I must be on some pretty interesting mailing lists because I frequently get solicitations to become a professional trader. One letter suggests that I can make thousands by trading just a few hours per week. All I need to start filling my bank account is to learn their “secrets”. These so called secrets have apparently been hidden from me even though I’ve been living and breathing this business for the last 25 years.
You may have received these same mailings or seen the advertisements in business magazines or newspapers. The ads are designed to appeal to the “Get Rich Quick” desire that we all have to some degree. The courses range from a few hundred dollars for a self study program to several thousand dollars for a three day seminar. Most of them center around a trading strategy that typically uses some kind of technical analysis to identify short-term trends that you can get in and out of quickly to pocket a profit.
All the advertisements I read quoted personal testimonies of average people who were successfully working the system. When you read the fine print they disclose that individual results may vary. There is no way to find out how successful a trading program has been because the performance is not public information. I suspect that the personal testimonies are only coming from their most successful students. There is no way to know whether the program actually works or to what degree because none of the trading program promoters study the success rate of their students.
The North American Securities Administrators Association studied day traders at the height of the day-trading craze during the late 1990s. They found that only 11% consistently traded profitably. What’s even more astounding is that they found 70% of day-traders sustained losses that wiped out their accounts. That is a statistic that should get your attention.
It is very difficult to be a successful day trader. Trading costs are high even if you use a discount broker. Transaction costs typically run between $5 and $10 per trade at national firms. Trading several times a day will make the discount broker happy but eats into your potential profits. Those in the 11% of successful traders admit it’s not easy. They often spend the entire day going over charts and graphs to identify the trends that will be profitable. And finally, the risk of financial loss is significant. Most people can’t handle the emotional toll that financial losses will have on them. That is why so many investors buy high and sell low to their own detriment. They would never consciously choose that strategy but they default to it when they experience a loss in the market.
Successful investing has more to do with having a long-term financial plan and consistently working to implement it than it does with identifying short-term trends. Write a financial plan, develop an investment strategy that is consistent with your plan and periodically review it for adjustments. There is more to life that watching a computer screen and studying charts and graphs.