Do you have the mindset of a trader?
That’s the advertising catchphrase for an online broker that is marketing aggressively around Raffles Place.
The advertisement makes short-term trading sound like a lucrative and exciting proposition.
But in reality, short-term trading is an extremely risky sport. Many factors are working against traders that they more often end up losing money instead.
With the aggressive marketing campaign in the heart of CBD, I thought it would be important to highlight some of the dangers of short-term trading before more people get burnt.
Day traders who trade frequently end up paying much more in commissions than long-term buy and hold investors.
These commissions add up over time, especially when short-term traders tend to take profit after only a small percentage gain.
While online trading fees are generally falling, fees can still add up over time.
Right from the get-go, traders are already trying to claw back what they lost in fees, making their task of earning money all the more difficult.
The difference in the bid and ask further complicates the issue.
Buy and hold investors, on the other hand, pay less in fees and each investment they make can end up becoming multi-baggers, making brokerage fees negligible in the long run.
The use of margin
Typically, day traders use margin to increase the size of their trade.
Margin allows traders to earn a higher return on their capital outlay but it also increases the size of a loss.
On top of that, margin calls make trades even riskier.
Should the trade position go against the trader and fall below their available funds, the margin call will immediately close their position, realising the loss.
It’s a zero-sum game
Short-term trading is effectively a zero-sum game. For there to be winners in short-term trading, there must also be losers.
In addition, short-term traders are playing the game against professionals, who may have an informational advantage.
This scenario is very different from long-term investing, where a rising stock market creates the opportunity for all investors to make a profit together.
A successful day trader also needs to factor in the time taken to make frequent trades.
Short-term trading requires the constant monitoring of charts, news, and technical indicators. The time and effort to make successful trades may not be dissimilar to that of a full-time job.
Get Smart: A uphill battle
Don’t get taken in by the aggressive marketing campaign to be a short-term trader.
While it may seem enticing, short-term traders bear the huge risk of loss. There are so many factors working against short-term trading, that only a small percentage of them are able to make consistent profits.
Get more stock updates on our Facebook page. Click here to like and follow us on Facebook.
The Smart Investor is not licensed or otherwise regulated by the Monetary Authority of Singapore, and in particular, is not licensed or regulated to carry on business in providing any financial advisory service.
Accordingly, any information provided on this site is meant purely for informational and investor educational purposes and should not be relied upon as financial advice. No information is presented with the intention to induce any reader to buy, sell, or hold a particular investment product or class of investment products. Rather, the information is presented for the purpose and intentions of educating readers on matters relating to financial literacy and investor education. Accordingly, any statement of opinion on this site is wholly generic and not tailored to take into account the personal needs and unique circumstances of any reader. The Smart Investor does not recommend any particular course of action in relation to any investment product or class of investment products. Readers are encouraged to exercise their own judgment and have regard to their own personal needs and circumstances before making any investment decision, and not rely on any statement of opinion that may be found on this site.
Note: An earlier version of this article was published at The Good Investors, a personal blog run by our friends.