Editor’s note: This article was first published in March 2018, with a later update. Broker welcome bonuses of 50 euros for new traders were restricted for retail CFD clients in the EU by ESMA from 2018, and the HFT and forex figures date from 2017-2018.
Time to update this post, in which we answer these questions: what is intraday trading, or day trading? Which type of trading is most profitable? And above all, do traders really make money in the long run, or do they consistently lose it? Who are the people who make money from this system? And the golden-goose question: can you make a living from trading?
I start from the premise that some people won’t agree with the definitions and data I’m about to give, but I also start from the basis that the statistics are on my side, as is my experience of more than 15 years in the markets, during which I’ve met all kinds of investors and traders.
The truth about trading: can you make a living from it?
Each of those investors and traders, with their own experiences and stories, has given me a fairly large representative sample, which reminds me why great investors insist that day trading is not the way to get rich quickly. It isn’t even a way to keep your finances healthy.
It’s hard to ignore the key fact: it is estimated that more than 90% of traders lose money consistently. A huge mass of traders around the world who, because they are playing a zero-sum game, place their money in the hands of a few institutional traders.
What is intraday trading, or day trading?
Day trading consists of buying and selling financial assets over a short space of time. In other words, opening positions and closing them on the same day, never leaving a position open after the market closes.
Day traders are analysts of short trends, often using automated systems, who aim to make a certain amount of money every day. A buy-sell trade can last a few seconds, a few minutes or even a few hours.
Let me take this opportunity to recall one of the best-known sayings in stock-market investing: “Anyone who tells you how much they make on the stock market each day is losing money by the end of the year.”
If stock-market investing is exciting and sometimes stressful, trading is highly stressful. Few people enjoy trading, and in many cases the person who enjoys it is the one who isn’t making money, so there are cheaper forms of entertainment out there.
“The most profitable investment is the one that most resembles watching grass grow.”
What is a trader?
Obviously, a trader is someone who trades 🙂 A professional trader knows that this is not a part-time job. Quite the opposite: it is a full-time job, because although it isn’t advisable for a trader to trade for more than eight hours (some say trading for more than four hours straight is counterproductive), they need to spend a large part of their time not only trading but studying charts (technical analysis) to spot opportunities or chart patterns that indicate a particular trend is about to form.
To do this, traders use various technical indicators, which can also be worth knowing when timing your entry into a medium- or long-term investment.
In most cases, traders don’t follow the financial news and don’t want to, because the market isn’t always reasonable, and sometimes it does the opposite of what common sense says it should.
That’s why traders build an investment system that they apply whenever the system gives them the green light, regardless of the news coming out in the market at that very moment.
*All of this is very relative, and plenty of traders trade on the news.
Why, in theory, does a trader have more peace of mind than an investor?
I say in theory because in practice it has been shown that this isn’t the case at all, and long-term investors don’t suffer the stress that traders do.
What sets traders apart is that when the market closes, they don’t keep positions open for the next day. They sell everything at the end of the session, so they don’t have to worry about news that may come out overnight while the market is closed. They seem to have the reassurance that if the market opened in the red, they had nothing to lose, while the investor with an open position has woken up to losses without being able to do anything to avoid them.
But it isn’t true that traders have more peace of mind in this respect
Countless studies have shown that the long-term investor not only makes more money in the long run with a single stock-market purchase, but completely outperforms any trader.
Studies on trading versus investing say that:
- 95% of investors who made a diversified 10-year investment obtained better returns than even professional investment funds.
- More than 90% of day traders don’t make money over 10 years of activity.
I don’t think you need to be a genius to interpret these two figures.
On the other hand, you’ll hear it said that a trader needs, on average, two years and losses of around 10,000 euros to learn before finding that winning system that will let them live off trading. Ninety per cent never find that system that lets them make a living from trading.
What’s more, in two years, for the price of two investment books and a few hours of study on your own, you could earn those 10,000 euros instead of losing them.
And that’s when the question comes up…
So who does make money from trading?
And you know what, I’m glad you asked, because I’m going to answer it.
I divided the people who really make money from trading into the following groups a long time ago:
1. The intermediaries
Without a doubt, these are the ones who really make the most money from trading. That’s why they give you free courses so you can learn to trade. It’s also why they give you a 50-euro bonus to get you started.
Burton Malkiel, an old hand in investing, used to say that trading won’t buy you a yacht, but with your trading you will help others buy several yachts. He was referring to the intermediaries: the owners of the platforms where you invest, or the brokers.
2. The people who teach trading
There are traders who have the formula for making money from trading. They are so good that they devote their time to teaching others how to make money from it.
Courses and books that teach other traders have proved to be an excellent way of making money from trading.
3. High-frequency trading machines
High-frequency trading is dominating the market. It is estimated that in the forex market more than 90% of the trillions traded every day are traded without human intervention. In other words, it is the machines that trade, and so it’s the owners of those expensive machines who make money from trading.
Even expert traders from the past say they now prefer online poker, because the algorithms are cleaning them out.
4. The trader who hit the marble and lived
Have you ever heard one of those stories about a guy on a motorbike, with no helmet, doing 120 km/h, who is thrown off, breaks the marble of a building’s facade with his head and doesn’t get so much as a scratch? That story is true.
Logically, he should have died on the spot. Everywhere, in every activity and in every profession, there are exceptions that prove the rule. In day trading there are also superstars who are statistical outliers.
See also: This man turned 12,000 dollars into almost 2 million trading penny stocks
What is the most profitable type of trading?
While I don’t know anyone who consistently makes money from day trading, there is another type of trading that is calmer, smarter and more profitable.
Trend trading
With trend trading, on the other hand, I do know many professionals who make money on a regular basis in a much calmer way.
What’s more, why day trade in the currency market when currencies tend to have broad, long-lasting trends?
In trend trading we can comfortably apply the technique of cutting losses and letting profits run. Futures, options, warrants, CFDs… many products can be used for this kind of short-term investing, making fewer trades, paying far less in commissions and limiting the stress of trading, as well as having more room for manoeuvre when placing stop-losses.
Trend trading means taking advantage of a complete bullish or bearish trend, which may last anywhere from a few days to weeks or even months. It would be the equivalent of a very short-term investor who collects the gains from a trend before it changes direction.
See also: Is day trading more profitable than long-term investing?
Featured image: Nenad Stojković, CC BY 2.0, via Wikimedia Commons.
