Steer Clear of Day Trading

If most people who day trade lose much or all of their money, why would anyone in his right mind do it? Well, you can blame the usual suspects -- greed and ignorance. You can also throw in overconfidence.

The research of finance professors Terrance Odean, Brad Barber, and Simon Gervais has linked overconfidence to frequent trading, and frequent trading to diminished investment returns. They suggest that traders tend to give themselves more credit for successful trades than unsuccessful ones, thereby becoming overconfident. (People also often tend to remember or dwell on investing successes rather than blunders.)

Desperation might also be at work. Once you've lost most of your money, you might frantically trade with what's left, trying to recover your losses. A grisly scenario, no? Many Fools prefer decade trading to day trading.

Here's a previous article with more information on day trading. And here's a Fool Boring Portfolio report on overconfidence in investors and common investing mistakes we all make.

If you question our negativity when it comes to day trading, read up on it a bit more. The Commodity Research Bureau notes, "The grim reality is short-term trading and especially day trading can be hazardous to your wealth" -- and estimates that 92 percent of day traders trying to scalp actually lose money.

Try being a year trader, or better yet, a decade trader. You'll probably make more money that way.


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