Day Trading: What It Is & Why It's a Bad Idea | The Motley Fool (2024)

People on social media occasionally tout the large profits they collect from big, one-day bets made on speculatively held stocks. For some, this form of trading is tempting. What's better than buying a few hot stocks, waiting an hour or two, and then making more than $100,000? It seems so simple and so easy.

Day Trading: What It Is & Why It's a Bad Idea | The Motley Fool (1)

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The reality is that consistently making money as a day trader is a rare accomplishment. It's not entirely impossible, but it's certainly an imprudent way to invest your hard-earned cash. For people considering day trading for a living, it's important to understand some of the pitfalls.

Day trading vs. investing

Day trading vs. investing

Investing in the traditional sense generally does not refer to day trading. While "investing" is a broad term, it's well established that the most efficient way to consistently earn stable and positive after-tax returns is to simply buy stocks or bonds and hold them for the long term.

Long-term, buy-and-hold investors typically do not experience the emotional swings that afflict most day traders -- even when their holdings gain value. If you were to create and maintain a portfolio of low-cost exchange-traded funds (ETFs) instead of day trading, the odds of turning a profit over a long time horizon would be overwhelmingly in your favor.

Definition Icon

Exchange-Traded Fund (ETF)

An exchange-traded fund, or ETF, allows investors to buy many stocks or bonds at once.

Investors with long-term holdings are well positioned to diversify their investments and mitigate the risk of large losses. Day traders who buy and sell just a few popular stocks have portfolios that are much less diversified, so the movements of any one stock have a much larger effect on their financial health.

Is it a good idea?

Is day trading a good idea?

Day trading is not worth it for the vast majority of day traders. Anecdotally, it's been widely estimated that 95% of day traders ultimately lose money, and it's been empirically demonstrated that about the same percentage of unprofitable day traders continue despite losing money. If you're thinking about day trading for the first time, it's important to know that day trading profits are hard to come by. You can make money day trading, but you'd be in very limited company.

The paradox of day trading is that it may seemlike a good idea, depending on how the stock market is performing. Day trading is essentially a play on the short-term volatility (or price movement) of a stock on any given day. Day traders often buy and sell stock the same day, buying at a perceived low point during the day and then selling out of the position before the market closes. If the stock's price rises during the time the day trader owns it, the trader can realize a short-term capital gain. If the price declines, then the day trader accrues a short-term capital loss.

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CBOE Volatility Index (VIX)

The Chicago Board Options Exchange Volatility Index, or VIX, is an index that gauges the volatility investors expect in the stock market.

A primary reason day trading is a bad idea has to do with transaction costs. The two most visible transaction costs are taxes and fees, such as trading commissions. If you purchase a stock and sell it before one year has passed, then any increase in the stock's value is taxed at your ordinary income tax rate, which is likely significantly higher than the tax rate that would be applied if you held the stock for a year or more. Depending on the trading platform you use and the type of security you're trading, you may also pay a commission every time you buy or sell a stock. These transaction expenses can be costly for day traders.

The inherent nature of the capital markets also typically makes day trading a losing proposition. Minute-to-minute stock price movements on any particular day are little more than random, and they tend to instantaneously adjust to any new publicly available information. Further, when you place a market order to buy or sell, you're trading against a large swath of sophisticated institutional investors and high-frequency trading machines. The probability that you know something professional investors do not -- without it being illegal insider information -- is extremely unlikely.

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Buy Limit Order

An order that instructs your broker to buy a stock or other security only at or less than a specific maximum price.

Given that successful day trading is a rare feat -- and even rarer on a consistent basis -- there are many reasons to stay away from day trading entirely. You worked hard for your money and should avoid putting it in unnecessary peril. Especially when you consider the significantly inflated tax rate assessed on short-term trades (sales of any stocks held for one year or less), it's fair to say that day trading is not worth the risk.

Can you make money?

Can you make money day trading?

Most of the time, day trading is not profitable, but it canbe profitable. Investors sometimes succeed at predicting a stock's movements and raking in six-figure profits by accurately timing the market. These traders may be dabbling in penny stocks to achieve their outsized returns, or they may simply get lucky on occasion -- as many people do at casinos every day.

You may hear stories of some traders making money in professional settings, leaving their investment firms, and calling themselves "successful" day traders -- but without ever having risked their own money in any trades! A non-professional investor trying to learn day trading using his or her own money is unlikely to succeed. On rare occasions, an individual investor can capture explosive gains. But far more common are the instances of day trading ruining lives or financial situations.

For most investors, the best way to grow their money, be it a $10,000 investment or a $20 one, is over the long term.

Is it gambling?

Is day trading gambling?

It's fair to say that day trading and gambling are very similar. The dictionary definition of gambling is "the practice of risking money or other stakes in a game or bet." When you place a day trade, you're betting that the random price movements of a particular stock will trend in the direction that you want.

In the same way that expert poker players study and practice relentlessly to excel at the game, the few successful day traders (who may be at institutions) tend to be extremely well-versed in how markets move in the short term. If a novice poker player were to challenge a table of experts, he or she may conceivably win one or two hands but would almost certainly lose money overall. While day trading is not precisely the same as gambling, one thing remains true about the practice: Most of the time, it is not profitable.

See Also
Day Trading

Penny stocks

Are penny stocks the same as day trading?

No, they aren't. "Penny stocks" and "day trading" are two entirely separate terms, but they are often found together in various contexts. Penny stocks are simply stocks that trade for less than $5. Day trading is the act of buying and selling a stock on the same trading day or within a similarly short time period. Many day traders choose to focus on buying and selling penny stocks, but day trading is possible for all stocks, even blue chip stocks.

Some day traders buy and sell primarily penny stocks because of the possibility of a high percentage gain in a relatively short period of time. A stock priced at $1 would only need to gain $1 of value for an investor to realize a 100% return on their initial investment. By comparison, a stock trading at $100 would have to gain another $100 in value before that same 100% gain would be achieved. Day traders sometimes try to exploit quick (and random) upward movements in penny stocks to capture large percentage gains -- despite stocks' movements during any single day being incredibly unpredictable and the gains far from guaranteed.

Taxes

Day trading taxes

When you buy a stock and then sell it within the same trading day, you might make money. But you'd also owe state and federal income tax on the gain, which is equal to the price at which you sell the stock minus the initial purchase price. The short-term capital gains tax rate is the same as the tax rate assessed on your ordinary income (e.g., the money you earn by working).

Definition Icon

Ordinary Income

Ordinary income is any income taxed at ordinary income rates.

Generally speaking, this tax rate is higher than the tax rate assessed on long-term capital gains, which are levied only after a stock or other security stays in your portfolio for a year or longer. The considerably higher tax rates applied to short-term capital gains are another reason to consider holding your investments for at least a year.

Aside from its inherent riskiness, day trading is especially not worth it when you factor in the significantly higher tax rates imposed on short-term trades.

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How you invest your money is ultimately up to you

You get to decide how to best deploy your money. If you decide to day trade, then the most prudent approach is to keep the dollar amounts at risk relatively low -- say, no more than 10% of the value of your overall portfolio. That amount might be enough to gain day-trading experience, but it won't completely devastate your portfolio if your short-term positions incur large losses. If you're also considering other strategies to build your net worth, you'd be wise to learn the many benefits of investing for the long term.

Day Trading FAQs

Is day trading stocks profitable?

The vast majority of day traders never make a profit, and those who lose money often continue to lose money, hoping for a win.

How much does an average day trader make?

More than 95% of day traders lose money, rather than making it. So the average day trader is sitting at a loss.

What stock is best for day trading?

The most popular stocks for day trading tend to be stocks that have a lot of trading volume throughout the day. Their prices will fluctuate more, allowing for a potential day trading win.

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Day Trading: What It Is & Why It's a Bad Idea | The Motley Fool (2024)

FAQs

Why is day trading a bad idea? ›

Day trading is a high-risk, high-reward strategy. If your decisions don't work out, you can lose money much more quickly than a regular investor, especially if you use leverage. A study of 1,600 day traders over the course of two years found that 97% of individuals who day traded for more than 300 days lost money.

Why do 90% of day traders lose money? ›

Lack of trading discipline

This is the primary reason for intraday trading losses in the intraday trading app. Trading discipline has to focus on three things. Firstly, there must be a trading book to guide your daily trading. Secondly, you must always trade with a stop loss only.

What does Warren Buffett think of day trading? ›

A classic Buffett quote indicates that he is no fan of day trading: “If you aren't willing to own a stock for 10 years, don't even think about owning it for 10 minutes.” This emphasis on holding a position for the long term means a very low level of trading activity.

How much money do day traders with $50,000 accounts make per day on average? ›

However, a widely accepted figure suggests that a successful day trader can pull between 1% to 2% of their account balance per day. For a $50,000 trading account, this equates to approximately $500 to $1,000 per day.

Is day trading actually worth it? ›

Studies have shown that more than 97% of day traders lose money over time, and less than 1% of day traders are actually profitable. One percent! But of course, nobody thinks they will be the one losing out.

How much money do day traders with $10,000 accounts make per day on average? ›

With a $10,000 account, a good day might bring in a five percent gain, which is $500. However, day traders also need to consider fixed costs such as commissions charged by brokers. These commissions can eat into profits, and day traders need to earn enough to overcome these fees [2].

What percentage of day traders go broke? ›

Key Points. Day trading is a strategy in which investors buy and sell stocks the same day. It is rarely successful, with an estimated 95% loss percentage.

How many day traders go broke? ›

According to a study by the U.S. Securities and Exchange Commission of forex traders, 70% of traders lose money every quarter, and traders typically lose 100% of their money within 12 months.

What happens to most day traders? ›

The vast majority of day traders are unprofitable, and many traders persist in trading for years despite their losses. It is estimated that 80% of day traders quit within the first two years, and nearly 40% quit within one month. After three years, only 13% remain, and after five years, only 7% remain.

Who are the richest people from day trading? ›

A Historical Perspective on Wealthy Day Traders
TraderNotable Trade
George Soros1992 short position on the British Pound
Richard DennisTurtle Trading in the futures market
Paul Tudor JonesPredicting and profiting from the 1987 crash
John PaulsonShorting the subprime mortgage market (2007-2008)
2 more rows
Jan 15, 2024

Can day traders be millionaires? ›

While it's possible to become a millionaire through day trading, it's not likely. Most traders end up losing money in the long run. A small number of traders, however, are able to consistently make money and achieve success.

Can you make $200 a day day trading? ›

A common approach for new day traders is to start with a goal of $200 per day and work up to $800-$1000 over time. Small winners are better than home runs because it forces you to stay on your plan and use discipline. Sure, you'll hit a big winner every now and then, but consistency is the real key to day trading.

Which type of trading is most profitable? ›

The defining feature of day trading is that traders do not hold positions overnight; instead, they seek to profit from short-term price movements occurring during the trading session.It can be considered one of the most profitable trading methods available to investors.

How many hours do day traders work? ›

Most independent day traders have short days, working two to five hours per day. Often they will practice making simulated trades for several months before beginning to make live trades. They track their successes and failures versus the market, aiming to learn by experience.

Is it unethical to day trade? ›

While day trading is neither illegal nor is it unethical, it can be highly risky.

Can you make 100k a year day trading? ›

But, those who follow strict trading rules can easily make an income of over $100,000 per year or more. Likewise, the national average salary for day traders who work for a company is $122,724 (source: Glassdoor). You can see below that this average varies based on where you work.

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