Making money is the intended goal of both day trading and investing, yet their approaches (and often the outcomes) are very different. As with all investing choices, it is generally a good idea to educate yourself and strive to make informed decisions based on your own circumstances and goals.
Day Trading: Short-term, Trend-based, and Risky
Day trading involves the buying and selling of stocks, typically in a short time frame of days, hours or even minutes, to turn a quick profit by taking advantage of short-term price fluctuations.
Tales of wild day trading successes tend to capture our attention and sound appealing, but the reality is that most day traders eventually suffer from catastrophic losses or middling returns for the effort expended.
At the extreme day, traders are gambling that current trends will continue. Losses are constant, and big wins are the exception.
Day trading is a form of short-term speculation, and that requires an acute ability to forecast and follow upward and downward trends betting that they will continue long enough to profit.
Timing is critical, and you have to be prepared to make moves quickly. Even with all of these variables at play, luck often determines outcomes, and this is an unsettling driver of financial decisions.
Day Trading Failure Rate Is High
Most individuals do not find success in day-trading ventures in the long-term, and many learn the hard way that day-trading risks far outweigh rewards.
Yes, at times the payoff can be worthwhile, but it is rarely lasting. Day traders are always just one or a few trades away from ruin.
The roller coaster approach of day trading can be exciting but it is a risky option especially when your financial savings are on the line.
Day Trading, in a nutshell, is:
- Financially risky. Faster gains, but also sudden unexpected losses.
- Largely dependent on timing. You must have the ability to monitor prices and act rapidly.
- Complicated as far as taxes go. Difficult to track large number of trades.
- Transaction costs and taxes for trades can quickly add up.
- Very dependent on trends. A serious time commitment is necessary.
- Stressful and demanding both physically and mentally
