Day Trading Your Money at Risk

#1
Day Trading Your Money at Risk

Day traders rapidly buy and sell stocks throughout the day in the hope that their stocks will continue climbing or falling in value for the seconds to minutes they own the stock, allowing them to lock in quick profits. Day traders usually buy on borrowed money, hoping that they will reap higher profits through leverage, but running the risk of higher losses too.

While day trading is neither illegal nor is it unethical, it can be highly risky. Most individual investors do not have the wealth, the time, or the temperament to make money and to sustain the devastating losses that day trading can bring.

Here are some of the facts that every investor should know about day trading:


Be prepared to suffer severe financial losses

Day traders typically suffer severe financial losses in their first months of trading, and many never graduate to profit-making status. Given these outcomes, it's clear: day traders should only risk money they can afford to lose. They should never use money they will need for daily living expenses, retirement, take out a second mortgage, or use their student loan money for day trading.

Day traders do not "invest"

Day traders sit in front of computer screens and look for a stock that is either moving up or down in value. They want to ride the momentum of the stock and get out of the stock before it changes course. They do not know for certain how the stock will move, they are hoping that it will move in one direction, either up or down in value. True day traders do not own any stocks overnight because of the extreme risk that prices will change radically from one day to the next, leading to large losses.

Day trading is an extremely stressful and expensive full-time job

Day traders must watch the market continuously during the day at their computer terminals. It's extremely difficult and demands great concentration to watch dozens of ticker quotes and price fluctuations to spot market trends. Day traders also have high expenses, paying their firms large amounts in commissions, for training, and for computers. Any day trader should know up front how much they need to make to cover expenses and break even.

Day traders depend heavily on borrowing money or buying stocks on margin

Borrowing money to trade in stocks is always a risky business. Day trading strategies demand using the leverage of borrowed money to make profits. This is why many day traders lose all their money and may end up in debt as well. Day traders should understand how margin works, how much time they'll have to meet a margin call, and the potential for getting in over their heads.

Don't believe claims of easy profits

Don't believe advertising claims that promise quick and sure profits from day trading. Before you start trading with a firm, make sure you know how many clients have lost money and how many have made profits. If the firm does not know, or will not tell you, think twice about the risks you take in the face of ignorance.

Watch out for "hot tips" and "expert advice" from newsletters and websites catering to day traders

Some websites have sought to profit from day traders by offering them hot tips and stock picks for a fee. Once again, don't believe any claims that trumpet the easy profits of day trading. Check out these sources thoroughly and ask them if they have been paid to make their recommendations.

Remember that "educational" seminars, classes, and books about day trading may not be objective

Find out whether a seminar speaker, an instructor teaching a class, or an author of a publication about day trading stands to profit if you start day trading.

http://www.sec.gov/investor/pubs/daytips.htm
 
#2
Day Trading is a strategy that ultimately ends in loss.

But why?

1. Cost of trading remains fixed
2. Losses increase and can range from small limited losses per trade to 100% loss per trade. GAPS cannot be avoided or predicted.
3. Profits are not guaranteed, cannot be predicted, and are certainly uncertain per yield per trade.
*4. And most important reason is MEAN REVERSION

As the frequency of trading increases, the net profit decreases, or closely matches the mean<average>.

Example.
You take 1 exam that has 100 questions. What is the likelihood or probability of earning 100%? it is 1/100. Suppose you take the exam and earn 100%. Your average win is 100%, but you only have 1 sample data.

Now suppose you increase the sample data from 1 exam to taking an exam with 100 different questions everyday for the next 180 days...what is the likelyhood or probability that you earn 100% on every single exam during that 180 day period?

Statistically speaking, the average always wins. So although you earned 100% on the very 1st exam, at the end of the 180 days, your average <mean> will decrease from the original 100% to somewhere closer to 50%.

Now apply that to day trading which requires a high frequency of trades with no guarantee of limited losses, no guarantee of profits or even that the profits will out weigh losses, and fixed costs per trade.

mathematically speaking, it becomes clear that day trading increases risks and lowers net profits. Form an investment standpoint, this is a poor bet.

Our job isn't to create an equal and balanced trading situation. Our job is to create/find trading situations that are unequally weighted in our favor. otherwise, we lose. Don't play superman and try to beat the math...instead, acknowledge the math and exploit it to your advantage. The house <market> is quite happy and content to have hundreds of thousands of day traders because they make money regardless of whether or not the trader makes money.

Masterchief
 

jamit_05

Well-Known Member
#3
Masterchief said:
Day Trading is a strategy that ultimately ends in loss.

But why?

1. Cost of trading remains fixed
2. Losses increase and can range from small limited losses per trade to 100% loss per trade. GAPS cannot be avoided or predicted.
3. Profits are not guaranteed, cannot be predicted, and are certainly uncertain per yield per trade.
*4. And most important reason is MEAN REVERSION

As the frequency of trading increases, the net profit decreases, or closely matches the mean<average>.

Example.
You take 1 exam that has 100 questions. What is the likelihood or probability of earning 100%? it is 1/100. Suppose you take the exam and earn 100%. Your average win is 100%, but you only have 1 sample data.

Now suppose you increase the sample data from 1 exam to taking an exam with 100 different questions everyday for the next 180 days...what is the likelyhood or probability that you earn 100% on every single exam during that 180 day period?

Statistically speaking, the average always wins. So although you earned 100% on the very 1st exam, at the end of the 180 days, your average <mean> will decrease from the original 100% to somewhere closer to 50%.

Now apply that to day trading which requires a high frequency of trades with no guarantee of limited losses, no guarantee of profits or even that the profits will out weigh losses, and fixed costs per trade.

mathematically speaking, it becomes clear that day trading increases risks and lowers net profits. Form an investment standpoint, this is a poor bet.

Our job isn't to create an equal and balanced trading situation. Our job is to create/find trading situations that are unequally weighted in our favor. otherwise, we lose. Don't play superman and try to beat the math...instead, acknowledge the math and exploit it to your advantage. The house <market> is quite happy and content to have hundreds of thousands of day traders because they make money regardless of whether or not the trader makes money.

Masterchief

As the previous article clearly says, inspite of the fact that you trade in situations that are in your favor you end up losing in the long run. He, I believe, he is pointing the reader in the direction of money management.

Very true, the market initially take plenty out of you in terms of time, money and emotional stability. After all that is done, if you have learned you lessons well then good... else hasta la vista baby and this time you wont be back!
 
#4
hi,
Happy New year.
I just started trading in commodities about two months back.
Being novice i lost money.
I m not able to understand how one can make money in the market.
Can anyone guide.:(
 

vince

Active Member
#5
Oh boy, I wish there was as simple an answer as the question you have asked ,but you could start by going through a good book on tech. analysis and that would be a good beginning.
 
#6
I would advise you to attend a proper technical analysis course if you want to learn technicals..For that you may contact the following id they will give you the details of the courses i have learnt technicals from them and im trading successfullynow id"[email protected]"
 
#7
SUBHASH said:
hi,
Happy New year.
I just started trading in commodities about two months back.
Being novice i lost money.
I m not able to understand how one can make money in the market.
Can anyone guide.:(
Hi,

Please mail me if you would like to trade with a system.

Thanks
Ropewlkr
 

Similar threads

Broker Special Offers

Intraday Higher Leverage

Save up to 90% in brokerage and get higher leverage for intraday trades.

Name:Phone:
Email:City:
State:
Are you a day trader?