Why Day Traders Mostly Fail
The spectacular post-COVID rally and the recent spate of IPO’s has resulted in an unprecedented rise in the number of retail stock broking accounts. But unfortunately, a lot of these so called “investors” are actually “traders” – or worse, “day traders”. And day trading in any security is fraught with risk, and the odds are stacked against day traders – heavily.
First, a quick word on what “day trading” is. Day Traders, unlike Positional or Swing Traders who hold on to their positions for a few weeks or at least days, necessarily close out all their positions before the close of trading hours each day; meaning that they never carry their open positions forward overnight.
The odds of succeeding as a day trader over the long term are actually too slim to pursue. Here are the top reasons why Day Trading usually ends up becoming a fruitless endeavour.
Intraday, It’s Mostly Noise
Intraday movements are mostly just market noise – with a large buy order pushing prices up and a large sell order dragging prices down. Day Traders can go from “Paytm is a horrible bet” to “Paytm is a great investment” in a matter of minutes! Truthfully, neither fundamental nor technical analysis produces any meaningful results when you’re trying to predict price movements of a security over the next half an hour or couple of hours. Hence, most Day Traders start knowingly or unknowingly relying on luck to produce results.
Emotions Run High
Day Traders are typically gripped by adrenaline during trading hours. Resultantly, emotions run high and decision making becomes more instinctive than anything else. Many first-time day traders encounter the ‘beginners’ luck’ syndrome which falsely convinces them that ‘winging it’ will continue reaping them rewards. Over the long run, day traders lose money as a result of constant greed/ fear driven decision making.
Trends Do Not Develop Clearly Enough
Look at weekly or even daily charts of any security from the NIFTY, to the USD/INR pair, to BTC/USD, and you’ll be able to map out trends through simple visual inspection alone. On the other hand, if you look at a half-hourly or tick by tick chart of the same security, it’ll most likely look like a scrambled mess more than anything else. Because trends do not develop clearly over such short time frames, most Day Traders operate without a clear trading plan – the cornerstone of any trader’s success.
The rewards Are Small
Because the rewards of even a successful day trade are typically very small in size, Day Traders are forced to go back in the ring again and again to reap a profit of any significant magnitude. Every time they trade, they increase their transaction costs, tax liabilities, and most importantly – their odds of losing. Over the long run, this works against them.
It’s Difficult To Be Rational
Day Traders find it extremely difficult to rationally adhere to stop losses. Since the time frame remaining to the eventual forced close of the trade is usually just a few hours away, they end up irrationally deciding to ‘wait’ for their position to recover. This often results in a series of repeat losses; with each subsequent loss fuelling more panic and irrationality.
