The hype around day trading is selling it as a fun and easy way to earn quick money and become financially free. A lot of people like the idea that they can make quick money out of stock market volatility. In reality ,day trading is a lot more complicated and riskier than it appears.
The allure of big gains at the speed of day trading is appealing, but the risks are enormous ones that can wipe out a person’s money and psyche. Those who can’t grasp the following risks involved will day trade with high volatility, emotional stress and no experience, which spells financial disaster.
High Volatility
Volatility in the stock market is built on rapid price changes. However, these moves are unpredictable and are very difficult to reliably predict short term market movement. Traders can lose their hard won capital, and even worse, lose everything they have with smaller capitalization or sudden market swings.
Emotional Decision-Making
Trading is a high stakes game and more often than not a game of emotion based impulsiveness rather than strategy. In trading, a trader is under a certain pressure to act and they are sometimes acting out of fear, greed or excitement rather than a rational plan.
Overtrading
One thing about day trading is that it’s always fast, so overtrading is always a possibility. Overtrading can be easy, and it can eat up your commission fees into the bargain and increase the chance of making the wrong decisions. Every trade has some risk and the more trades you take, the higher the probability one will end in a loss and eat up your capital.
Market Manipulation
Large financial markets can sometimes be manipulated, as with large hedge funds or institutional investors or day traders. They can be used to create artificial market movement and use them to mislead the smaller traders trading on market based on wrong information. As the market is full of deception and new people, day trading is a very easy way to lose your hard earned money.
High Fees and Commissions
Most day traders are in and out of stocks all day long paying high fees and commissions for each trade. And they can start carving pretty quick into profits. These fees can eat into total return, making it hard to realize long term gains, particularly if you have smaller capital to play with.
Lack of Experience
Not knowing a thing about the stock market or how to read charts, news, or trends, hundreds of people jump into day trading. It’s very easy to make costly mistakes without experience or education. Bad advice, poor investment choices, and misinterpretating data costs novice traders big time.
Short-Term Focus
Day trading means working in the short term movements of the market, fast decisions and hope for profit. The problem is that the focus is too short term, so traders aren’t able to take a strategic, long term approach to investing, which would usually smooth returns over a longer period of time.
Leverage Risks
To increase gains, many day traders leverage, or use, borrowed money. Leverage can also make you money but it can also make you lose. A trader can leverage put in less than what they could potentially be losing, or in debt. Day trading is especially risky for people who can’t afford to lose lots of money.
Unpredictable Outcomes
You can analyze or research anything under the sun, but day trading outcomes are not predictable. If the information was not caught, it can still happen to the most experienced trader, and things can happen outside of trading and knock the best of the best on their backs.
Mental and Physical Strain
As day trading requires constant monitoring of the market and quick decisions that have their foundations in emotions, these are hard on day trader’s mental, as well as his physical health. Long term stress and anxiety cause burn out, poor decision making and poor focus. That can all be mentally stressful and can also affect personal relationships and quality of life.
Overconfidence
Some traders start off successfully and believe they were born to trade. It can lead to one acting recklessly, i.e. one can make larger trades when acting well intentioned. Traders who are over confident can simply go on impulse and run away without any risk management strategies which end up in whopper financial losses.
Lack of Diversification
For day traders especially, they will often just trade a handful of stocks or other assets they play in, in order to avoid being exposed to the rest of the market. The problem is that this isn’t diversified, and if one of their positions moves down, they could lose a lot of money. Day traders forget the principle of a well diversified portfolio, that spreads the risk over a number of different assets so that any one loss does not matter.
Constant Market Monitoring
Day trading is successful when you watch the market all day long. It’s too much if you’re already busy with other things or other jobs, it just takes a lot of time and attention. The truth is that market monitoring fatigue and burn out can result in bad trader decisions or missed fundamental market movement.
The Dangers of Chasing Losses
If you’re a losing day trader, you may find pressure to keep trading to make back that loss as soon as possible. But that process can become a hazardous spiral of adding ever more risk in an attempt to recoup lost money through poor decisions. Attempting to chase losses just leads to even more money problems and more losses in an endless vicious circle.
No Guarantee of Success
Day trading appears to be appealing, but the truth is, it is everything speculative and risky. The market is volatile and unpredictable and while a number of traders can pull a few successes out of the bag, the vast majority of people end up losing money. One of the least certain and most challenging ways to invest demands skill, quick thinking and a major user of time. It’s not a reliable way to make consistent profits for most people.
Disclaimer: This list is solely the author’s opinion based on research and publicly available information.
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