Is trying to learn day trading a complete waste of time?

Question

I understand there is a lot of people, maybe even most, who believe day trading is far too risky or the person trying day trading won't be skilled enough. I have gotten interested into investing lately, so I've invested my small amount of money I get weekly mostly in mutual funds.

However, I am intrigued by day trading in addition to long-term investing. I have been watching a lot of videos online about it. Do you think that, given several years of practicing day trading / teaching myself about it in general (I wouldn't have $25k in account balance anyway for a few years), I could become successful?

I don't want to waste a lot of time learning something that is really only profitable for professional finance wizards. I am weary of listening to some random YouTube people saying this works, while also happening to sell courses in doing it.

If it matters, I am 18 and going to college for 4 more years.

Answer 1

The vast majority of people that day trade lose money. Of those that make money, most aren't going to beat an index fund. Of those that actually beat an index fund, very few do so without investing so much time that they'd be better off working elsewhere. If you have a $1 M portfolio and you can reliably beat an index fund by 1%, that's worth $10,000. If you're spending 20 hours a week, that's 1000 hours a year so you're valuing your time at $10/hour. You'd do better working those 20 hours a week at McDonalds or putting in extra time at your day job (particularly as a fresh graduate). If you've got a $100,000 portfolio, you'd be valuing your time at $1/hour.

There may be folks that actually have the skill to beat an index fund year over year. My wager, though, is that it is luck an survivorship bias more than skill-- if you have a 50% chance of beating the market in any particular year and you start with 1024 traders, you'll likely end up with 1 that beat the market every year for a decade merely by chance. If you got 1024 gamblers together and had them bet red or black on a roulette wheel, 1 would win 10 spins in a row. Whichever gambler happened to hit that amazing streak would happily and loudly tell you about his "betting strategy" and convince you to follow it. The 1 gambler that lost 10 times in a row would be a lot less vocal.

Most mutual funds fail to beat the market consistently (particularly after fees) and those are run by large finance companies that can employ small armies of analysts, traders, programmers, etc. They spend huge sums to get market data fractions of a second before you do, run it through the fastest hardware you can buy programmed by a small army of developers implementing algorithms developed by teams of PhDs in quantitative finance. If there was a way to learn to consistently outperform the market, you'd have to expect those companies to find and exploit it. If they can't, I'd wager that you can't either. Most people that tell you that you can learn to day trade are lucky, bad at accounting (i.e. they think they're doing well because their portfolio has grown even when it's lagging a simple index fund), or just trying to sell you some "How to Daytrade" courses (hint, if you could beat the market consistently, you're not going to be selling courses on how to do it to college students, you'd be making billions of dollars running a hedge fund or teaching hedge funds how to beat the market).

I'd recommend focusing on your college classwork for now. Put your money in an index fund, let it work for you, keep your focus on college. If you want to get involved in active investing, learn about how to do fundamental analysis and look to buy some value stocks that you can hold for years and decades, not hours and minutes. It's rare but there are handfuls of people that beat the market over time with that approach (think Warren Buffet for example). You probably won't beat the market investing in individual stocks but you're a lot less likely to lose everything. And learning fundamental analysis has benefits outside of investing when you're dealing with problems in the business world.

Answer 2

"High-frequency trading" has made day trading basically obsolete. Computer systems can take an order feed, process it through a set of algorithms, and issue an order in under a microsecond. The company operating this system will have a team of PhDs analysing the effectiveness of the strategy and tuning it frequently. Your odds of reliably beating this as a day trader are .. low.

There are also a large number of companies out there looking to exploit the fantasy of getting rich from day trading. Things like "binary options" are basically unregulated gambling, and in many cases you can lose more than you invest.

Given your situation I would look at your nearest investment bank's job listings and over the course of your degree (which should be maths or a maths-heavy subject) work towards that. While it's very hard work it's also very well paid, and much less exposed to the risk of losing all your investment.

Answer 3

The fundamental problem with day trading is that it's essentially gambling - you are buying this or that stock in the expectation that its price will increase in the short term. But this is subject to the problem of the Gambler's Ruin ( https://en.wikipedia.org/wiki/Gambler%27s_ruin ).

You are betting your fixed resources against an opponent ("the market") with essentially infinite resources. Even if on average stocks go up in the long term, in the short term they fluctuate. If you stay at it long enough, eventually you will hit a losing streak that will wipe you out. "Successful" day traders are just the ones lucky enough not to have been wiped out YET.

Answer 4

I've worked in stock market data analysis and distribution (albeit it was some time ago, around the time of the 2007 crash).

Day traders are losers, literally.

There's no way you're going to be able to compete with the large trading institutions and their automated systems. These systems can react far faster to market fluctuations than you will ever be able to manually. Plus they don't incur the transaction fees and delays with brokers that you as a small time player will inevitably have to deal with.

Also, these large trading firms have access to market data that's far more accurate and up to date than what's sold (or worse yet, freely available) to the small traders in their living room or home office.

While in theory you could buy the realtime data (well, delayed by a fraction of a second to a few seconds depending on the source) but it'd be prohibitively expensive, and the cheap data is updated only once an hour or so, maybe once every 10 minutes for an intermediate plan.

For day trading, which depends on making snap decisions on rapidly fluctuating prices, that's lethal. And without a budget of many millions of dollars in ready cash to buy and even more invested already in stock, you're not going to be able to afford the more up to date data sources simply because of their price.

You're also not going to get the high speed transactions that make use of such data sources worth the cost, as you'll be dealing through brokers that typically delay your transaction a bit in order to bundle it with other transactions in order to reduce their operational cost (say you order your broker to buy 100 shares in XEDAS, he'll delay that for maybe 10 minutes in the hope of getting more orders for that stock, as his cost to place an order doesn't depend on the size of the order, only on the number of distinct instruments). That broker also will charge you fees, of course, which fees may well be higher than the return on rapidly buying and selling small amounts on minute price fluctuations, and again you won't have the money to buy large enough amounts in order to make that game yield enough income to yield more than the brokerage fees per transaction.

As a small time investor, it's far better to buy into what appears to be a stable, slowly growing, portfolio. A few transactions per month in normal times, each large enough to make the transaction fees small in comparison to the transaction size, and keep that stock long term even if the price fluctuates downward for a while (of course if it appears to be going down the drain completely, maybe because of changes that make the company unstable, sell off and reinvest in something else, but don't do so just because this morning it was 10 cents higher than it is in the afternoon).

Answer 5

No, it is not a complete waste of time. It could result in a loss of money, but you will definitely learn something! Early experience in the market is valuable and so is pursuing areas of interests, especially if it could lead to a career. Squeezing out every penny from your investment isn't necessarily the most important thing when you are very young. Just take caution, which you are already demonstrating by posting here.