Tons of people look into day trading as a way that they could potentially quit their jobs and start making tons of money from home. However, a 2019 study from researchers at the University of Sao Paulo found that only 3% of day traders who trade for over 300 days will turn a net profit, with the other 97% coming out losers.
It seems like the majority of people who get into day trading have seen some YouTube video about how someone got rich off day trading, and think, Hey, that sounds pretty easy. Unfortunately, the reality is quite different. People without in-depth knowledge of financial systems who get into day trading are losing tons of money every day. So, if you’re thinking about getting into day trading, here’s my advice: Don’t do it.
Here’s why:
Time Commitment
Day trading requires a huge time commitment. It’s not something that you can do in your off-hours and expect to be successful. The few people who actually turn a profit day trading are the ones that make it their full-time job.
Whether you’re trading stocks, futures, commodities, or currencies, you need to spend you’re entire day examining the market and identifying patterns in the market mechanics. If you start trading on a whim without learning about how prices in a market move, you’re going to end up losing big.
Capital Requirement
Successful day trading requires a lot of capital. If you only have a couple hundred or couple thousand dollars to put in, you’re probably going to lose it all.
The SEC actually requires margin stock traders (which are essentially day traders in the stock market) to have a $25,000 margin minimum in their accounts. This is meant to prevent people who don’t really know what they’re doing from skewing market prices by making uneducated day trades.
On the other hand, day trading in currencies has no minimum requirements. However, even the most successful day traders end up taking large losses, so day traders working with little capital may find that they lose their entire fund on just one or a couple trades and have to get out of the game.
Higher Taxes
Short-term investments are taxed at a higher rate than long-term investments. The short-term capital gains tax rate starts around a whopping 37%, while the long-term capital gains tax rate (which is applied to investments held for more than a year) is typically only about 15%. Plus, those long-term investments have a way better chance of making you money anyway.
Also, if you’re making a high volume of trades per day, you’re going to have to record all of those trades to report to the IRS. If you fail to do that, you could find yourself in some hot water with the government.
