Tempted by day trading? Here’s why you shouldn’t bother

If you’re lured by the promise of quick profits from day trading, this research may make you think twice.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Day trading, defined as the purchase and sale of a company’s shares on the same day, is often portrayed in the media as being both an exciting and potentially highly profitable endeavour. Thanks to our ability to get access to a lot of information that only professional investors were once privy to, it’s also a lot easier for anyone to give it a try these days.

The only problem with all this is that, based on academic research, the likelihood of success is very small. 

King for a day?

One of the most recent papers to be published on the subject is by three Brazilian academics (Chague, De-Losso and Giovannetti). They were interested in investigating just how possible it was to earn a living from day trading.

From a sample of almost 20,000 people, they found that the proportion of successful day traders fell as the number of days they traded increased. In other words, people became worse at trading the more often they did it. 

The researchers then focused on the 1,551 individuals who continued to trade in the equities futures market for more than 300 days. The percentage of successful traders (and how much they actually made) from this group was pretty shocking.

Based on the data, only a minute proportion (0.4%) earned more than a typical bank teller in Brazil in a day ($54) with the best-performing individual taking home $310. A staggering 97% of this sub-group lost money. 

Why such appalling numbers?

For one, markets movements are incredibly hard, if not impossible to predict over the very short term. Counter-intuitively, we can be more accurate about where things will be decades from now but not so much in just a few weeks or days. For this reason, day traders are at an immediate disadvantage to long-term investors.

Another issue with day trading is that it requires a high level of emotional discipline. Most of us struggle to keep a leash on fear and greed at the best of times, but trying to do so over a very limited period is arguably even more difficult. A profitable trade in the morning could lead to taking unnecessary risks in the afternoon. Alternatively, some less-than-optimal news could push us to sell and crystallise a loss or take profits too early. 

Day trading can also be highly complex, hence why those who do well tend to have devoted a huge amount of time and practice to developing their strategy. Most people won’t get this far, relying instead on their intuition (or placing their faith in get-rich-quick scams that have proliferated on the internet). 

And there are the costs to consider. Buying and selling frequently may or may not generate profits for those brave/foolhardy enough to do it, but it will always benefit those who get commissions, regardless of the result. Profits can quickly evaporate once fees are taken into account. 

In sum, consistently profitable day trading might be achievable by an incredibly small number of people but, to be frank, the chances of it being you, me or anyone else you know are very slim. Most of us are better off sticking to the tried and trusted way of growing our wealth, namely buying stocks in great companies, holding for years and doing very little in the interim. Go elsewhere if you’re looking for excitement. Stay Foolish. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Paul Sumers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

Could the 9.8% M&G dividend yield get even bigger?

Christopher Ruane reckons that, although the M&G dividend yield is already close to a double-digit percentage, it could get better…

Read more »

Investing Articles

How much passive income could I earn by putting £380 a month into a Stocks and Shares ISA?

Christopher Ruane explains how he'd aim to turn a Stocks and Shares ISA into four-figure passive income streams each year.

Read more »

Investor looking at stock graph on a tablet with their finger hovering over the Buy button
Investing Articles

2 passive income stocks I’m buying before an interest rate cut

With the market expecting interest rates to fall in August, time might be running out for investors looking to buy…

Read more »

Investing Articles

If I’d bought Rolls-Royce shares a year ago, here’s what I’d have now

Rolls-Royce shares have been the big FTSE 100 success story of the past 12 months and more. And there's still…

Read more »

Young female analyst working at her desk in the office
Investing Articles

If the Dow’s heading for 60,000 by 2030, can the FTSE 100 index hit 12,000?

Strategist Ed Yardeni predicts a 50% rise for America’s Dow Jones Industrial Average over six years. Can the FTSE 100…

Read more »

Investing Articles

Is the National Grid share price a once-in-a-decade opportunity?

The National Grid share price looks like a bargain. But there’s much more for investors to think about than a…

Read more »

Investing Articles

Here’s why the Rolls-Royce share price should keep gaining!

The Rolls-Royce share price is up 185% over the past 12 months, but there are a host of tailwinds that…

Read more »

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

Buying 1,852 shares in this ultra-high yield FTSE 100 income stock would give me £1k a year

Harvey Jones is keen to load up on this blue-chip income stock that pays the highest yield on the FTSE…

Read more »