For a day trader, an hour is a long time to be in a trade. Day traders seek to take advantage of slippage (the difference between the bid and the asking price of a stock). They also watch closely for trends and seek to manipulate trends. They may only be looking for an 1/8 or 1/4 of a point in many cases. But the real question is, ‘Do Day Traders Make Money?’
A study was done by The North American Securities Administrators Association where they analyzed numerous high-velocity trading accounts at a brokerage and concluded that 70% of those they would classify as day traders had lost money in their account. A subsequent analysis of 12 high-frequency trading brokerages uncovered horrifying practices at some of these institutions where individuals having lost their entire account were even loaned further funds to continue to try and make up their account. Talk about gambling! (Read the article here)
Based on information from the SEC, it appears there is an alarming concern about the number of individuals who lose money day trading. The following is a list of items from the SEC warning those involved or thinking about getting involved as a day trader:
- Be prepared to suffer severe financial losses
- Day traders do not “invest”
- Day trading is an extremely stressful and expensive full-time job
- Day traders depend heavily on borrowing money or buying stocks on margin
- Don’t believe claims of easy profits
- Watch out for “hot tips” and “expert advice” from newsletters and websites catering to day traders
- Remember that “educational” seminars, classes, and books about day trading may not be objective
- Check out day trading firms with your state securities regulator