Disadvantages of Day Trading

  • The Intelligent Investor is aware that the future cannot be predicted.

When Mr. Market comes to our door, sometimes he is happy, sometimes he is sad. Sometimes he is Dr. Jekyll. Sometimes he is Mr. Hyde.

We could never predict what Mr. Market will be tomorrow. He is unpredictable. Sometimes he is hot. Sometimes he is cold. Sometimes he is up. Sometimes he is down. This guy is bipolar. And the Intelligent Investor is aware of this.

Day Trading has many disadvantages. It is like dealing with Mr. Market everyday. Dealing with an unpredictable bipolar creature is:

  • Time Consuming
  • Very Costly
  • Emotionally Stressful

Day Trading makes the assumption that future behavior of stock price can be predicted using charts, graphs, and other trading tools. It makes the assumption that the future can be predicted.

 

"The Stock Market is designed to transfer money from the Active to the Patient."

- Warren Buffett


Day Trading is Time Consuming

Most people work during market hours and have obligations after market hours. It takes intense focus and research to day trade. The Day Trader has to do a lot of reading and analysis to make a decent profit. It is practically a full-time job. The Intelligent Investor has better ways to spend their time. Instead of day trading, build a real business. As an example, Warren Buffet did not waste his time day trading, he focused his energy on building a $300 Billion dollar conglomerate.

 

Day Trading is Very Costly

Making money cost money. Commissions cost money. And where there is profit, there is also a higher tax bracket. A Day Trader makes several trades a day. Every time they make a trade, they pay their broker a commission fee. Let's say they make an average of 10 trades per day. Each trade cost $7 dollars. There are 252 trading days in a year. The yearly cost of Day Trading would then be:

 

Yearly Cost = 10 x $7 x 252 = $17,640 per year

 

Then there are taxes. Short-term investments are taxed as ordinary income. The Day Trader pays anywhere between 10% and 39.6% in taxes depending on how much money they make, whereas long-term investments are taxed as capital gains, which is anywhere between 0% - 20%. Let's say they make $50,000 in day trading and taxed at 25%.

 

Taxes Paid = $50,000 x 0.25 = $12,500 in taxes


Now let's calculate the profit after commission and taxes. So the Day Trader made $50,000 in profit for the year, paid $17,640 in commission, and has to pay $12,500 in taxes.

 

Profit = $50,000 - $17,640 - $12,500 = $19,860

 

In this example, for a profit of $50,000 they keep only $19,860. Day Traders have to make so much to gain so little. They are not making themselves rich. They are making their brokers and the government rich.

 

Day Trading is Emotionally Stressful

The fear of losing money puts most people under a significant amount of stress. Trading in a high emotional state of mind causes most people to make decisions based on emotions. This creates bad trades and can have a negative impact on profits and losses. Not everyone has the right personality to day trade.

 

Use the Fundamentals and be Disciplined

Day Trading has many disadvantages. The Intelligent Investor does not predict Mr. Market. Nor do they even try. The Intelligent Investor focuses on the fundamentals instead and uses discipline.

Always use Equity Bond Theory to compare the stock price to the yield of a bond.
Check out the P/E Ratio.
Look at the 10 Year Earnings History.
Analyze the company’s Financial Statements.

Never ever try to predict the market. Be disciplined and stick to the fundamentals.

 

My Financial Analysis of Stocks

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