I read all the articles about day trading, 99% of them said it is one of the most dangerous things in the world. I just can't understand why, why day trading is dangerous? as far as I see it, it is much much safer to day trade than to hold a stock over night(I wouldn't be able to sleep) If you hold a stock for 60 minutes for example, the chances that the stock will drop are pretty low. If you hold it for years you are very exposed to events that will wipe out your money. Also holding a stock over night when you have no control over your stock (the price changes drastically over night) is a lot more gambling than day trading will ever be. Can anyone explain to me why day trading is considered not safe? Thanks in advance
It rather depends on what you mean by 'safe'. Day trading may not suit a large number of individuals, who over the long term would probably get better returns from an index tracker (for example). If on the other hand, a trader can make consistent profits from day trading, then it could be viewed as 'safer' than long term buy and hold.
You're focusing on time as a risk factor. Size is a risk factor too, and you'll need to trade larger size to make decent returns in a shorter time frame. It's size (especially leverage) in combination with lack of discipline that makes day trading "dangerous".
There was a guy (Lets call him Mark) who made great returns (15% pa), by using long term strategies. Mark would often enjoy going on holiday, and skiing was his passion. He would often leave trades open while he went to Ski in Europe and beyond. One day a friend of Mark gave him a hint about buying a penny stock, priced at only $0.05. Mark analysed the stock, and after due consideration, bought up 1/4 his usual line, then departed on his holiday to the alps. Mark enjoyed a month long retreat and thought little about the markets. On his return however he found that the penny stock he'd bought had risen to around $2, a rise of 4000%. Dumbfounded, and exited over profits, such as he'd never seen on a single trade, Mark began over the next six months, trading more and more in penny stocks. While he enjoyed many large percentage returns on his trades, he was apt to also lose large amounts, but still Mark didn't mind; he was hooked. Weighting the 200% gains in his mind to be of far greater importance than the 50% losses he sometimes suffered, Mark began spending exaggeratedly. Over the next six months, he was bound to lose more than 60% of his total fund. In this story we see a profitable trader, who allows his emotions to become involved by seeking returns of which type he is unused. He became addicted to seeking the 200% returns, as making even a 5% gain on a blue chip stock was no longer interesting. There are many pitfalls to short term trading that are greatly reduced by trading over longer timeframes. Day trading should only be attempted with the utmost professionalism, and with continued self analysis.
Trading requires high quality execution. Let's define the term Strategy Slippage: as the difference between your trade execution and the best price you could have gotten for the time frame in play. Be it day, week, month...whatever. As you move into the day time frame, more of your profits will be dependent on the quality of your executions. Since you are battling it out with algos that execute flawlessly, your going to get your head handed to you. I can imagine brokers filling buckets of cement right now...
Re-posting this as I initially put it in the wrong thread. --------------- There are many problems with day trading. Here is my 10 cents. First, the"strait talk" about the daytrading industry: The reason it is promoted is because it makes brokerage firms and the often related market makers a great deal of money. That is why you have a platform with all the blinking lights and "info" and "analysis". Much like a "one armed bandit" in Vegas. So, clearly the problem number one is transaction costs, which most retail traders woefully underestimate or never bother to estimate in the first place. These folks are simply chum for the industry, nothing more. To the firm the "day trader" is a sucker or warm body that produces revenue for the firm or brokerage, nothing more. U wash out and are then replaced, they have the mathematics down while the day trader keeps his "dream alive" by reading books on discipline and being "in the zone". The second problem is that over very short term holding periods, there is no chance to benefit from the market drift upwards, which is what causes long term investing to work. The third problem is that most of the "analysis" on day trading does not take into account intraday variations in market liquidity, which in practice causes it to mostly be invalid and money-losing even though on paper or simulation it appears to work. In the time I have read ET ive seen "gurus" proffering ideas or buy points where I know there is no market liquidity in practice. Its a "paper, simulated trader" mirage. The fourth problem is that it typically precludes one from having gainful employment and investing for the long term. The fifth problem is that the typical day trader give up the benefits of a "job" but also their trading experience has no connection to other fields, creating a massive career risk, marriage risk, etc. It can be ruinous. The sixth problem is that most day traders are the "dreamer" type who go to "rich dad, poor dad" seminars - they want to spend money on "education" but don't ask them to learn any serious analytical skills, its too much work for them. The seventh problem is that dreamer types often have a thin skin, and worry what other people will think of their career choice, so they develop mental issues (Ive seen this in comments on this board many times) The eight problem is most want to earn a living from a small account, which is very failure prone and doomed to eventual failure - In the small % of time the trader seems to be doing ok, they eat all the seed corn so never grow, then ultimately wash out when a small run of bad luck hits. The ninth problem is many day traders learn "trading lessons" that almost guarantee they will never grow. They will just grind and burn commission. They never figured out that 90% of the "trading advice" out there is designed to protect clearing firms and brokerage houses, not help the trader make money. U see this type very frequently proffering their "great trade management ideas" to others, as if they are gurus. The ninth problem is that they don't attempt to understand the industry in the slightest. They never visit a real trading firm or HFT trading firm to see who the competition is. They don't realize they are like a start up, undercapitalized corner store attempting to compete against wal-mart on price and selection. The tenth problem is that most day trader overestimate their intelligence and ability to win. We have heard in all the books that "its not intelligence, is discipline" well, that is hogwash. Perhaps that was true in the past, it is not true anymore. Today people are high level scientists, top notch engineers, or extremely creative and unconventional people with substantial resources. That said, I know some great day traders. The difference is they are very smart people, often managing a relatively large amount of capital for a proprietary firm, fund, or backers, have vast analytical skills that the 'dreamers" can't hope to match. And even then the non-market makers/HFT typically transition to longer holding periods.
Bingo. It does attract it's fair share of whack jobs. As if trading, as an endeavor, did not produce mental imbalances well enough on it's own. Fortunately, ET provides a venue to funnel these twisted entertainers. Add the stress of financial failure to the mix and you have DRAMA............ or your neighbor on the 6 o'clock news.
Wrong. The plan itself is ineffective. Not to mention your statement is circular reasoning. Why not answer ETA's question in the other thread rather than posting platitudes and pages of cut/paste from flawed educators?