Day trading isn’t easy and profitable to most traders. If you’re not Thomas Miller or John Roberson, you may reconsider day trading because of the following reason:
- Tax. Day traders are taxed at normal income tax rates and are less likely to outperform the market when compared with just holding. Warren Buffett defers income until when he sells his shares and thereafter at the long-term capital gains rate. This is a significantly lesser tax burden than day-trading and earned gains with the standard income tax rate.
- Returns. With taxation aside, day trading can be a problem on a risk-adjusted return basis. It gets worse as time passes because your trading strategy may not perform 5 years from today.
- Liquid stocks. If you trade day-trade the liquid stock market, you along with all the others who trade daily and the naive traders are likely to be snubbed by the top hedge funds that control more than $40 billion and have high leverage with massive numbers of quants, technologists and data analysts.
- Illiquid stocks. When you trade in illiquid stocks you’re in the crosshairs of traders and market-makers who could take your money. The wide bid spreads, the deficiency of liquidity, and the fact that you have less information.
Ben Carlson, the author of the blog Wealth of Common Sense and Director of Institutional Asset Management at Ritholtz Wealth Management, recently highlighted various studies that paint an extremely negative image of day trading as a whole such as Brazilian futures traders showing an average of 97% day traders made losses over the course over 300 consecutive days. In Taiwan from 1995 to 2006 just 5% of day traders were profitable. A study conducted by the U.S. Securities and Exchange Commission of traders in the forex market found 70% of traders make losses each quarter, and traders usually lose 100% of their capital in 12 months.
In the end, making profitable day trades on a consistent level is demanding and the system is stacked against you. Not impossible, though.