Since the 1990s, day traders have become fairly ubiquitous. Day trading is still a full-time job for some; they spend all day sitting at their home computer buying and selling stocks online in an effort to make money from short-term price fluctuations. Some of them even make money – you might even hear them bragging at your local coffee shop about all that extra cash they made that day. If you’ve ever thought about trying your own luck with day trading on the stock market, here are five important things you should know first:
1. Most day traders don’t make any money. It’s true: academic studies like this one show how hard it is to make a profit through day trading. As the study notes, 8 out of 10 day traders lose money – and while heavy day traders earn gross profits, that money is not enough to cover transaction costs.
2. You’re irrational. No matter how level-headed you think you are, when it comes to money, we have inherent behavioral biases that are nearly impossible to overcome. Academic studies have covered these at length – hindsight bias, loss aversion and plain old greed can lead us to make bad decisions when it comes to managing our money and buying and selling stocks.
3. You need to have money to burn. Or, at least you need to have enough money so that any losses won’t financially destroy you. Retirement savings, for example, should be off limits to day trading. The same goes for your emergency fund. And borrowing money to day trade is also pretty risky business.
4. You don’t get to keep all the money. As the academic paper referenced earlier found, most heavy traders don’t earn enough to cover their transaction costs. That’s because every time you buy or sell a security, you’re paying for the privilege. Transaction costs can vary depending on what platform you use.
5. You can’t predict the future. Day trading is essentially market timing. You make money when you anticipate what others are going to do and act first. Hit the buy or sell button too late and you can lose more money. The thing is, nobody can predict the future – you need to be able to handle the uncertainty and to stay calm in the meantime.