Is Day Trading Worth It? Can You Get Rich Off Day Trading?
Day trading looks intriguing to a lot of people. The idea of buying and holding shares of a certain stock in one day and selling it the same day is incredibly tempting. However, before you rush off tying your hard-earned cash into forex and going straight for day trading, there are some things you need to be aware of. Is day trading worth it? Do you have what it takes to participate in day trading? Can you recover from the losses incurred if it all goes sideways? This article would tell you all you need to know about day trading. Let's dive right into it.
Is Day Trading Worth It
While consistently earning from day trading might seem interesting, the reality is that it's very rare. It's not exactly impossible but it's not a good way to invest your funds. That's right, day trading is generally considered to not be a good idea, especially if you're considering doing it for a time. If, however, you plan to do it for a short time, you still need to know the downsides to this method of trading.
One of the reasons day trading is generally considered to be a bad idea is the cost of transactions. Let's say you buy a stock and sell it in less than a year, the increase in the value of the said stock is taxed at the normal income tax rate. The normal tax rate, in this case, is always higher than it would be if you held on to the stock for more than a year. You are also required to pay a commission fee every time you buy or sell a stock. For day traders, this would mean paying a lot of money every time they buy and sell.
Let's digress a little bit. While gaining profits day trading is a rare feat, gaining profits consistently is damn near impossible. Why would you put your funds through that? Especially with how high the tax rate on short-term trades is?
Another reason day trading is generally considered to be a bad idea is the fact that you're going up against the capital market. When you invest your money in day trading, it means you're trading against veteran investors and professional traders. There's a very slim chance of you winning without coming across something illegal like insider information.
In the end, it all comes down to timing. Yes, there have been a few lucky individuals in the past who raked in massive profits by day trading due to their accurate timing. Since this is not always the case, the chances of you incurring losses day trading are higher than the chances of you gaining profits.
Can You Make Money By Day Trading?
Investors sometimes make accurate predictions, time the market correctly, and make six-figure profits. This is not to say however that it's always like this. It's all about luck. Just like casinos and your classic game of poker. Most of these professional investors too rarely use their own money for day trading so you really can't compare yourself to them now, can you? Your chances of losing are way higher than winning if you day trade with your funds. In conclusion, day trading is not profitable, except in cases where it is profitable but you have to be extremely lucky to be on the latter side. There has been news of companies perishing and the lives of investors ruined due to day trading. Trading is all about taking risks but this is one we highly recommend you don't take except if you're incredibly sure that the price of the stock you're planning to invest in will rise before you close the trade.
The Average Rate Of Return
You might wonder, what is the average rate of return a day trader may expect? According to a bunch of scientific papers, the failure rate for day traders is ranked at 95%, this makes about only 4.5% of day traders successful. Success in this context refers to gaining consistent profits. If we want to look at it from another perspective however and determine success by the rate of investors who don't lose money day trading, then the rate climbs up to a solid 6%. Other sources however drop down the success rate to 1%, especially for male traders. While it may seem like day traders only require a little deposit to start trading, other significant charges would add up and this would in turn make day trading more expensive.
The Financial Industry Regulatory Authority (FINRA) says that it requires consistent day traders to at least have around $25,000 in equities before they can gain access to the stock market. With all these factors adding up, things are not just looking up for day traders. Apart from the funds, they have to familiarize themselves with forex tools that would help them analyze the market, do some extensive research and complex math so they can even have a chance to beat the odds. The average return rate of a frequent day trader is around 10%, however, if we decide to add in factors such as years of market return data, the average return rate is at a measly 9.8%. The concept of day trading can be seen in a way as betting. The main concept of betting requires that people lose.
Day Trading: How To Get Started
If you, however, decide to proceed with day trading (and you're sure there's nothing new can do to stop you), there are some tips to at least give you a leg up before you start and while trading. Let's get right into it.
Picking a day trading market
The first tip? Don't try to get into all the markets at the same time. Pick one market and throw all your focus into it. Once you can master the in and out of one market, it's only a matter of time before you're advancing and mastering other markets as well. You may already have a market in mind but let's do a little breakdown.
-The foreign exchange market
This market demands the least capital. If you want to ease into day trading and try with fewer funds at first, this is your best choice. In this market, you trade with currencies. So you'll be seeing a lot of EURs and USDs as you go. The minimum capital for entering the forex market is $100 but it's recommended that you start with more so you can determine your profits.
- The Futures Market
In this market, you trade in resources such as crude oil and gold. Unlike the forex market, you need more capital to start. The minimum requirement here is $1,000. There are also a lot of futures to trade (apart from crude oil and gold of course).
- The stock market
This is the most expensive market to get into as you require at least a deposit of $25,000. Here, you trade in shares of company stocks.
Equipment and software
If you're going to go into this, you need a few tools to help you along the way. The first thing you need is a computer. Two monitors are recommended but not necessary. You also need to make sure that your computer has enough space and a fast processor that doesn't make your trading program crash or lag whenever you run it.
You need an extremely fast internet connection system if you're going to be running your trading program with it. This would make sure you get notified the instant there's the slightest change in your stock. Cable connections are also recommended in this regard. If you're fine with the one you're using, by all means, keep using it. However, if your internet service keeps going down most times, you might want to consult your internet provider or choose a new one altogether.
Sometimes, it's not always about the brokers who offer the lowest commission. You need a broker that would attend to you anytime you reach out to them (especially if you're a day trader). Trust us, a few more dollars is nothing if thousands of dollars can be saved. Banks aren't that good an option for a day trader, you need small brokers that offer a sizable amount and also offer great customer service.
Example of a Day Trading Strategy
We'll make this quick and understandable. Let's say the target of a stock is $0.06 and the maximum risk is $0.4 giving you a risk to reward ratio of 1 - 1.5%, you as a trader with $30,000 decide to make your maximum risk per trade $300, this means 7500 shares on each trade will keep the risk within the $300 limit.
Now, 60 trades would be profitable because 60 x $0.06 x 7,500 shares = $27,000.
45 trades on the other hand with the same calculation is a loser which would give you $13,500. The gross profit is $13,500. Now if the commission is $30 per trade, the profit altogether would be $10,500 ($13,500 in case it's $30 x 100 trades).
There you have it, all you need to know before going into day trading. Make sure you do more research, get more updates and have a good day.