Warning: Trading can be hazardous to your wealth, and even to your entire well-being!
Why do you want to trade? Do you think that you will get rich quickly? Maybe turn $5,000 into $100,000 in one year by day-trading? If you have such aspirations, it is time for a reality check.
Here are a few choice truths. They are posted here instead of as a blog post, because they are important enough to be standing alone, just so that every reader can be informed and take these truths seriously.
Be very skeptical of advertised claims of large profits from day trading. You should be wary of advertisements or other statements that emphasize the potential for large profits in day trading: Day trading can also lead to large and immediate financial losses.
For most people, day Trading requires substantial knowledge.
- Day trading requires knowledge of securities markets.
- Day trading requires in depth knowledge of the securities markets and trading techniques and strategies.
- In attempting to profit through day trading, you must compete with professional, licensed traders employed by securities firms. You should have appropriate experience before engaging in day trading.
- Day trading requires knowledge of a counterpart firm’s operations. Such counterpart firms include your broker, your clearing firm, and possibly other entities. You should be familiar with a securities firm’s business practices, including the operation of the firm’s order execution systems and procedures. Under certain market conditions, you may find it difficult or impossible to liquidate a position quickly at a reasonable price. This can occur, for example, when the market for a stock suddenly drops, or if trading is halted due to recent news events or unusual trading activity. The more volatile a stock is, the greater the likelihood that problems may be encountered in executing a transaction. In addition to normal market risks, you may experience losses due to system failures.
Day trading on margin, or short selling may result in losses beyond your initial investment. When you day trade with funds borrowed from a firm or someone else, you can lose more than the funds you originally placed at risk. A decline in the value of the securities that are purchased may require you to provide additional funds to the firm to avoid the forced sale of those securities or other securities in your account. Short selling as part of your day trading strategy also may lead to extraordinary losses, because you may have to purchase a stock at a very high price in order to cover a short position.
Risks Of Day Trading
For purposes of this notice, a day-trading strategy means an overall trading strategy characterized by the regular transmission by a customer of intra-day orders to effect both purchase and sale transactions in the same security or securities.
You should consider the following points before engaging in a day-trading strategy:
- Day trading can be extremely risky.
- Day trading generally is not appropriate for someone of limited resources and limited investment, or trading experience and low risk tolerance.
- You should be prepared to lose all of the funds that you use for day trading. In particular, you should not fund day-trading activities with retirement savings, student loans, second mortgages, emergency funds, funds set aside for purposes such as education or home ownership, or funds required to meet your living expenses.
- Further, there is some anecdotal evidence that a trading account of less than $50,000 will significantly impair the ability of a day trader to make a profit. Of course, an investment of $50,000 or more will in no way guarantee success.
Day Trading Costs
Day trading can generate substantial commissions, even if the per trade cost is low. Day trading involves aggressive trading, and generally you will pay commissions on each trade. The total daily commissions that you pay on your trades will add to your losses or significantly reduce your earnings. For instance, assuming that a trade costs $5 in commissions, and a trader makes 20 trades a day, if we assume that the trader will trade for 250 trading days in a year, the trader will have to generate $25,000 just to cover commissions.