You should avoid day trading because day trading is highly risky, costly and time consuming. Day trading means completing a trade within a trading day. Day trading is different from swing trading because day traders will not continue a trade for more than one trading day. In this article, you will learn top 20 reasons why you should avoid day trading.
1. High commission in day trading
Day trading is really costly. High commission rate is the real culprit to trade frequently. But, remember that commission rate varies from country to country. Let’s say my trading commission. I have to pay 0.4% commission both for buying and selling shares. If I buy 1000 shares at $50 for each share, total cost is $50000 (1000*50).
My commission is $200 (50000*0.4%). Per share cost with commission is $50.2 (50200/1000). If I sell per share at $50.50, my selling amount is $50500 (1000*50.5). Thus, commission is $202 (50500*0.4%). Profit is $98 (50500-50200-202). Profit percentage is 0.19%(98/50200)*100. 0.4% commission is the minimum commission rate.
On the contrary, if your broker house’s commission is 0.6% or more, you will lose capital for that trading.On the other hand, if you sell at $49.5, you will lose both commission and capital. So, day trading is not suitable for all. Day trading is suitable for highly sophisticated traders.
Day trading is highly risky. Almost 95% day traders unable to preserve their trading capital. But, they don’t leave the market for hope and desire. They are always persistent to regain their capital.In some cases, they even no capital to continue trading. Hence, you should master on day trading strategies before starting day trading. You can start with swing trading at the beginning. Gradually, you can enter into day trading.
Let’s share a real example
I took a trade two days ago. But, I made a silly mistake to select the company. I didn’t know the date of first quarter board meeting. Meanwhile, company held a board meeting. It declared minus 0.57 EPS. So, share price fell 10%. As my trading exchange has circuit breaker, price didn’t cross more than 10%. Otherwise, price might fall more 20%. Just for a mistake, I had lost nearly 10% trading capital in a day.
3. Time consuming
Moreover, day trading is time consuming. A day trader has to watch the trade screen during trading hour. Moreover, day traders are active in the market. Hence, they can’t do any full-time job along with day trading. If you do full time job, you can start swing trading or investing on fundamental stock.
4. Need more study for day trading
A successful day trader always studies the market condition. Day traders need to catch the trend. Moreover, they are trend trade reversal. They analysis trending sector to entry. If you haven’t enough time to study the market, you should avoid day trading. Moreover, if you are weak in research, you should search for other investing opportunity.
5. Greed and emotion
Human being has greed and emotion. There is no place for greed and emotion in day trading. You have to take decision immediately. Therefore, you should keep your greed and emotion aside to take buying and selling decision. If you are a over emotional or greedy, you should avoid day trading.
6. Less profitable
To be honest, day trading is less profitable than swing trading or investing. You may hear the name of some successful day traders. But you don’t know about 95% unsuccessful day traders who have lost all trading capital in day trading. As day traders are trend traders, they have to count lose if they make any trading mistakes. So, think before starting day trading.
7. Day Trading needs huge capital
Day trading needs huge capital. Successful trading rate is very low in day trading. So, traders want to earn more in single trading to cover the loss of wrong trades. If you haven’t collected large capital, you should avoid day trading. Moreover, you should not risk your large capital until you have achieved enough knowledge about trading.
8. More intelligent
Undoubtedly, day traders are more intelligent than general investors. Some people may call them stock gamblers. Simply, they can control a company’s stock. As they have large capital, they can influence over common investors. You need to know the tactics of day trading. If you are not an intelligent person, you should gather knowledge. Otherwise, you should better to keep distance from day trading.
9. Low success rate
Many writers and traders accept that the success rate of day trading may not more than 5%. I think, success rate may below 5%. There is no statistical data to tell you. Are you ready to enter into 5%? Think carefully.
10. High Tax
In some countries, capital gain is taxable. This rate for day trading is high. In this situation, you should think about your country’s tax rate. Calculate commission and tax rate. There is no reason to lose money continuously in stock market. Rather you should invest in strong fundamental stock.
11. Mental Pressure in day trading
Don’t you control your mental pressure? Avoid day trading to keep your mind fresh. Generally, a stock price fluctuates from time to time. Basically, investors hold stock for long time. So, short term price fluctuation doesn’t create mental pressure on them. But, in stock trading, you will dishearten for downtrend market. You need to learn downtrend market strategies to survive in downtrend market.
12. Trading Mistakes in day trading
Trading mistakes frequently happen in trading. Traders want to earn more profit. They apply only technical analysis and trade penny stock. Their mission to gain more in less time. As a result, they can commonly make trading mistakes. Basically, a prudent trader can save trading capital by applying the golden rule of stock trading: stop loss. So, avoid day trading if you can’t successfully apply stop loss rule.
13. Technical analyst
Day traders are technical analyst. They have enough knowledge on candlestick chart and some other technical indicators. You need to learn how to apply candlestick chart in trading. So, avoid day trading if you don’t like to learn chart analysis.
14. Highly Volatile
Trading stocks and investing stocks are not similar. Traders choose highly volatile stock so that they can sell easily. But, highly volatile stock has a serious problem.As price is highly volatile, you can’t exactly predict the price movement. In stock market, fear is stronger than greed. So, if your trade goes against you, you will need to calculate more loss than probable gain.
15. Stock selection
Day trading stock selection is somehow difficult. You have to fulfill some criteria before picking a stock. For example, you should consider volatility, risk, trend and traders’ interest to select a stock. Don’t you like to spend more time to pick a stock? If your answer is ”No”, you should avoid day trading.
16. Uncertainty in day trading
Although stock market investing consists of uncertainty, day trading is the top risky trading. Continuously, you will face uncertainty in trading.
17. Quick Rich
Want to quick rich from day trading? Avoid day trading if you want to rich overnight. In order to learn trading techniques, you need to spend two to three years. But, your learning may not guarantee your success.
Gamblers use high sophisticated technology to gamble stock. They even manipulate stock price. They know the stock price manipulated tactics. You need to compete with them. If you can trade along with them, you may earn more. Otherwise, your money will go to their hands.
19. Margin Loan
Traders always use margin loan. Margin loan can vanish your trading capital. Moreover, your broker will give you pressure when market goes down to sell your holding. As they only think about their loan, you have to sell at loss. So, better option to trade with own capital. But, it is not easy to escape from margin loan.
20. Sell short mistakes in day trading
At downtrend market, traders prefer to sell short. Sell short is better option if you can understand the trend. But, if your trade goes against, you have to buy back at high price. So, short sell is riskier to buy back at high price. If you can’t apply short sell techniques, you should avoid day trading.
I have shared top 20 reasons why you should avoid day trading. And I didn’t write this post to prevent you from day trading. I have shared these reasons so that you can avoid day trading mistakes. Moreover, I believe that we should learn about negative before learning positive.
If you learn problems, we can get probable solution. Financial Ask is your good friend. Financial Ask always tries to share both positive and negative aspects so that you can succeed in investing career.