Day trading is one of the most talked about methods of buying and selling stock. If done correctly, this method of trading can be highly lucrative.
However, the reality is that most day traders do not make money. In fact, it’s estimated that 80% of all day traders end up losing money in the long term.
So, how is it that day traders so often lose money despite experience and careful strategy? We’ll be answering that question in this article, so read on!
What Is Day Trading?
Here’s a short introduction to day trading for those who aren’t familiar with the strategy.
Day trading is a method of share dealing that involves buying and selling shares, often multiple times over, in the course of a single day.
The idea behind day trading is rooted in the fact that minor price fluctuations can affect shares throughout the day, meaning that if you repeatedly buy and sell, you can, in theory, profit from those fluctuations.
It has to be said, however, that the key words in that definition are ‘in theory’. As we mentioned in the introduction, this method only proves profitable for about 20% of day traders.
Let’s take a look at why that is.
Why Day Traders Lose Money
Choosing The Wrong Stocks
As a day trader, before you can start buying and selling to make money over the course of the day, you need to be able to choose stocks that you know are going to be profitable from the beginning.
This is hard enough at the best of times, but when you have to factor in perfect timing (more on this later), it becomes incredibly difficult.
Finding the stocks that are likely to skyrocket during the day takes a lot of diligent research, and it’s not often easy to find the time to do this when you’re actively trading all day.
Therefore, one of the main ways day traders set themselves up for losses before they’ve even started selling is choosing the wrong stocks.
Getting The Timing Wrong
Even if you do choose the right stocks for day trading, messing up the timing can mean you lose money anyway.
Unfortunately, this is very common in day trading and is one of the biggest reasons why day traders end up losing money.
Something many people don’t fully realize, even if they’ve been trading for a while, is that most of the money made in the stock market is made over a period of a few days out of the year.
If you miss these crucial few days, the best case scenario is that you only make a very modest amount of money trading throughout the rest of the year.
However, if you’ve also incurred losses over the course of the year and then miss the most lucrative days of the year, you won’t have any profit to speak of at all.
The role of overconfidence in day trading losses can’t be ignored.
Unfortunately, because it’s widely known that most day traders don’t make money, those who do make a profit can allow it to go to their heads.
The reality is that even with the most meticulous planning and research, a lot of successes in day trading come down to chance.
However, successful day traders can sometimes lose sight of this and attribute all of their success to their ability as a trader.
They’ll see the statistics showing that only 20% of day traders make a profit and decide that the reason they’ve succeeded so far is simply because they’re more intelligent and more skilled, completely ignoring the possibility that luck may have been on their side so far.
This was proved by a 2017 study that showed that successful stock traders tended to disproportionately attribute money made to skill rather than chance.
Of course, it’s not a bad thing to have confidence in your trading abilities, but if you forget that there’s always a level of risk involved, it’s easy to make reckless or ill-advised decisions.
This is the downfall of many day traders
Frequently Asked Questions
Is Day Trading A Good Idea?
Day trading is risky and the statistics show that you’re more likely to lose money day trading than to make a profit.
However, if you have the time to thoroughly research stocks that are likely to be successful and put together a plan of action, it might be worth giving it a try.
With that being said, we would only recommend day trading if you’re in a financial position where you can afford to potentially lose money.
Is Day Trading Illegal?
No, day trading is not illegal. People caution against it because of the extent of the financial losses it can lead to as opposed to any legal reasons.
How Do I Start Day Trading?
If you do want to start day trading, the first thing you will need to do is open a brokerage account. This will allow you to transfer money into your account and start trading.
Before you start buying and selling, though, you should have a plan of action based on research conducted into the stock market.
Each morning, you will need to review your plan and follow it according to your watchlist for the day. Then, at the end of the day, you’ll review your trades and calculate how much you have gained or lost.
There are several reasons why most day traders end up losing money rather than making a profit.
The first two reasons are selecting the wrong stocks to trade and not getting the timing right. However, a huge contributing factor to day trading losses is overconfidence.
Traders can easily forget that there is an element of luck involved in trading when they have enjoyed success for a long time, and this can lead to reckless trading.
If you’re planning to get into day trading yourself, please start with a well-researched plan and some form of financial backup.