The Sketchbook of Wisdom: The first print of my book – The Sketchbook of Wisdom – got sold out in a matter of 3 months. Now, the second print is reaching me soon. Click here to reserve your copy. I will start shipping next week. Send me an email at firstname.lastname@example.org if you wish to place bulk orders.
One of the questions I get a lot, and especially in times like these, is, “How do I learn day trading in stocks?”
I ask, “Why do you want to day trade?”
The answer often is, “To make money, obviously.”
I ask, “Why do you think you can make money day trading?”
There is generally a pause, and then this reply, “I see so many people making money day trading.”
Well, the answer to the question “Can I make money day trading?” is “Of course, you can.*”
But like you read those product advertisements with an asterisk and a small text saying “* Conditions apply,” this also applies to day trading in stocks.
All that new stock market enthusiasts see is people making money in day trading, and the reason they see this is because they and their enthusiasm are born only in a rising market when day traders are making money.
But the fact is that, over the long run, most day traders DO NOT make money.
In fact, if I were to go by a study of retail day traders in Taiwan from 1992-2006, they found more than 75% of all day-traders quitting within two years, and with disastrous results. Also, the aggregate performance of all traders over the entire 15-year period of the study was negative. The study also found that only 1% of day traders earned profits over time. That is 1 out of 100. In other words, only 1 out of 100 day traders who try and make a career out of it by betting their life savings may make a living doing it.
The study concluded –
Inconsistent with models of rational speculation and learning, we document that the aggregate performance of day traders is negative, that the vast majority of day traders are unprofitable, and many persist despite an extensive experience of losses.
Another study published in June 2020 studied day traders in Brazil – those using the equity futures market to make their bets – between 2013 and 2015. It concluded –
[Out of] all individuals who began to day trade between 2013 and 2015 in the Brazilian equity futures market, the third in terms of volume in the world…97% of all individuals who persisted for more than 300 days lost money. Only 1.1% earned more than the Brazilian minimum wage and only 0.5% earned more than the initial salary of a bank teller — all with great risk.
…it is virtually impossible for an individual to day trade for a living, contrary to what brokerage specialists and course providers often claim.
While there is no such study conducted on Indian day traders, I am assuming the reality is not far from what has been seen in Taiwan and Brazil.
And not just day traders, the stats may be relatively better but absolutely bad even for people who indulge in short term trading (holding stocks for a few days to weeks).
As per data from India’s two main depositories, led by pandemic-driven restrictions and job losses that left millions of people at home with little to do, active demat accounts rose by a record 10.4 million in 2020. A leading broker has reported that 72% of the customers it added from October to December 2020 had never traded stocks before.
Only about 3.7% of Indians invest in equities, compared with about 12.7% in China and 55% in the US, and so a lot of people in India who have never traded stocks will continue to join in over the next few years. But the problem is when many of these new people enter the market with a ‘casino’ mentality – that the market is here to help them ‘make money quickly.’
The situation has been worsened by the rise of cheap trading apps and ‘influencers’ on social media like YouTube, Twitter, and Telegram who talk frequently about their stocks, provide stock tips, and run stock discussion chat groups. Worse, some of them also show off their daily P&Ls showcasing the amount of money they made in a single day.
I have nothing against day traders. Like I practice buy-and-hold investing, everyone has a personal choice on how to act in the stock market. All I am trying to do today is forewarn the new, young people trying to start their journey in stocks doing something – day or frequent trading – that has a high chance of causing them a lot of headaches and heartaches in the future.
Of course, not everything is under a person’s control. Our body’s chemical signalling system tells us that both gambling and trading are fun and veer us towards compulsive behaviour. Casino operators have long recognized this and have done everything possible to keep the dopamine flowing.
Now, cheap or zero-cost trading apps – in the name of a fintech start-up revolution – are playing the same role in the stock market, by making it cheaper and simpler for inexperienced people to trade online. Not to forget the plethora of stock tippers on social media who command huge followings based on their grand claims. These apps and people seem to be ‘democratizing’ investing, which is nonsense. All they are doing is directing inexperienced people to potentially hazardous paths while pretending as if they are doing them a favour.
The stock market does not operate exactly like a casino, my friend. It is the gamblers who think it does. In a casino, the longer you play, the more you will lose (remember, the house always wins). However, in the stock market, as history suggests, the longer you play (the long game), the more likely you are to win.
Of course, you will hear stories of someone (that 1 out of 100) who made a quick killing in the stock market through day trading, derivatives, etc., just as there was someone who left the casino with millions. But always remember this for a fact – these are exceptions, not the rule.
The rule is that you can build wealth from the stock market – and without the stress and dangers of short-term trading – by buying high-quality businesses and owing them till they remain high-quality. That was indeed the original purpose for which the market was created.
But if you are here to play the short-term game (for minutes, days, or weeks), be forewarned.
So, coming back to the question “Can I make money day trading?” the answer is “Of course, you can.”
But, (many) conditions apply. And it is certainly not a good idea.
- The Greatest Danger Investors Face (Ben Carlson)
- Millions of millennials are piling into India’s stock market, shows data (Business Standard
That’s about it from me for today.