Editor’s note: This article was first published in September 2010, and its argument that frequent trading is costly because of commissions has weakened since, as many brokers have moved to low- or zero-commission trading.
Elena from A Coruña asks us what exactly a trader is and what day trading means. Some people won’t agree with the definition I’m about to give, but the statistics back me up. Trading is one of the most dangerous practices for an investor, since 90% of traders don’t make money; basically, they lose money.
What is trading
Trading consists of buying and selling shares over the very short term. Traders may make 5 or 6 buy-and-sell trades in less than 25 minutes. It involves constantly monitoring the movement of one or more stocks or indices, trying to spot when a small rise or fall is about to begin, and buying or selling according to the trend they expect.
In those seconds or minutes when a share starts to rise, that’s when they buy or sell and quickly pocket the gain, in some cases a tiny gain from a rise that lasted just 45 seconds.
They usually use analysis software, which in some cases has buy and sell orders programmed to trigger when the share reaches a high or a low, or when technical analysis indicates that the share is close to a support or resistance level.
If investing in the stock market is exciting and at times stressful, trading is extremely stressful. Few people enjoy trading, and in many cases those who do enjoy it don’t make money, so there are cheaper forms of entertainment.
That said, there is also trend trading. This kind of trading may indeed be profitable, because it isn’t based on intraday trades (buying and/or selling and closing positions on the same day). Instead, it consists of riding an entire upward or downward trend that can last anywhere from a few days to weeks or even months. Trend trading would be the equivalent of a very short-term investor who takes the profits from a trend before it reverses.
What is a trader
Obviously, a trader is someone who practises trading :). In most cases, trading is a full-time job, since it requires constant attention and a series of decisions made with pinpoint precision, guided by a 100% technical and statistical method.
In most cases, traders don’t follow the financial news, nor do they want to, because their game isn’t based on knowledge of the market but on the most basic things. A chart, a rise, a fall, a green light from their speculation system is all they need to spring into action.
What sets them apart is that when the market closes, they don’t hold on to any shares until the next day. They sell everything at the end of the session, so they don’t have to worry about changes the next morning or about news that comes out while the market is closed.
As I said at the beginning, most traders don’t make money during their first few months. It’s said that they often don’t make money during their first 2 years. 90% never make money from this practice in their entire lives, and it can become extremely expensive, given that so many buy and sell orders mean paying multiple commissions.
Having said that, some American traders earn staggering amounts of money from trading. Of course, they don’t treat it as a game but as a source of income, which in many cases runs to millions of dollars a week, although the ones that make the most money are high-frequency trading machines: automated systems that are generally owned by large firms.
In short: trading isn’t advisable for an investor who likes making money, unless you’re made of special stuff, as some people are.
Further reading
- Why stock market investing is the most profitable investment
- Free beginner’s course on stock market investing
- Warren Buffett’s thinking summed up in 12 quotes
- What Arthur Rock analyses before investing in a company
Featured image: Ank Kumar, CC BY-SA 4.0, via Wikimedia Commons.
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