The Fool FAQ

Day Trading

The Fool FAQ

We are asked many questions about short-term trading, that is jumping in and out of a stock trying to make money on small price moves. We think a Fribble written for us by someone who's been there said it best:

A Farewell to Trading, by Jeff Schatz (Nazdek)

After one full year of online day trading, I've come to an important conclusion: it is not as profitable as investing for the longer term, at least for me. After carefully analyzing my hundreds of trades and monthly statements, it was apparent that several "buy and holds" (IOMG, AMER, etc.) this spring accounted for the bulk of my profits, while the day trades whittled away at those gains, slowly but surely. Like gambling, the odds are stacked against you, and the more you play, the more you lose. Granted, market conditions can play a large part in the outcome, but most of you cannot "beat the house" in the long run by trading.

That is not to say that there are not successful day traders out there, but I believe that there are very, very few. Human nature being what it is, few individuals will admit to failing, and I suspect that most of you who are trading will ultimately come to the same conclusion that I have reached -- or go broke denying it. Trading, like any job, is hard work and offers no free ride. Remember that there are thousands of market players working very hard at trying to take your money away; every winning trade requires a loser at the other end.

Online trading has other pitfalls beside the obvious potential to lose hard-earned money. It can become an addiction, and the cyber-world can become a substitute for work and family. You may come to feel that you can't be away from your computer monitor for 10 minutes or you will miss a hot stock or your position may downtick. If your quote feed goes down, you may get very anxious. If you make a bad trade or fall behind in a position, you might "double up" or over-trade, trying to make it back all at once. These are the same symptoms of compulsive gambling and are very easy to fall into, especially if you are making money at the time.

The cost of online trading can be deceiving if all you look at is your account balance. Quote services, commissions, margin interest, and taxes have to be deducted, not to mention the lost earning power of a job plus what your capital might have made sitting in a mutual fund in the greatest bull market in history.

All of the pitfalls above pale in comparison to the biggest obstacle to trading success -- yourself. Emotions are a terrible thing and will undermine many would-be sound trades. The adage "buy low, sell high" is much wiser than it may seem, as most do not and cannot accomplish it because of their emotions. Few have the discipline to enter a stock before it is rising or when it is dropping, yet in many cases that is the only way to "buy low." Even fewer have the ability to "sell high" as they are either shaken out by sudden drops and miss the real run, or hold on until the stock has fallen out of favor. Other popular idioms like "sell when others are buying," "don't fight the tape," and the like are equally profound if you examine your own trading habits.

I've made more money than I have a right to and the market offers great opportunities, but I will now try to profit from it as an "investor," not a trader.

Best of luck to all of you and thanks for all of your advice and camaraderie.