Day Trading: Impoverishing Dilettantes Since 1990

By Greg McFarlane AAA

Never underestimate the human capacity to search for workarounds. Plenty of enterprising people look at the unfortunates who don constricting clothes, commute to 9-to-5 jobs and passively accept annual cost-of-living increases while waiting for retirement, and think “There’s got to be a better way.” There are, in fact, several such ways. But most of them involve starting a business and spending years watching it grow while encountering setbacks and triumphs along the way. For the less-patient among us, that isn’t enough. Better to think that you’re outsmarting the masses while getting paid for the privilege, ideally with a minimum of effort. And few endeavors require as little visible effort as day trading does. Or so it would seem.

Wagering – on sports, on horse racing, on poker – has been described as “a hard way to make an easy living.” It requires restraint, self-control, and the creation and maintenance of a bankroll large enough to withstand the inevitable slumps that even the most successful must endure. That’s why aspirants outnumber legitimate professional gamblers on the order of thousands to one. The same goes for day trading, which is almost the definition of gambling – taking risky action in the hope of a desired result.

Advent of Electronic Communication Networks Changed Trading

In the prehistoric pre-Internet world, the only trading method available to most investors involved calling one’s broker and placing an order. Stockholders thus held onto their shares for years, far longer than modern stockholders do, in no small part because the act of trading itself was inconvenient. The advent of electronic communication networks (ECNs) has not only sped up trades but eliminated much of the need for brokers. That has a secondary effect: requiring fewer brokers means fewer and smaller commissions, which means that a stock’s price need not increase as much to net a profit for the speculator.

So is there any downside to speedy and effortless trading? How can instantaneous trades be worse than trades that take 10 days to settle? How can low commissions be worse than high ones? In a vacuum, the answers would be “none,” “they can’t” and “they can’t,” respectively. But inexpensive trading encourages trading, much like cheap alcohol encourages drinking. Day trading by its nature requires no interest in fundamentals. Does this company have healthy cash flow from operations? Is that company’s long-term debt sustainable? What about the other company’s year-over-year increase in profitability? Those and other pointed questions, vital to the buy-and-hold investor, couldn’t be less relevant to the day trader who’s interested only in the shortest of short-term price movements - which bear little resemblance to fundamentals. In fact, they bear little resemblance to anything. Technical analysis, i.e. noticing and attempting to derive meaningful information out of pricing trends, is all that matters to the day trader. So given the requirements for the position – real-time data feeds, thousands of dollars worth of proprietary charting software, a mindset incompatible with delayed gratification – is it possible to make a living as a day trader?

No, of course not. Well, it isn’t literally impossible, but the odds are less than poor. Author/hedge fund manager/serial entrepreneur James Altucher claims that for every successful day trader, 500 go broke.

Minimum $25,000 Bankroll Necessary to Start Day Trading

The Financial Industry Regulatory Authority (FINRA) points out that you need $25,000 in an account to even get started, which already eliminates the overwhelming majority of the population who can’t amass that much. (Or at least, can’t amass that much without leaving their credit card and student loan bills unpaid.) Once sufficiently fortified, you can trade quadruple the margin excess in said account. Go beyond that, and you’ll be subject to that two-word phrase that paralyzes investors of all risk levels with fear – margin call. Five business days to square up, and you can’t dip into other accounts with the same broker to do so. The legal requirements for day trading are so daunting – even before funding the fast Internet connection and order management system you’d need to day trade with any effectiveness – that the message from the regulators and brokerage houses is unmistakable: This is a pastime for already wealthy people with short attention spans and the wherewithal to withstand gigantic downside. Operating a day-trading account is like owning thoroughbreds or an America’s Cup team. You don’t just decide you’d like to enter the arena one day, at least not from a position of modest resources.

While the era of day traders going on murder-suicide sprees after sustaining losses seems to be behind us, the list of truly successful day traders remains a short one - if indeed it exists at all. A few people claim to make money as day traders, but curiously, such people’s activities seem to disappear from public view within a year or two of their initial gains. Enduring day traders are as common as enduring Russian roulette players, and for the same reason.

The Bottom Line

Being a successful day trader is as easy in both form and execution as being a successful lottery player. Just know which numbers are going to appear, and when they’re going to appear, then watch the profits roll in. And once you’ve perfected that, you can advance to predicting sporting events, blackjack hands, the weather and earthquakes. On the other hand, if you aren’t omnipotent, you’re probably better off investing with a long-term strategy - one that looks years down the road rather than milliseconds.

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