If you look online to find out how easy or difficult is day trading, you will probably come across a lot of marketing material. These may be ads for training courses, membership plans or other paid private groups looking to attract new customers.
These adverts make it sound very easy to day trade.
They want you to appreciate that day trading is tricky enough to require paid training or support. But they also need you to see yourself realistically being able to achieve a reasonable income if you buy their product and put in some effort.
In this article series, I’ll look carefully at the evidence, and explain how easy or difficult is day trading.
How easy or difficult is day trading?
Don’t become a victim of the Dunning-Kruger effect
Before I begin in earnest, I want you to take heed of some interesting pop psychology. If you’re a beginner to day trading, then it’s highly likely that the Dunning-Kruger effect is impacting your judgement.
The Dunning-Kruger effect is a somewhat ironic phenomenon which we’re all susceptible to.
It is the name given to the unjustified confidence that we often have when attempting something we know little about.
The less we know, it’s likely the more confident we will feel about our ability to perform well.
Have you ever listened to an awful audition on a singing talent contest and wondered ‘How on earth does that person think they’re good?’
Have you ever been at a bar or pub and listened to an individual ramble on with conviction about a subject which they clearly know little about?
This is the Dunning-Kruger effect in practice.
Applied to day trading, the risk is that we also feel unjustifiably confident about our ability to make profits by trading in the financial markets when we’re at the beginner stage.
Why is the effect a thing? What causes it?
Well, it comes down to the fact that you can only judge your ability to do something well, when you already know the subject matter.
Only when you fully appreciate the challenges and hurdles that an activity can throw at you, can you make an accurate assessment of whether you have the necessary characteristics to be able to excel at them.
In the absence of knowing about the challenges – why wouldn’t you generally assume that with some training and knowledge, you’d be able to overcome them?
With the pop psychology lesson over, and with heightened self-consciousness, let’s educate ourselves on the challenges ahead. The drawbacks of day trading are real.
Let’s run down the list of factors that determine whether day trading is easy or difficult.
1. Successful day traders were rich already
Day trading is a game of percentages. The profit on a trade is calculated as a percentage, your return to date is measured as a percentage. Day traders measure themselves to each other by comparing their annual return percentage.
Trading is a percentage game because it goes on at vastly different scales, from a small retail trading staking £750 on an idea, to a venture capital group taking a $50bn position in tech stocks via call options.
But while percentages allow for meaningful comparison, they don’t matter when it comes to earning a day trading income. What matters is the absolute value of £ or $ that you are able to generate.
Unfortunately, even a good return percentage won’t put food on the table, if it’s in the context of investing a small sum.
Continue reading: How much money do you need to begin day trading
2. You cannot simply follow a formula
Online gurus will usually present their course or mentorship as a way to learn a ‘blueprint’ for day trading.
This implies that they will provide you with a step-by-step method for identifying trades and executing them in a profitable manner. So long as you follow their method to the letter, you will find profits… or so they claim.
Of course, the smallprint at the footer of their sales pages will often state the exact opposite – that they are not financial advisers and cannot provide any guarantee that their methods will lead to profits. In fact, this is usually the only place where you’ll see an honest disclosure that day trading could lead to serious losses instead.
This is because no trading blueprint will work forever.
In fact, the more students that try a trading strategy, the less effective it will become.
Consider a real world example of a trading opportunity:
You find a chinese manufacturer who sells toothbrushes for just £0.20 per pack, and you know that you can sell toothbrushes at a local market for £2 per pack.
If you’re the very first trader to grab this opportunity – for a short time you will see a fantastic return on your investment. However, other market traders will soon take notice, and look into seeking a direct supply from China themselves.
Soon, the market is full of stalls featuring cheap generic toothbrushes, and customers now have many stalls to choose from. In light of dwindling sales, you choose to lower the price of your brushes to attract more customers to your stall. After all, even a sale at £1.50 would be a handsome return.
Unfortunately, you find that your competitors quickly do the same, and either match or beat your lower price, in an attempt to retain some custom for themselves.
Eventually, the market price for these toothbrushes reaches a rock bottom – set at the lowest price any market trader can be bothered to sell them for.
The takeaway from this story is that competition causes profitable pricing opportunities to evaporate. Because someone else will always be prepared to take your trade for ‘slightly’ less margin, a race to the bottom will proceed until the trade offers such a small return that it is no longer worth pursuing.
Continue reading: Why day trading blueprints are doomed
Day trading can be a full time job
It’s frankly very difficult to find a reliable source of information for how long independent day traders spend at their desks each day.
To find a good answer, I needed to try and filter out the loud sales pitches of people trying to sell a miracle day trading solution which will provide a six figure income with 1 hour of work per day.
This is an enormous task, as the volume of sales copy outweighs honest accounts by a significant ratio, particularly on websites like Reddit and Quora, so I’d stay away from those platforms.
Patrick Boyle is a Hedge Fund manager based in the UK. In this eye-opening interview, you can listen to him explain that trading is a very long-hours job. To quote him directly, he states that he has not taken a real holiday in years.
This news should come as a shock.
This is a successful hedge fund manager – someone who has as good a knowledge of the financial markets as a trader can. Yet even he feels compelled to work all hours to generate the best return he can.
If he needs to work those hours to generate a great return, then why would a beginner think they can do better on a part-time basis?
Day trading can be stressful
Day trading could be described as an emotional rollercoaster.
As the value of your portfolio moves up and down, so will your emotions, here’s the evidence to prove it:
In this 2005 paper written by Thomas Oberlechner and Ashok Nimgade, the researchers reported that out of 326 financial traders they studied, 32% reported ‘very high’ or ‘extremely high’ stress levels. Overall, traders ranked ‘profit goal’ as the highest stressor followed by ‘long working hours’.
They noted that one manager noted “the tendency of some traders to react violently in stressful situations means having to replace a number of telephones or keyboards”
You only need to take a look at professional trading courses to see that they include modules like this one, which promises that students will “learn a code of conduct to follow in the event of distressing or alarming situations.”
Finally, why would there be demand for published books entitled “Mastering Trading Stress: Strategies for Maximizing Performance”, if trading stress wasn’t a widespread concern.
Now, most of the above relates to trading with a bank or investment firm’s capital. If that is stressful, imagine if it was your own personal savings which you had lost in a bad trade.
Now you can start to understand why trading is a stressful pursuit. For every excellent trade, there will be a similar number of poor trades which cause you to doubt your ability to function as a good trader.
It is widely acknowledged that investing psychology and the ability to deal with loss is a vital component of the mindset of a successful day trader.
This cannot merely be ‘taught’, and will in many ways come down to your personal risk tolerance, which is a combination of genetics and your own past experiences.
Further reading: How to deal with investing losses
You can also gain a lot of knowledge about trading psychology in the books I’ve picked as the best day trading books and its sister list of the best forex trading books, if the forex market is of interest.
Mastering day trading could take months or years
Day trading tutors will encourage you to use ‘demo accounts’ or ‘live trading simulations’ before you place real trades.
Demo accounts allow you to trade like normal, but with pretend money. This is a risk-free and ideal way to experience day trading without paying the hard way for any early mistakes.
In principle, demo accounts should teach any investor how difficult it is to make good money from day trading. However, they sometimes have the opposite effect.
A beginner who places a few large trades on a demo account may experience some good luck which swings them into profit. This can cause the newbie to feel regret that they didn’t stake their own money behind these bets, and feel as if they have missed out on a large win.
This can drive lucky beginners to abandoning their demo accounts far too soon, and then learning the hard way that they didn’t yet have a reliable edge.
For this reason, I recommend that you trade on a demo account for months before you even consider using real money. For any shorter a time period, you simply cannot be sure that you did not win due to luck.
Also, consider the broader movements in the markets during your demo period. Did the stock market move upwards or downwards overall? Did this overall trend happen to play right into your hands and provide a tailwind to your trades?
A genuine market edge is rare, yet traders find it all too easy to chalk up their success to skill rather than luck. An expert day trader is humble, and almost has a paranoia about their ability (or inability) to maintain their edge. This is a healthy attitude to have.
Choosing a demo account
My personal advice is that you only sign-up to a demo account with a platform which you intend to eventually place real trades.
In other words, do your research and comparison of stockbrokers upfront, and use the demo-account which will mirror the actual platform you’ll spend money on.
This way – you’re gaining valuable experience of the financial markets while also learning the ins and outs of the software you’ll be using too.
If you train on one demo account, then switch to a different platform for real trades, this will add delay to your training, as you’ll want to learn the new platform properly before placing your money at risk.
How easy or difficult is day trading: a summary
In summary, day trading is difficult. It’s difficult because the very laws of economics and pricing.
- You cannot follow a simple formulae
- The easy opportunities have already been taken
- Trading is stressful
- You may require a larger budget than you can afford to lose
This might not make for pleasant reading for a budding day trader, but only by fully acknowledging the difficulties of day trading will you have a chance at being successful.