Day trading is one of the best approaches to making money online. It has numerous advantages like flexibility, the ability to make profits on the first day, many assets to trade, and a wide variety of strategies you can use.
Day trading has evolved over the years and is now accessible to most people globally. Brokers have reduced the barriers to entry and it is now possible to trade with as little as $50.
The challenge for day trading is that it can be a bit tough. As such, studies show that only a handful of people who start trading become successful. Precisely, less than 15% of people who open their trading accounts achieve success.
In this article, we will look at some of the things to look out to know that trading is not for you.
Trading is not for everyone
Trading is a career, meaning that not everyone can be successful in it. For example, not everyone can be a good lawyer, doctor, teacher, or pilot. Most successful traders have unique traits that make them good at trading in different market conditions.
Trading is not for everyone since people are gifted differently. Some of them are gifted at being good traders while others are great at being long-term investors. For example, while Warren Buffett has made a fortune as a long-term investor, he would fail in day trading.
Similarly, other well-known long-term investors like David Einhorn, Dan Loeb, and Bill Ackman would not do well as day traders. This explains why they focus on buying and holding stocks for the long term.
Therefore, it is perfectly okay if you don’t make it as a day trader. Perhaps, you might be good at investing or other areas.
Unrealistic expectations
One reason why most day traders fail is that they have unrealistic expectations about the market. In this, most new traders assume that the process is easy and that they will make a fortune in a short time. Sadly, this is how many brokers advertise their products.
The reality is that becoming a successful and consistent day trader takes hard work. A beginner should take more than a year to learn and create a good strategy. For most people, this period looks quite unreasonable.
Another reality is that not all your trades will be profitable. History shows that many of the most successful day traders experience downturns as well. This is a normal part of business.
The same applies to long-term investors. A look at the returns of most investors shows that their annual performance is not always positive.
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Passion and knowledge
Another reason why you should not become a day trader is that you are not passionate about the market. As a day trader, you need to be interested in the financial market. For example, you should not find it boring to read about stocks, currencies, bonds, and other assets.
Some people simply have no passion for these things. As such, while they might love to become good traders, the lack of passion about the industry will see them being less successful. Instead, they might be passionate about other things like athletics, medicine, teaching, or music.
In line with this, you should avoid being a trader if you don’t have knowledge about the financial market. This is where many potential day traders go wrong since they start their trading journey without having the knowledge.
The good thing about knowledge is that it can be boosted. There are many free and premium programs that can teach you about day trading.
You are risk-averse
Further, you should not be a trader if you are a risk-averse person. Risk-averse is defined as a situation where you are not comfortable taking risks.
The reality about day trading is that all trades have three potential outcomes. You can close it at a loss, profit, or flat. For most inexperienced people, many trades tend to be unprofitable.
Therefore, if you are not willing to take risks and lose some money, then you cannot be a successful trader.
Fortunately, there are several risk management tools that you can use to reduce the potential losses in the market. Some of these tools are a stop-loss and a take-profit.
You don’t have time
Another reason why day trading is not for you is when you don’t have time to do it. There are several reasons why you might not have adequate time to day trade. Perhaps, you might have a busy 9-5 job or you might be a student.
In most cases, when you have an extremely busy schedule, it can be extremely difficult for you to day trade since the process takes time,
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Fortunately, there are some ways for you to participate in the market. The easiest one is being an investor, where you buy stocks and hold them for a long time. If you don’t know where to start, you can buy popular vanilla ETFs like Invesco QQQ and SPDR S&P 500 ETF.
Another approach is that of becoming a swing trader. Swing traders buy and hold assets for a few days. As such, you could open trades during your free time and hold them for a few days.
You can’t control your emotions
Further, you should avoid day trading if you cannot control your emotions. Being an extremely risky undertaking, trading can lead to numerous emotional challenges. For example, many people tend to be highly stressed when they make a big loss. In the past, some people have even moved into depression because of these losses.
At the same time, other people tend to react positively when they open several profitable trades.
A successful day trader should not be affected immensely by profits and losses in the market. One way of doing this is to have a good risk and reward-ratio that ensures you don’t lose or make a lot of money per trade.
Some of the consequences of not controlling your emotions are:
- Panic selling
- Revenge trading
- FOMO
Panic selling is a situation where you sell an asset that has just moved into the loss territory. Revenge trading is where you attempt to recover your funds after making a loss. FOMO, on the other hand, is where you buy an asset that is rising or short a tumbling one.
You don’t follow your own rules
Day trading is not for you if you never follow your own rules. For example, you might have a rule about not leaving your trades open overnight. You can also have rules on having a stop-loss and a take-profit for all your trades.
Other popular rules that many traders set are having a trading journal, not overtrading, and position sizes. Most importantly, you should always follow your trading plan or strategy.
If you cannot follow these rules, then you should avoid being a trader since you will end up losing a lot of money in the long term.
Summary
Not everyone should be a day trader. In this article, we have looked at some of the most important reasons why you should avoid being a day trader. Some of these reasons like following your rules and having no time can be addressed over time.
The best alternative in all this is to allocate your funds to a portfolio of stocks and bonds and hold them for a long time. These assets will give you both capital appreciation and dividends.
