Is the daily trading investment strategy truly effective?
How about making additional income or even a salary independently, with no boss or fixed work hours, and from any location?
Exploring the world of day trading can be an appealing prospect for those who want to earn some extra income or create their own schedule. However, the reality of day trading is not as simple as it may sound. While many aspire to become successful day traders, the statistics show that only a small percentage actually achieve long-term success in this field.
In order to fully understand the challenges of day trading and set realistic expectations, let’s start by defining what day trading is. Day trading refers to the practice of buying and selling securities within the same day, with the goal of capitalizing on short-term price changes. It often involves the use of leverage, which can amplify both gains and losses.
The Realities of Day Trading
Before diving into day trading, it’s important to consider a few facts:
Survival Rate
- Within the first month of starting day trading, almost 40% of traders quit.
- After three years, only 13% of day traders remain in the market.
- Within 90 days, 90% of day traders lose 90% of their capital.
While these statistics may seem discouraging, it’s crucial to remember that success is possible for those who are highly disciplined and skilled at managing their emotions.
Day Trading Demographics
It’s interesting to note some demographics of day traders:
- Approximately 9.6 million people worldwide are active traders.
- 33% of traders reside in Asia, 16% in North America, and 16% in Europe.
- 1 in 7 day traders is a woman.
- The majority of day traders are under the age of 35.
These demographics highlight the global nature of day trading and the age group that tends to be more inclined towards taking risks.
An Important Clue to Success
One key factor that separates successful day traders from the rest is their focus on maintaining a higher reward-to-risk ratio. This concept is closely tied to the idea of breakeven, which is the point at which trades neither make nor lose money.
As shown in the table below, the higher the loss percentage per trade, the greater the return needed to bring the trader back to breakeven. Therefore, it is crucial to limit losses and practice effective portfolio risk management.
| Loss | Breakeven |
|---|---|
| 10% | 11.11% |
| 20% | 25% |
| 30% | 42.86% |
| 40% | 66.67% |
| 50% | 100% |
| 60% | 150% |
| 70% | 233.34% |
| 80% | 400% |
| 90% | 900% |
The risk-reward ratio is another crucial aspect to consider. Establishing a risk-reward ratio greater than 1 (where a trader is willing to risk $1 to make more than $1) increases the likelihood of success. This can be illustrated through the example of two traders; John and Paul. Despite John having a risk-reward ratio of 1 and Paul having a ratio of 3, Paul ends up being more profitable due to his higher risk-reward ratio, even with only a 30% success rate in his trades.
Pros and Cons of Day Trading
Considering both the potential advantages and disadvantages of day trading is essential:
Pros
- Potential for quick and substantial profits.
- No overnight holding risks.
- Flexibility to work from anywhere.
Cons
- Comes with considerable risks.
- Can be time-consuming.
- High balance requirements.
- Tax implications to consider.
