Day trading is defined as the buying and selling of different financial instruments including options, futures, currencies, and most popularly, stocks. The goal is to make a profit between the difference of the buying and selling price. Day trading is different from other forms of trading simply because the positions are held only during the same trading day, or before the market closes.
However, there are many people who claim that day trading is not a form of investing, rather it is mere gambling in the stock market. Others defend their occupation, saying that day trading, like any other profession, requires skill and experience, and it is only those who have adequate knowledge about the craft can consistently make a profit.
So what really is the reason, or reasons, that day trading is most often associated to the risk and unpredictable nature of gambling? Below are the top five reasons that just my convince you that day trading is a game in the stock market’s casino.
Reasons Why Day Trading is Like Gambling:
- You Bet On Something Unsure – One of the definitions of gambling is when you bet on an uncertain outcome. Certainly, no one can predict which color the ball of the roulette will fall on, and in the same sense, no day trader can predict which of the stocks will rise or fall, and at what time this will happen. Although there are some tools available that will predict market trends, such as technical analysis and market and investment charts, no matter how much you study it, you will only end up with an educated guess. Which in the end is still termed as speculation, meaning the outcome will remain uncertain.
- Getting In Over Your Head – Isn’t it a familiar scenario to walk inside a gambling bar or casino, and to find a haggard looking man, unshaven for days, with sunken eyes, staring closely at the game of cards with a desperate look on his face? This is a sign of a person who has gambled way over his head. This person is gambling the last of his money away, in the hope of regaining the thousands (or even millions) that he has lost.
The same scenario can happen in day trading. First of all, borrowing money to trade in stocks is always a risky business, but it happens all the time. Day trading strategies will demand using the leverage of borrowed money in order to make a profit. The danger with this is that when the day trader loses, he not only loses his own money, but he ends up in a large pool of debt. Day traders should learn to understand how margin works, how much time they will have to meet a margin call, and the potential of getting in over their heads. Let’s not forget that in the business of day trading, traders are required to sit on hours end, staring at a computer screen, wishing for luck to come their way.
- There are Still Restrictions – In theory, one of the ways you can win at a game of roulette is by making use of the martingale system of money management. Here, every time you lose, you double the bet on the next spin until you win. To make this applicable to the stock market, we can modify the system by doubling the “bet” of the last loss and adding one base unit. Meaning, you will make 1 unit or $1, if that’s your base, for each spin of the wheel. However, the reason why this system could not possibly work in the casino is that first, you would need unlimited capital to carry you on despite your draw downs, and second, is that the casino has a limit on how much you can bet on every spin.
In the same way, the martingale system cannot work for day trading because it is hardly possible for any one person to have access to unlimited amount of capital, and also because the house limit is implemented by the lack of liquidity in the market. Finally, there is a time during the day when the market closes. If the day trader has not yet “won” before the market closes, then he risks the chance of losing everything.
- Emotions Can Ruin You – Day trading is probably one of the most emotionally taxing forms of investing. The moment you act on your emotions, that’s the moment you lose. Let’s take for example a classic game of poker. The experienced poker players will know that this game relies more on the skill of the player to manipulate the emotions of the competition rather than the hand of cards he has been dealt with. The inexperienced player will immediately be taken by his emotions, declare “all in”, only to realize seconds later that he has been played. Although there is no other human player to manipulate you in the table of day trading, the stocks themselves and the rise and fall of numbers will be enough to toy with your emotions. Despite having investing philosophies, a stock can coyly rise in price and get you excited, only to harshly drop at the moment you finally decide to buy it. By the time you sell the same stock, you would have already lost.
- You Can Win Some, And Lose It All – And finally, there is that possibility of winning some, then losing it all. Depending on the decisions made by traders during the day, they can successfully gain hundreds to thousands of dollars in a day, but only to lose the same amount, or possibly more the following day. Many novice day traders can suffer severe monetary loses during their first months of trading, while not being able to stay long enough in the game to see a profit. Reasons for this could be lack of capital, or being burned from experience.
There are those who really take the time to study and master tools of analysis and market trends, not to mention those who learn how to control their emotions during a trade. These expert and professional day traders may be able to offset their losses and manipulate their odds. They even say there is a science to trading, and that the only reason why people deem it as risky and comparable to gambling is because these people who criticize day trading do not even know what they are talking about. Whether there is a calculated approach to day trading, the fact remains that there is a high percentage of day traders who continually lose money on the stock market. The craft is still associated to high risk, and for anyone who wants to get in the game, you just have to make sure that you are using money that you can afford to lose.