Great news, I found the perfect way to deal with the pesky problem of having too much money – start day trading. Why? You’re almost guaranteed to lose money! It’s hard to find an exact number, but most research suggests 80-90% of day traders end up with less money than they started with. Don’t just believe those unconfirmed stats, believe my example!
I was a senior in high school, sitting in my Physics class and watching my road to millions pave before me. My dad and I started a stock account with $3,000 and within four months took it up to $28,000. This was too easy.
Luckily for my viewing pleasure, I had to spend a fair amount of time on the computer for class, so I could sneak a peek at the ticker throughout the day. Our account went up $5,000 in one day! Oh yes, I wouldn’t even need to go to college at this point; I was going to get rich day trading.
At the time, we didn’t know we were experiencing the peak of one of the most raging periods of a bull market ever. The year was 2000. Any stock that had ‘.com’ or bio tech in the name was skyrocketing to the moon. The old traders said it couldn’t last, but this was a new market, and they didn’t understand how to make the quick money.
Day trading seems like quick money because of the possibility of turning hundreds into thousands and those same thousands into tens of thousands in a short period of time. You could be one of the people you hear about on TV that gets rich from trading penny stocks! Unfortunately, those ads only pull in suckers.
How do you day trade? There are a variety of ways to do it. You can trade on news, current events, cycles, and technical analysis. You can attempt to identify a pattern, extrapolate it out into the future, and then make a bet based on that. They are extremely short term bets and generally you don’t care about the outlook of the company.
Unfortunately for me, I’ve tried most of those strategies with day trading, and I’ve proved I’m unsuccessful at them!
Now, back at school where I was getting rich day trading. In March of 2000, things started to take a turn towards the worse. The market was in the beginning of a major correction that wouldn’t subside until 2003.
At that time we didn’t know that much, but we knew that our portfolio dropping $7,500 in one day wasn’t a good thing!
I still remember my mom asking why we weren’t taking any of our profits out. The answer was easy… when you fire your workers; you can’t make any more money with your company! So, we kept our workers (dollars) employed in the risky stocks, and soon our large profits were erased.
The beat down continued and before we knew it, we were below where we started.
It was a wild ride and the two best things that came out of it were my interest in the financial markets which pushed me to study Finance, and Mr. Market teaching me some tough lessons. It taught me to stay in it for the long term when investing.
Now that I learned my lesson, there is no way I would ever day trade again. You would think so at least! When I started making money after college, I went back for another drink. It is just too tempting!
This time, I was playing around in some penny stocks and oil futures. Once again, I lost money. It was finally then that I learned for good (hopefully) that I will always be part of the 90% of day traders who are unsuccessful.
It’s really not worth it.
Day trading adds stress to your life, and you’ll find yourself checking the markets many times a day (or hour) and focusing more on stocks than your day job. There were times in my second day trading venture where I’d check the market multiple times within a minute. It was addicting!
Even Andrew Carnegie discussed this addiction in the book, Andrew Carnegie and the Gospel of Wealth. He said, “I found that when I opened my paper in the morning I was tempted to look first at the quotations of the stock market. As I had determined to sell all my interest in every outside concern and concentrate my attention upon our manufacturing concerns in Pittsburgh, I further resolved not even to own any stock that was bought and sold upon any stock exchange.”
Carnegie was addicted to checking his stock prices, and he didn’t even have to deal with the instant access of the Internet!
Instead of day trading, my current strategy is to invest in low cost mutual funds (Vanguard) that attempt to match market returns (index funds). The appeal of the quick buck is too risky, and it can hurt you long term. There are many items working against a day trader that I’ll discuss in the future. Click here to learn how to start investing.
Warren Buffet said day trading, like gambling, is a fools game. His rules of investing are the following: “Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.”
Yes, that sounds like common sense, but common sense hasn’t always influenced my actions! Some people might have experienced success day trading, but most of the stories you hear are just to sell books or trading software. Enter at your own risk!
Have you ever day traded? What is your trading strategy?