, called trading arcades, where traders could go each day to buy and sell securities. The big advantage these firms offered was high-speed Internet access. Now almost everyone can get high-speed Internet access at home, so there’s little need for day traders to go elsewhere, and most of these offices are closed.
Working at home is great for some people. If you prefer camaraderie during the day, like the support of a team, and want friendly faces around you, you’re likely to be miserable day trading. It’s just you and the market, and the market doesn’t have a great sense of humor.
You can’t be bothered with the details of running a business
Day traders are small-business people, and their entrepreneurial flair goes beyond making their own buy and sell decisions. They also buy equipment, shop for supplies, and maintain careful income tax records. To some, this is exhilarating. No more mean office manager who decides how many and what kind of pens must be used. No more going through hoops and bringing in letters from a doctor to get a fancy ergonomic chair. You’re the boss, and if you want it, you can have it.
But to others, all this responsibility is overwhelming. Picking out pens? Creating backup procedures? Worrying about accounting software? It’s too much. If the mere thought of standing at the office-supply store gives you the heebie-jeebies, you may want to consider trading as an employee rather than trading for your own account.
You crave excitement
Trading seems so exciting. You’ve seen the stereotypical picture of the people on the floor at the Chicago Board of Trade, wearing bright-colored jackets and loud ties, screaming and waving their arms. It gets my blood running to just think about it. Of course, they were probably shouting out coffee orders and waving their arms in a debate over the Cubs versus the Sox. And anyway, floor trading is mostly obsolete. Most of the large stock, bond, and derivative exchanges have gone through mergers and reduced the square footage of their trading floors because of changes in how people trade. Nowadays, most traders sit in offices in front of computer screens. They have to stay focused on the little blips in front of them, and it can be deathly dull. Some days few, if any, opportunities come up to trade using your system.
If you crave excitement and have trouble staying focused, you may find that day trading is too boring for you. It can involve intense stress with few opportunities to work it off during the day.
With the frenzy of trades and the rapid-fire decisions involved, day trading may seem like a perfect career for an impulsive person. It’s all about instinct, about acting on your hunches, about pulling the trigger and seeing what happens. Right? Uh, no. To be a good day trader, you have to trust your trading system more than your hunches. Sometimes you’ll make trades when it doesn’t seem right and you’ll sit out periods even though you are itching to get in. Good day traders are quick thinkers, but they do think. If you like to act now and deal with the consequences later, then day trading isn’t a good idea for you.
You love going to the casino
Do you get a big rush out of gambling? Do you love trying to beat the odds? Does day trading seem just like a visit to Vegas without the airfare? Then you shouldn’t be day trading. Unlike at a casino, no one is going to give you free drinks or Celine Dion tickets in exchange for your massive losses.
A lot of traders like to gamble. Every trader has some crazy story about playing Liar’s Poker using the serial numbers on dollar bills instead of with cards, or about a friend of a friend who bet on whether the person walking in front of him would turn right or left. And that’s fine, if they keep their gambling in perspective and bet no more than they can afford to lose.
Trading isn’t necessarily gambling, but it can be, especially if you get carried away with the market and don’t stick to your trading and money-management systems. But remember this: In gambling, the odds always favor the house. When you cross the line, you hand your profit potential over to someone else.
The line between day trading and gambling is thin. Check out these questions to see whether you may have a gambling problem. Substitute day trading for gambling and see what you come up with. And by all means, get help if you have a problem. Don’t take up day trading.
You have trouble setting boundaries
Successful day traders are disciplined. They have set trading hours that they stick to and set systems they use to plan trades and manage their money. They took the time to carefully test their trading strategy (see Chapter 16 for more on how you can do that). They understand that if they don’t have a system and manage their risk, they are more likely to become one of those numerous day traders who lose everything early on.
The whole idea behind day trading is that you limit risk by closing out your positions at the end of the day. The financial markets are global, though, so in theory, the trading day never ends. If you have a hard time turning off the lights at the end of the day, you may not be the best day trader. If you resent rules, you may rebel against the rules that you’ve set for yourself.
Good day traders know that they are cut out for day trading before they even begin. They’ve taken the time to assess how their personality and psychological makeup mix with the demands of the job. And one key trait is discipline.
You want to get rich quick
Day traders look for short-term profit opportunities, so it follows that day trading leads to big, fast profits, right? Wrong. Day traders make money by collecting a large number of small profits. Those who make money usually do it through patience and persistence. Yeah, one or two day traders out there may have managed to make a killing in a week, but they’re the exception.
Research shows that 80 percent of day traders lose their capital and are gone from the business within one year. Instead of getting rich, you are more likely to go broke quick from day trading. If you don’t like those odds, try something else with your money.
The guy on YouTube said it would work
A lot of money can be made in day trading, but sometimes it seems like more money is made selling day trading training systems. Some of these systems are heavily marketed online and even through television infomercials. The sales pitch makes day trading seem like an easy, safe, fun way to make money using your own smarts. These commercials leave out pesky details about researching and testing systems, high levels of risk, and the pressure trading can place on a person.
Day trading is great for some people. But like anything, if it sounds too good to be true, it probably is. Don’t let a strong-arm sales pitch cost you your hard-earned money.