Day Trading: Make Millions or Go Bust

Day trading – buying and selling the same security in the financial markets intraday – has always held an allure for people wanting to make their fortunes quickly. I’ve been seeing a lot of stories about day traders recently, so I decided to share some of these today.

Bloomberg News recently reported on a mystery day trader in Japan, who has moved Japanese markets and has accumulated 16 billion yen (that’s over 140 million USD) in a decade:

His tax return showed he traded 1.7 trillion yen worth of Japanese equities in 2013 — about half of 1 percent of the value of all the share transactions done by individuals on the Tokyo Stock Exchange. On his busiest day, he says, he bought and sold 70 billion yen worth of stocks.

At current exchange rates, that’s over 640 million USD worth of stocks bought and sold in ONE DAY. These are mind-boggling numbers!

Who wouldn’t want to make this much money from day trading at home in their pajamas? But for every successful trader we hear about, there are numerous others losing money and we don’t always get to hear about them.

Online trading

Online trading has opened the financial markets to anyone with a computer and internet connection.

The BBC aired a two-part documentary entitled “Traders: Millions by the Minute” that provides a fascinating look at the lives of both professional and amateur traders, who make and lose thousands of dollars in a day. The documentary covers traders in different areas, from traditional face-to-face trading in the pit to the cutting-edge low-latency algorithmic trading. It also pays special attention to online trading, which has made markets accessible to anyone with a computer and internet connection.

The first episode focused on experienced traders and some students of day trading trying to join the ranks of the professionals while the second episode took a look at some amateur day traders hopeful that they too can make the big bucks from trading at home. The differences between the two camps are vast:

  • The professionals have learned to deal with the losses that accompany their high risk jobs. They are more likely to have mastered their emotions and will stick to a plan instead of impulsively reacting to the markets. People involved in day trading always emphasize having the right frame of mind for it, which is likely why psychology coaches for day traders abound.
  • The professionals have specializations. They focus their attention on building expertise in certain products, like equities, commodities, or forex.
  • The professionals demonstrated an inherent understanding of their markets. They’re not just following charts for technical trading. They develop a strategy for their trading day based on what’s expected to happen in the markets. They know what historically impacts price movements for these products. For the big players, it’s even more important to understand how global events impact the markets.
  • The professionals are tuned in to news almost 24/7. They are subscribed to premium news services and have a network of contacts providing tips, allowing them to get information before the rest of the world.
  • The professionals are equipped with the latest hardware and software to properly trade.

For me and my husband, the amateurs were a more interesting lot to watch, perhaps because we were curious as to whether day trading would be something we could do. It became quickly apparent though that a lot of the people featured were way in over their heads.

One woman, a mother of three working as a nurse on weekends, struggled to raise the 6000 pounds she needed as initial capital to start forex day trading at home. She did well on the simulated trading software before embarking on the real thing but she visibly wasn’t emotionally ready to trade real money. Conversation between me and my husband while watching this segment:

Mrs. Bookworm: She’s already so nervous just dealing with a few hundred pounds. I think she’ll end up making bad decisions and losing her money.
Nomnomhead: This woman is an idiot. Why is she trading the Turkish lira? What does she know about Turkey or the lira?

Then there was the man who had given up a successful business in antiques to go into day trading. He followed a diligent routine of getting up early, eating a good breakfast and going for a walk to clear his head before starting his trading activities. He spoke of how he was really getting a feel for the markets now. Further into the episode, we found out that he had made a profit of only 10 pounds after day trading for several months!

Nomnomhead: He should just unplug his computer. He’ll be saving himself 10 pounds per month right there!

Of course, some amateurs featured were making a profit. One man seemed to earn well enough from his day trading activities and was just asked to trade for a fund with 50 million pounds. Then there were two younger men, who were recruiting investors for their trading business using social media. They were managing about a million pounds and seemed to have a good run so far.

Mrs. Bookworm: So what happens if they make some bad trades? Are investors going to be just, “Meh, better luck next time?”
Nomnomhead: Sounds like a lawsuit just waiting to happen.

The documentary ended with some trivialities about the featured participants, nothing inherently satisfying. Everyone was hopeful but there was no sufficient demonstration of any real fortunes being made yet.

For me, the quote that stuck came from Karen Finerman, a hedge fund manager featured in the first episode, who takes a more long-term approach to investing:

I find it very difficult to react to market moves on any particular day. The idea that I’m gonna get it right at the top and then I’m gonna, you know, sell on top and buy at the bottom, I can almost guarantee you that I won’t be able to do that.

This pretty much sums up my sentiment about day trading: you are more likely to get it wrong than right. I’m not dismissing day trading as a valid means of earning a living but in many instances throughout the show, I felt there was little difference between this activity and gambling. It makes me uneasy to know that people already struggling with money, who have no clue about the financial markets, are looking to day trading as a means of making lots of money quickly. They are the ones who have the most to lose.

Our reactions after the show ended:

Mrs. Bookworm: I feel better about being a long-term investor.
Nomnomhead: How do I get started on day trading?

If you’re interested in day trading, I suggest you watch the documentary and decide for yourself if the possible high returns is worth the risk of losing your time, effort, and money.

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