Opinions on day trading vary depending on who you talk to. Some of the criticism you hear is warranted, while others are just emotion-led opinions. Let’s distinguish between misconceptions and the actual facts surrounding this practice.
“Day trading is simply gambling; nothing more and nothing less.”
False. It certainly is true that plenty of gamblers try day trading, just as plenty of gamblers may make other types of investments based on a “hot tip.” But it’s a mistake to label all-day traders as mere gamblers. That opinion usually comes from outsiders who form their views based on movies or social media.
Professional day trading is a highly disciplined process. It involves learning a great deal about the movements of stocks, assessment of risk — and perhaps most importantly — human nature. I mean not only how other traders react to market movements but also how you react when things are going well and especially when they are not.
Day trading is humbling to those who work hard at it before it ever becomes consistently profitable, but that outcome is possible.
Related: How to Find Great Stocks for Day Trading
“Scientists talk about separating a signal from noise. With long-term investing, it’s possible to detect signals like stock fundamentals. With day trading — where positions are held for hours, minutes, or even seconds — it’s all noise.”
False. I can’t speak for high-frequency trading, where trades are sometimes measured in milliseconds, but no matter what duration you hold stocks, it’s possible to detect signals among a great deal of noise.
Day traders are keenly focused on patterns that repeat. I’m reminded of fractal patterns that can be found in giant trees and also under the microscope.
It’s certainly true that sometimes I might notice a pattern forming in the last series of trades on a stock, and I may even take a position only to discover that the expected pattern did not materialize. That’s when I will likely close out the position, cut my losses, and turn it into a learning moment. I am a huge proponent of journaling after a trading session. I write what I thought would happen, then what did happen, and what I can learn from the episode. Rigorous analysis of trades is my shortcut to getting better over time.
“Day trading is inherently riskier than any other form of investing, except for crypto and futures.”
False. If I take a position in a $7 stock, not only will I be watching it intently, but even before I take that position, I will have calculated the point at which I bail out if the stock goes south — no hand-wringing; just executing a plan. Therefore, I’m not at risk of losing the entire value of that position. Contrast that with people who trade penny stocks that can go to zero quickly, or options investing where one moment the option is worth something, and the next moment it has evaporated. That kind of investment is too rich for my blood.
Related: How I Turned $583 into $10 Million by Day Trading
“Day traders who take positions in order to “stick it to the man” are misguided at best and idiots at worst.”
True. I’m all for investing in entities that provide a useful service and are not involved in illicit or unethical activities. But I don’t regard investing as the soapbox for broadcasting my views. When I am day trading, I’m looking for stocks that at this very moment are behaving in a certain way: they have made a significant move on high volume; that move is because of certain things like news of a successful drug trial or announcement of a new product; and the stock trades in my preferred range of $2 to $10, among other factors. My goal is to invest prudently and professionally. Then I can use any profits to make political statements.
“Gamers make the best day traders.”
False. It certainly is true that many great day traders also are veteran gamers; but simply being fast with the keyboard does not make you a natural day trader.
Gamers bring to the table certain advantages like being proficient with commands and also being able to make quick decisions. Both are useful when day trading, but they are not enough. You must also have a great deal of self-awareness and self-discipline: At this moment are your emotions being hijacked by FOMO after you just saw some traders make a killing on a stock? Are you tempted to ride a stock down “just a little longer” when your preset threshold indicates you should sell?
Fast fingers are a plus. What’s even more important is what goes on between your ears.
Related: 10 Important Things You Need to Know Before You Try Day Trading Stocks
“Highly trained, professional day traders can actually eliminate market risk.”
False. I’ve logged well over 20,000 trades in my career. I am an intensive student of the profession and have every tool at my disposal. Even so, I cannot eliminate all market risks. The most that I can hope for is to learn from my mistakes and be highly disciplined in how and when I place my trades. That goes a long way toward reducing my risk. Even when I’m completely on my game, occasionally the market will smack me back into humbleness.
Perhaps there are certain professions, like sports, art or poker, where extreme cockiness can pay off. Day trading is not one of them.
“Anyone including day traders can get lucky in the short term, but eventually that luck will run out; it’s called ‘regression to the mean.'”
False. I do think that “beginner’s luck” is a thing. Some people get excited about day trading because they got a hot tip, opened an account, and made a few thousand.
Let’s say that is you. Congrats. What’s important is what you do next. If you think you can find another hot tip and replicate that success, you’re in for a rude surprise.
Instead, if that first easy win made you curious about day trading and you decide to get serious about how it really works, then good for you. You’re on the ground floor of a whole lot of steps you must take to become a disciplined and effective trader.
