If you’ve ever considered becoming a full-time day trader, read this post first.
Based on all the different books and research I’ve read over the years, it’s pretty safe to say that trading is a lucrative way to create long-term wealth for most people.
This is not to say there aren’t some who succeed. The point is that becoming a successful day trader is extremely difficult and unlikely.
In this post, I will show you why I think stock trading is not worth it for the average investor.
What Is Stock Trading
Taken literally, stock trading means buying and selling stocks. The term itself doesn’t say anything about the timeline of these transactions, but it implicates a short time frame.
Day trading, for example, is a practice where a stock is bought and sold during the same trading day, and swing trading has a time frame from usually 1 hour up to a week.
Therefore, when we talk about stock traders, we mean active short-term investors whose aim is to make a profit by buying a stock and selling it at a higher price. Simple enough, right?
Well, not exactly.
Since stock prices tend to move quite randomly in the short term, making a profit by constantly buying and selling is not easy.
To overcome this adversity, stock traders have come up with different strategies to predict where the stock price will go. Unfortunately, I won’t go into details of quantitative analysis since I have no idea how that works.
Instead, let’s look at some mildly interesting and wildly depressing statistics about trading.
Depressing Trading Statistics
According to research done by Brad Barber et al. in 2009, active traders tend to lose around 2 to 3.8 percent on returns annually. In other words, most traders would be better off by investing passively.
Another research done by Barber concludes that less than 1% of all day traders can consistently earn positive abnormal returns over long periods of time. Over a six-month period, only 13% succeeded.
It’s also worth mentioning that all the successful traders did day trading as a full-time job. The odds of succeeding as a part-time day trader are therefore non-existent. Not to mention that the same statistics apply to people who day trade for a living.
In fact, trading stocks is so difficult that only 7% of traders continue trading after five years. In other words, 93% of all traders quit during the first five years. Moreover, around 80% of all day traders quit within the first two years.
Why Is Trading Not Worth It
I think the statistics speak for themselves. Whatever the activity, a less-than-1% success rate is not exactly tempting. Especially when it’s real money you’re dealing with.
When we reverse the numbers, there’s about a 99% chance of losing money as a trader in the long term.
If you aim to make a living as a trader, you should be aware of the realities. An overwhelming majority of day traders lose money in the process. The odds are not in your favour.
The cons of trading include:
- An extremely high level of risk
- Low probability of success
- Can cause a lot of stress
- A steep learning curve
- Takes a lot of time
- A lot of possible expenses and taxes
According to research and common sense, stock trading is simply not worth it.
Why Most Traders Fail
It should be clear by now, that most amateur and professional traders DO lose money. There’s no question about it. What’s not so clear, though, is why that happens.
The way I see it, it’s due to three main reasons.
Stock Price Movements Can’t Be Accurately Predicted
The first and the biggest reason is that stock prices can’t be predicted. While traders have extremely sophisticated strategies for predicting where the stock price is going, they don’t work consistently.
As Mark Twain put it back in the day: “Prediction is difficult – especially when it involves the future”.
The way I see it, it’s the uncertainty of the stock market that’s most difficult to accept. Trading and investing are all about dealing with those uncertainties in a successful manner.
People like to think that making a thorough fundamental analysis or analyzing the stock charts will somehow predict what will happen in the future. They will not.
The truth is that there are so many moving parts in the market that it’s impossible to know for sure what will happen in the future.
Psychological Biases
Since trading is all about successful decision-making, traders are extremely vulnerable to different psychological biases.
The most common of these include confirmation bias, loss aversion, illusion of control, and maybe most importantly, overconfidence.
The problem with cognitive biases is that they are ever-present. You can try to overcome them by reflecting and educating yourself, but believing in completely rational behaviour is folly.
Overall, our minds don’t really work all that well with financial markets. There’s too much randomness going on for us to accept.
Lack of Time, Practice, and Skill
As was shown by research, all successful day traders traded full-time. There’s practically no such thing as a successful part-time trader.
Trading takes an immense amount of effort and practice, which means it’s necessary to devote a lot of time to it. As it is, most people can’t do that.
Since skill is linearly tied to practice, it naturally follows that most traders will lack the necessary skills.
The Fantastic World of Social Media Traders
If you’re an avid doom-scroller like so many others, you’ve probably come across videos where people are sitting on their computers telling you how much money they earned that day.
By and large, it’s pure nonsense.
Most of the so-called traders on social media are merely selling you different services as a side hustle.
Do not be fooled into thinking that they are there to provide you with useful information.
The thing is that no one, and I mean NO ONE is going to share a wildly successful trading strategy with the whole world. Why? Because the second everyone knows it, it’s gone.
People on social media tell you that trading is a fantastic way to make millions of dollars, and that’s probably true, but only if you start with billions.
