Updated: Nov 8
Author: Irene Fantappiè
Date of Publication: 09/10/2022
Day Trading is a well-known term for people interested in the world of investments. Traders actively buy and sell securities within the same day in order to capitalise on prices in the very short term. In fact, it gives profit opportunities in the timespan of a day thanks to the changes in stock prices. However, this isn’t always the best strategy for each investor and some of the players fill their days with day trading as a sort of entertainment.
The risks of leveraged investing
With respect to other peer trading styles, like swing trading, it can be more dangerous. Within a market day, many events can occur, increasing volatility, which can be a significant challenge even for most expert day traders.
Individuals must make sure to fully understand how leveraged investment strategies work. For example, some of these strategies are trading on margins, usage of options or other leveraged products. If they want to become day traders because of the leverage capital for buying additional assets, it can entail great risks.
For instance, options and margin trading both involve the usage of very sophisticated instruments. By using these instruments, you can make very good profits when the market is moving in the right direction. Nevertheless, the greater the reward, the greater the risk, and this concept might not appear as clear as day at first. The problem with acquiring more assets means that you can also lose more money than what you initially invested.
Leveraged investing also requires cold blood. In fact, you have to be able to live with the undergoing of these risks. Otherwise, you should not try this strategy at all. In general, strategies involved in day trading can be riskier with respect to other types of investments. So, it is not - for sure - the best way to assure yourself a structured and strong financial future.
Before embarking: personal evaluations
Generally speaking, the elements you need to come up with your personal investment plan are:
An investment horizon
Awareness about your investment (or lack of) experience
An evaluation of your financial situation
Your personal risk aversion
You must also take into account that day trading requires fast-paced movements. In addition, you might not have the time to thoroughly research your investment with respect to longer-term plans. Moreover, beginners should keep in mind that the actions involved repeat themselves over and over again. Each trader should find the same way of trading in order to lock in a certain grade of confidence. This is the only way to ensure the possibility of profits.
Success Rates: Statistics and Problems
First of all, building your own wealth through day trading takes more time if you have less money and less time. However, trading is a practice that requires a great amount of work and study. But most people that drive into it without a second thought usually do not put that much effort into research.
Keeping in mind that these statistics are approximate, we can state that:
Allegedly, people make a living out of day trading with a 4% success rate. Keep in mind that making a living out of it, doesn’t necessarily imply a luxurious one.
Side-hustling via day trading is found to be between 10% and 15%.
The minimum time required to build a structured wealth out of day trading goes from 6 months to one year. You might take longer than this, but taking a shorter time isn’t feasible. This means that day trading also requires patience.
In Europe, around 70% of people lose money when they trade with brokers. Brokers are required by law to disclose this information.
People are also subject to what’s called an availability bias. Most of them engaging in day trading are inspired by successful individuals that hide away their sacrifices and losses. These are rarely to never shown on social media. Even people that trade from 6 to 8 hours per day every weekday may not be able to make a living out of trading. They might be able to have a successful and brief winning streak, without ensuring a constant profit generated through months.
You can use day trading as a main source of income, or you can use it to side-hustle. You need a lot of dedication in every type of scenario.
You will still require some months to perfectionate your trading style. However, if this is your choice, your probability of success will be higher. We can then conclude that a lot of people put a lot of work in trading. Some, however, put on a lot of efficient work, and that’s what makes the difference.
What makes it so easy to lose money
There are various reasons why Day Trading seems to leave lots of its followers with lost money.
Some of these are:
Individuals start trading with the prospect of getting rich really quick - a mentality real far from what is likely to occur.
40% of traders trade for only one month due to poor risk management.
80% of traders quit within 2 years.
13% of individuals remain active in day trading after 3 years.
Only 7% of individuals keep trading for more than 5 years.
The underperformance of active traders, annually, is 6.5%.
Yearly, people on average underperform the market index by 1.5%.
If you take trading as a form of gambling, you are more likely to underperform than non-gamblers.
Individuals are more prone to active trading once they experience a successful trade.
Retail traders are usually not that good at trading trends. They generally trade against the trend through short positions in uptrends and vice versa. In reality, one of the rules of thumb for day traders is that the trend is your friend.
Tips for successful Day Trading
Surprisingly enough, day traders account for a very large percentage of the total day trading volume. This is thanks to the incredibly high frequency of the transactions. But what can help an average day trader become a successful one?
Practising and executing the same trading style over and over again. Trying out a different trading way each time will extend the time frame in which you will be able to make profits out of trading.
Improving your stop loss and expanding your profit target might help you improve your trading style, too.
Improve your trading mindset. Trading your money means also putting them at risk. You should never invest more than you’re willing to lose. So, while trading you might have to leave out your more conversative and frightened side.
Improve your risk/reward ratio. This ratio expresses your trade’s potential profits and losses, and it’s based on your stop loss and profit target.
Becoming a successful day trader isn’t a walk in the park. Whoever embarks in this journey needs to demonstrate perseverance and relentlessness. They have to believe that they can be part of the small percentages shown above. Also, perhaps, they might use even a little bit of luck.