Asked and Answered: Questions to Ask If You’re Considering Day Trading

Day traders buy and sell financial instruments frequently to take very short term, speculative positions for a quick profit, hoping to have more profitable trades than losing ones, and striving to keep their day trading winners bigger than their losses.

In the United States anyone who makes more than four day trades in five business days using a margin account is designated a “pattern day trader” by the Financial Industry Regulatory Authority, and is required to report to FINRA for financial oversight as well as meet certain regulatory requirements.

Day traders trade a number of assets. They operate in equities markets such as U.S. stocks, state currencies such as the Euro and the Yen, cryptocurrencies like Bitcoin, commodities like cotton or oil, and derivatives like short contracts. Their participation in the market helps it along by adding liquidity and velocity to the market’s movements.

If you’re considering going into business day trading, you might want to know the answers to some of the following questions:

How Many Day Traders Are There?

Looking over the available information there are probably over a million day traders globally, but it’s hard to know for sure. That’s the best sense of it one can really get with no official list of day traders out there to consult. Even with pattern day traders (those that execute a given number of trades within a given time period) reporting to the Financial Industry Regulatory Authority (FINRA), it’s impossible to get hard numbers on this.

But one thing is for certain: The number of day traders is constantly fluctuating as traders turn over and new entrants to the market try their hand at day trading.

What Is The Average Length of A Day Trader’s Career?

Short. Day traders working for institutional finance companies can make a lot of money investing other people’s money for a salary and for a performance based commission on their successful trades. But they are under enormous pressure in a high stress environment, locked into a grinding competition with colleagues and the rest of the market. Most day traders are young, under the age of 40, and many retire by their mid-30s.

Part of the reason why isn’t merely that they can retire after earning a great living grinding through their 20s in an investment bank’s fast-paced trading floor, but because they can’t unlearn a decade of market trends they grew up with when markets inevitably change. For instance, millennial traders have no idea what it was like to trade in a pre-functionally zero interest rate environment. There is an expiration date on good day traders.

Average Salary / Rate of Return for Day Traders?

This is another question for which the data isn’t complete enough for anyone to know for sure. In researching this question you will find a number of websites full of hypothetical scenarios describing how much a day trader could make given a set of assumptions amounting to how much money they start with and how well they do.

These kind of articles (like this one from The Balance) essentially say: Day traders can do very well–– if they do very well.

For a more scientific approach, only one percent of the day traders studied by economist Brad Barber at the University of California made any profit at all, while 99% lost money day trading. The study’s authors cite “perverse security selection abilities.” They found that for some reason individual investors seem to be very good at losing money day trading.

Another study of 66,000 U.S. households by Barber and a fellow UC economist, Terrance Odean found that frequent traders (including day traders) under performed investors who buy and hold by nearly a third. They also found that the more frequently a participant traded, the more they under performed the study average.

As if that weren’t enough, a 2013 research study at the Cass Business School at City University of London concluded that monkeys throwing darts at stock pages will outperform the average day trader.

Conclusion

If you’re considering day trading, you most certainly want to have the many advantages, resources, and management of a major financial company at your back. Going it alone as an individual day trader is most likely a recipe for losing your money. Markets don’t operate randomly, but they do respond to a functionally limitless number of random inputs. When these are aggregated on the scale of a major national economy or the global economy, the result is a truly unpredictable market. At least it’s not predictable on the time scale and in the way that day traders would need to make a reliable living at it.

Should you decide to go for a career in day trading with a major firm, expect to have no time for family, friends, or hobbies. Be prepared to give up a decade of your life eating, breathing, and literally sweating trades in a cutthroat environment full of seriously smart, insanely hard working people.

Be sure and keep something in your desk for the indigestion. But if you don’t see yourself ever being passionate enough about day trading to make those kind of sacrifices, there are more different money making opportunities than ever before in today’s economy, and the smart investment strategy for the savings you accumulate is to buy and hold.

Featured image courtesy of Shutterstock.