DO DAY TRADERS BEAT THE MARKET?

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Day trading is a commonplace tactic of dealing in financial offers within the same business day. It may occur in any market on the grounds of its faster returns on investment than other strategies, but it is mostly used by stock and forex traders. Facing an ever-increasing number of day traders, many people raise the question of whether they can defeat markets and gain more wins. The answer is usually a “NO” and the article will elaborate on reasons why that is so.

The Popularity of Day Trading

According to the Cerulli Edge – U.S. Retail Investor Edition issued in Q3 2020, many more Americans turned their attention to day trading in the stock market as a result of the economic turmoil in this quarter. This activity has so far been considered widespread among households who have limited assistance from advisors, whilst advisor-assisted individuals are increasingly independent of their financial consultants to engage in investment practices they wouldn’t do previously.

In a similar sense, trading activities have become the main domain among young individuals who are easily tempted by immediate rewards instead of pursuing long-term goals. Especially when the Covid-19 pandemic compounds pre-existing problems such as jobless or income inequality and renews prevailing fears of employing more automated machines to reduce labor costs, individuals unsurprisingly become less patient with safer yet longer-run investment products.

Meanwhile, day trading often comes with financial returns over a shorter time. Moreover, the introduction of modern trading platforms has opened ripe opportunities for those with low spending to enter financial markets. Besides, they may participate in Contracts For Difference (CFDs) trading that allows them to trade on leveraged accounts without the ownership of physical instruments. Therefore, day trading seemingly becomes a fertile ground for the over-18 groups from various jurisdictions to make profits.

Crowd psychology is another reason behind aggressive swamps in financial markets. In a CNBC report, certified financial planner Douglas Boneparth, a founder and president of Bone Fide Wealth in New York said that no one wanted to hear their friends likely earning thousands of dollars on Zoom’s stocks whereas they didn’t. Sometimes, the confidence that they can make handsome incomes without a second thought of their capabilities and wealth is among the stimuli to trading in the markets.

Barbara Roper, a director of investor protection for the Consumer Federation of America, wrote that the coming of too many advertisements on day trading was one possible reason for a surge in the realm. They are promised to earn much more than the average remuneration or even become overnight millionaires from day trading.

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Do Day Traders Beat the Market?

One frequently asked question in financial forums is whether day trading always helps participants defeat the market. Some people on Quora supposed that merely professional traders who work for financial institutions and use a pooled capital to trade on behalf of clients are often capable of doing so. Ross Lederman, a former investment and risk manager, had a point. He believed that such traders could outsmart financial markets and have a higher likelihood of winning the competition years after years. That is why he found them more reliable than a wealth management division at a large commercial bank.

Professional traders are backed up by experience and a huge database provided by hedge funds where they are working. With technological support, they can react to important news earlier than retail traders and then beat the latter to one punch. So, their win rate is unsurprisingly much higher.

Having said that, several studies demonstrate that those with trading experience and high margins may reap financial gains. They do not strive to beat the market, but rather aim at managing risks by involving stops and limits to avoid unacceptable losses and lock in profits. What’s more, even trading geniuses are not always performing profitable trades. In other words, they also make careless decisions and consequently face monetary losses.

However, those facts cannot reflect the big picture of financial markets. Some evidence – whether official or unofficial – indicates that more than 80% of traders fail to generate profits from trading financial products every year. According to Barbara Roper, day trading was akin to gambling that required you to make the right moves to take advantage of price fluctuations and predict whether a company’s stock or currency pairs would appreciate or depreciate.

Carolyn McClanahan, a CFP and director of financial planning for Life Planning Partners, also claimed that traders spent too much time forecasting an unpredictable future. Inevitably, nobody has a crystalline lens to exactly anticipate the fate of companies or the major news announcement. Even one of the most valuable stocks invested on Wall Street, KODK (Eastman Kodak), hit the bottom of merely US$1.59 per share in March 2020 after losing its peaks in 2014. Nothing can guarantee the permanent triumph of such giants as Apple, Tesla or Facebook.

The same also applies to the forex market where macroeconomic and political events can take heavy tolls on supply and demand. The onset of the Covid-19 epidemic or stricter policies on currency speculation in some jurisdictions may become a signal for a downward trajectory of the issued currencies. Not to mention that the market is occupied by banks and large financial companies. Hence, any activity of individual traders is likened to a drop in the bucket. That is, they hardly drive the market towards their favored directions.

Outstanding Stories of Legendary Traders

When it comes to the best forex traders in the world, George Soros is always mentioned first on the list due to his shocking event of breaking the Bank of England in September 1992. Cooperating with Stanley Druckenmiller and Joe Lewis, George Soros went short on the huge volume of British sterlings. This financial deal made the pound’s value slip down below the foreign exchange limit set by the European Exchange Rate Mechanism (ERM). The devalued pound was consequently taken out from the ERM by the UK government. Furthermore, this event partially ruined the reputation of the Conservative Party at that time.

The risky transaction brought George Soros a net profit of more than US$1 billion. Other companies in this trade were rumored to generate bigger earnings. Another similar case comes from Andrew Krieger who took a venture on the New Zealand dollar. Particularly, he acknowledged the kiwi’s overvaluation and decided to open a big short position against the US dollar. After the deal, he obtained over US$300 million.

Indeed, legendary figures like George Soros or Stanley Druckenmiller are rare examples who were able to shape the market in lieu of barely being impacted by market movements. Their impressive stories prove that day traders may beat the market at times. Nevertheless, you should keep in mind that it is not impossible for them to always win because the market looks like a puzzle that takes much time to understand and solve.

Culprits Behind the Failure of Day Traders

Although some day traders have a high likelihood of earning large incomes, financial markets have witnessed an extremely high washout rate. Many of them are poorly prepared for market conditions. A flock of individuals is dabbling in forex or stock trading for entertainment or reimbursement for the lost salary when social distance and remote work become new norms at the height of the coronavirus pandemic. Carefree attitudes can make you repeat serious mistakes even in your main jobs, let alone such risky side hustles as forex or stock day trading.

Further, financial specialists find the realm awash with dangers, especially for those who lack an understanding of markets. The majority of retail investors have insufficient experience and improper trading strategies to make money and suffer potential losses.

Rance Masheck, a founder and president of the stock and options trading platform iVest+, specified that traders hinged too much on robot-advisory trading and believed to succeed from a few dollars they invested. Many of them find it hard to develop a self-directed trading insight, which holds their learning curve in check. Beyond that, day traders fail to approach tools and materials that equip them with fundamental and advanced skills to trade on markets. Such knowledge should not be confined to theoretical lessons from market educators but had better extend to mistakes and trials. This helps them learn how to control their pockets effectively.

Ivan Illán, an award-winning financial services entrepreneur, emphasizes the paramount importance of diversifying assets reasonably rather than only trading the best instruments. The main goal of trading is always maximizing the total financial return and minimizing risk tolerance. Thus, the right product allocation should be included in any trading plan. Unfortunately, many day traders neglect this tactic. They only focus on hot stocks and are driven by greed for larger profits without any risk adjustment.

One possible oversight comes from their search for the “best” brokers who help them earn the biggest money. Legitimate dealers now try to provide their clients with the fullest assistance, from lower commissions to webinars with personal analysts. But most of them still lose money. In fact, there are no proprietary trading platforms or strategies that make them rich without their endeavors and preparations over the long haul. To become a winner in any financial market, they are required to seriously comply with market rules and spot opportunities in the most challenging time.

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