by Guest Writer.
I see many investors who view day trading as the holy grail and the key to getting rich quick with minimal effort and who overestimate their own ability and knowledge and dream of being able to retire at which point they can then become day traders full-time. Declaring that you are a day trader seems to akin to wearing some sort of badge of honour. Of course it’s fine to dream but I’m afraid most are pretty much doomed to fail. Unfortunately, short term trading attracts far too many newbies who make brokers very rich.
I retired at 40 (about 14 months ago) and after investing in various assets classes for a fair number of years decided to step up my presence in the equity markets (l am still learning to this day and expect to continue to do so for ever). I do make occasional day trades sometimes but do not consider myself a day trader as I’m more comfortable swing trading which is usually done over a couple of weeks and is a excellent way to trade more obvious and pronounced trading patterns.
Equities including the highly speculative (short term trading via CFDs/spreadbets) along with my growth and income equities account for around 45% of my total portfolio. And to be honest I can spend all my day trading and I have done and I can tell you from my experience it can be an unfulfilling and lonely existence. To start with, one of the problems with day trading is that you need to be stuck to the screen all day with your finger on the trigger, so you need to be full-time. I work also, so it is impossible, and I’m not sure I want to ruin my eyesight doing it or become a recluse shut in a cupboard. In fact, the challenges facing the aspiring day trader are considerable, not insurmountable but yet almost all will embark ill-prepared and without sufficient knowledge, time or a sizeable enough pot of capital to trade with the net result being they are destined to be consigned to the 80%+ who fail.
I have seen first-hand a number of individuals who were successful to varying degrees in many aspects of investment or business who embarked upon the path to become a day trader and almost all failed unfortunately. It’s the reality of the situation in my experience.
Are you a Day Trader?
You might have already deduced it, but the one significant omission in my coverage has been day trading – which is the style of trading that most first-time spread bettors probably expect to be doing. Anyway, the first thing to say about day trading is that the idea is to notch up some profit (and ideally not a loss) on each and every trading day. Unlike longer term swing trading or position trading where it can go against you for some time before eventually paying off “big time”, when day trading you get to say almost every day “Hey, I made £N today!”. Well, that’s the idea.
The reason you know exactly how much money you made or lost – which is for real, not merely “on paper” – is because in the purest form you close all of your positions at the end of each and every trading day. The advantages are that you are not exposed to potentially devastating overnight price gaps, and the fact that you don’t hold positions overnight means that you don’t accrue any slow-but-sure overnight rolling charges.
But then for balance there are those few for whom day trading is very lucrative, but as I say I don’t personally know anyone I would consider a day trader. They may self profess they are but then this in itself doesn’t bear closer scrutiny. A number of us make trades which are closed out the same day but this does not make us day traders, simply that we make some day trades but will also run positions (including multiple positions) for longer and also invest long term in actual ‘real’ shares.
Position Trading
- Approach: Hold positions for longer periods (days, weeks, or even months).
- Objective: Maximize capital appreciation and potentially earn dividends, even at the expense of accumulating financing charges.
- Risk and Reward: Exposed to overnight price gaps and rolling charges but offers the potential for significant long-term gains.
- Diversification: Positions are typically more numerous and smaller to spread risk.
Day Trading
- Approach: Close all positions by the end of the trading day.
- Objective: Achieve a consistent daily profit while avoiding overnight risks and financing costs.
- Risk and Reward: Profits are realized daily but are often smaller and capped compared to the potential of a longer-term trade.
- Focus: Fewer positions, often trading larger stakes in series rather than parallel small positions.
Reflections and Trade-Offs
- Day Trading: Ideal for traders seeking daily certainty and avoiding overnight exposure. It requires active management and quick decision-making.
- Position Trading: Suits those willing to endure short-term fluctuations for potentially larger gains over time. It benefits from a disciplined approach, including judicious use of stop orders to manage risk.
Day trading is opening and closing a position within one working day. You have to be ruthless to make this work for you. What’s the point of my write-up? In my opinion three things matter above all else. Personal discipline, cash/capital management, and a strong sense of human psychology. And day trading is for the few that are ‘Vulcan’s’ and exhibit self discipline and control and are indeed successful.
And to all the aspiring day traders – is it for you? Well, if you smoke or drink or have another vice that you enjoy, ask yourself if you could stop immediately, no ifs or buts but just stop right now. If the honest answer is no then day trading is not for you in all honesty. If the answer is yes then ask yourself if you have enough capital to begin day trading and sufficient capital to live for 12-18 months (excluding your trading capital), can take the losses that you will incur to begin (and will continue to have to endure). If again the honest answer to this is yes then you may well indeed be one of those few who can be successful enough in day trading to make it your living.
