Day Trading - An Online Way to Fortune or Disaster?
Everyone knows the term "day trader", but have you ever actually met a day
trader? Taking large positions every day in the stock market, watching
money come and go in seconds, making huge percentage gains, working from home
and finishing work in just a few minutes a day! Sounds pretty exciting
right? Well, here is our view on online day trading.
What is day trading? Day trading is a form of trading
whereby securities are bought and sold in short time periods, and all positions
are closed before the end of the trading day. The securities traded can be
stocks, options, currencies, futures, ETFs or any other exchange traded asset.
Some day traders hold securities for a few seconds while others hold them for a
few hours, however, they all make short term trades. Some make hundreds of
trades per day and others make only one. Since the online investing boom
in mid 1990s, day trading has become very widespread and has moved out of
financial institutions so that anyone can attempt it. Furthermore, the
historic rise of the stock markets in the late 1990s where fortunes were made
every day (until the bubble burst) added to the glamour of the job and also
greatly increased the number of day traders.
What are the strategies employed? Day traders take on
many different strategies. Some look for stocks in the news or that have
momentum in them, and then trade them based on that momentum. Another
strategy is to put in nearly simultaneous buy and sell orders at slightly higher
and lower prices than the current bid and ask, whereby a fraction of a cent can
be made in just a few seconds. Although minimal in nominal terms,
multi-thousand share trades can be quite profitable. Some day traders
follow technical analysis techniques to try to predict moves and then trade in
and out quickly to try to profit. There are dozens of different techniques
that can be used to try to profit through very short term trades.
Can you make a living day trading? This point is worth
arguing. Because the market is seemingly efficient and unpredictable, day
trading seems unlikely to generate long term positive returns, however it is
also easy to point out that stocks follow trends and have momentum. Also,
I've heard people talk about knowing and seeing day traders that do very well.
We've known a few day traders, but none of them are still day trading today.
In fact, we don't know of anyone that was able to stick with it for very long.
Is day trading investing? Day traders might disagree,
but day trading is not investing. Investing is when you purchase something
for its financial merits and hold the investment to capitalize on its value.
Day trading is often buying and selling stocks of companies that they know
nothing about, hoping to capitalize on a short term movement in the price, not
on the companies merit.
Does day trading work? Despite claims to the contrary,
we don't believe that day trading works. By definition, the stock market
cannot be predicted. If someone could predict it with just 51% accuracy,
then that person could become a billionaire with their trading. It may be
possible that some methods of day trading work for a short while, but as soon as
the secret is shared with someone else, the benefit is gone. And because
when the markets change momentum, day traders are also caught in their trades.