TEN GOOD REASONS TO AVOID DAY TRADING
Day trading isn’t right for everyone. In fact, it’s a bad idea for most people. 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, 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.
I list ten signs that maybe day trading isn’t right for you right now. Take them seriously. Most day traders lose money, in part because a lot of people who aren’t cut out for day trading try it anyway. Don’t fret if it turns out that you aren’t day trader material. Most people aren’t.
You Want to Learn Investing by Day Trading
Many people want to manage their own investments, and it’s certainly possible. It requires taking the time to learn about the basics of finance, such as the relationship between risk and return, proper diversification, and figuring out your time horizon.
Some people confuse investing with day trading, though, and they are not the same. I list tons of information on the differences, but here’s the condensed version: 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 it is not a good idea to day trade with all your money.
It is entirely possible to buy and sell securities on your own without being a day trader. 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.
In modern usage, a hedge fund is a private investment partnership that does not have to register with the Securities and Exchange Commission. You wouldn’t be stretching the truth much to say that you’re running a hedge fund!
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 Microsoft 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, it is difficult to learn technical patterns. 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 at it. 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-businesspeople, 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 might 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 may be shouting out coffee orders and waving their arms in a debate over the Cubs versus the Sox. With so many people together, they can make their own excitement on days when the market isn’t doing anything interesting.
For that matter, the number of people trading on exchange floors is small and getting smaller. The Chicago Board of Trade is merging with the Chicago Mercantile Exchange, partly 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 might 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 might 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, day trading isn’t a good idea for you.
You Love Going to the Casino
Do get a big rush out of gambling? Do you love trying to beat the odds? Does day trading seem like it would like a visit to Vegas without the airfare? Then you know what? You shouldn’t be day trading. Unlike at a casino, no one is even going to give you free drinks in exchange for your massive losses.
A lot of traders like to gamble. Every trader has some crazy story about playing Liar’s Poker, played with the serial numbers on dollar bills instead of with cards, or about a friend of a friend who bet on whether the person walking infront 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.
You Have Trouble Setting Boundaries
Successful day traders are disciplined. They have set trading hours, which they stick to, and set systems for planning trades and managing their money. They took the time to carefully test their trading strategy. 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 might not be the best day trader. If you resent rules, you might 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, there may be one or two out there who managed to make a killing in a week, but they are 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 the Infomercial 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 are heavily marketed, even through television infomercials. The sales pitch makes day trading seem like an easy, safe, fun way to make money using your own smarts. It leaves out pesky details about researching and testing systems, high levels of risk, and the pressure trading can place on a person. And the wash-sale rule is never mentioned.
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.