Everyone wants to earn money and that too quickly. Let me tell you a best-case scenario:
- You wake up in the morning all excited about the money you are going to make via day-trading.
- You get in front of your system sharp at 09:00 am.
- You make a trade of Rs. 20,000 with a 5X exposure at 09:15 am.
- Your security goes up by 5% at 09.30 am and suddenly you richer by Rs. 1000!!!
- This continues for the 250 odd yearly trading days, and you happily accumulate close to Rs. 2.5 lakhs.
- Lastly, the best part is that you are now earning more than 2.3 times the per capita GDP of our country and that too by devoting less than 150 odd hours in the entire year.
That’s great right? No, not at all! This has a 99% chance of becoming a nightmare you wouldn’t be able to forget for a very long time. There were two very important things that are yet to be considered before you start intraday trading as a source of side income or maybe a full time thing. Firstly, this was a best-case scenario that did not consider the time allocated for research, and secondly the hidden expenses. We’ll discuss more on this after some time.
To be clear, this time we are going all guns blazing against intraday trading and hope that by the end of this article, even you will start advocating the concept! Rather than giving you examples this time, we’ll directly start with why intraday trading doesn’t work the way you want it to!
I’m sure you might have heard the statistics that 97% intraday traders lose money, 2% manage to make a living out of it and only 1% actually make money! Yes, those numbers are harshly spot on. It is that 1% population that lets everyone know about their feat and create a sort of illusion – that anyone can do what they just did! Consider for a moment that everyone in that 95% category started following the ‘so-called-rules’ including the 1-1.5% stoploss protocol toted out by the 1% lot who now consider themselves as market gurus. So, what happens next? Stop loss orders would trigger all over the market and prices would inflate and deflate just as they do now. In simpler words, everyone trying to do the same right thing facilitates the same market movements when they are doing their own wrong thing. The point is, it doesn’t matter how people trade or if everyone traded the same way… most would still lose like they are losing now.
When we discuss this with our clients, we get a lot of resistance. Some say that if intraday trading is so unbecoming, why do the Dalal Street and Wall Street professionals day-trade all the time? Are they so absurd? Here’s what they missed out:
1) Most of these traders are trained professionals who get paid to day-trade using other people's money. Apart from that cushion of not using their own money, they earn a fixed percentage on the total traded amount as well on the profit. On the other hand, the average retail trader trades using her/his own money. So, they not only have to break even, but also bear the costs of brokerages, taxes, information, etc.
2) Secondly, the most important thing that matters is the difference between the resources a Dalal Street professional and a stay-at-home intraday trader have at their disposal. The skills, the privilege to first hand information, the tools, the cushion of not gambling with their own money, etc is what the latter can only dream of. This makes this competition like a college football team against, say Manchester United FC. Will it be possible for them win? Yes. But it is highly unlikely (1 in 1000 cases).
Intraday Trading is a zero-sum, infact a negative sum game if you factor in the commissions and service costs. Every paisa earned by one trader comes out of the pocket of another. In most of the cases, the average retail traders belong to the latter category. Think about it by yourself, given the resources, the chances of Dalal Street professionals losing is very low and their winnings have to come from somewhere, which is why they thank you for playing with them!
Finally, we’ll come to the part where we say that it is better to go to Vegas and gamble or simply work at McDonald’s than to day-trade! Apart from the above mentioned reasons of how illogical it is to compete with the professionals, intraday trading is a ‘dumb’ job. Yes, you read that right, it is actually a dumb thing to do which ensures that you lose money almost all the times (considering a 1 year horizon here). Have a look at 8 such reasons:
1) Intraday trading = Pure gambling
It might be fun to day-trade just like gambling, but it is nothing less than it, infact worse. Like you learn nothing when you gamble, you literally learn nothing from intraday trading also. But unlike gambling, you pay hefty fees irrespective of how much money you make or lose.
2) Hope becomes your strategy and Uncertainty becomes your best friend
You are a retail trader with no great resources as your disposal. Thus, you are bound to get to a point where you ‘hope’ you don’t get ruined and this is where you should realize that you have something wrong! Hoping is not a bad thing, but if it’s the only thing you rely on, means you haven’t considered all the possible outcomes. Remember, hoping for good things to happen is the most powerful as well as the most forgotten prayer.
3) You take too many or too less risks
Some traders take too many risks and go bankrupt and some people are just too cautious. Both do not fit the day-trading job! Some people are so afraid of a risk that they end up booking small profits which are all wiped out by one single loss.
4) Intraday trading takes a toll on your health
It pulls everything out of your life. One bad trade and you don’t sleep well, you don’t eat well and you don’t feel well! This goes on and on and you suddenly become depressed with your life. The only question here is, WHY?
5) You develop a thing called ‘commitment bias’ and make Greed your no. 1 enemy
When you trade intraday and it doesn’t work out, even when your heart wants it to, you simply start averaging. You think, just because you’ve already put in your time, energy and money, you should stick to the plan no matter what; and eventually end up losing more.
It is at times like these when your margin based portfolio get wiped out if you are not lightening fast! Consider the following scenario:
||Case I: Loss 5%
||Case II: Loss 10%
||Case III: Loss 20%
As in the above given table, if your portfolio is margined with 4/5th of the money borrowed from the broker, a 5% decline in the price of your stock as in case I, will result in a 25% decline in the portfolio. Simply put, a x% decline in the stock price will result in a 5x% erosion of your wealth. The situation worsens when the exposure given by the brokers increase. What we fail to understand is no one but the broker is the winner here. You on the other hand, are not only paying him interest on the money borrowed, but a ~0.05-0.1% brokerage (approx Rs. 150) and some ‘hidden’ taxes for intraday trading as follows: (case 1 considered)
1. Service Tax of 14.5% + Swachh Bharat Cess of 0.5% + Krishi Kalyan Cess of 0.5% (applicable from June 2016) which is applied on the brokerage. (Updated Mar 2016) i.e. approx Rs. 24
2. STT (Security Transaction Tax) of 0.025% is only on the selling amount i.e. approx Rs. 24
3. Stamp Duty on the total turnover for the day which is 0.002% i.e. approx Rs. 4
4. And finally Regulatory Charges on the total turnover for a day which is 0.004% i.e. Rs. 8
Also, you have to pay a 15% tax on the profits you’ve made via intraday trading over a period of one year. So the initial brokerage+tax accounts to Rs. 210 for the day. Well that’s pinching!
7) You start getting desperate for the so-called tips!
Another big threat to aspiring day-traders is from the community of fraud tipsters. Tips from these fake research companies who sometimes don’t even have real analysts can lead to more and more losses, but, there’s more to it. You try to pin that blame on these tip providers instead of analyzing the causes for your loss. Yes, you will feel victimized here, but it won’t stop your losses from continuing!
8) What if trading fails? What next?
Suppose you give in everything for day-trading, you do all the research, you follow all the protocols and you still don’t get lucky! What will you do next? At one point, you will have to quit, and when you do so, all the time and effort you’ve put in will count for nothing. In fact:
- 40% of day traders quit within a month
- 87% of day traders quit within 3 years
- 93% of day traders quit within 5 years
It will be like you’ve lost all those months or years. There’s no going back!
But on the other hand, if you had dedicated that time doing a real job, like at McDonald’s (no offense), you could atleast use that experience for a better opportunity in the future. Just for your information, McDonald’s average hourly pay is around $4/hour i.e. instead of day-trading, if you work at this fast-food chain for 3 hours a day, you will end up earning approximately Rs. 800. Shocking right? Also, you could just go to Las Vegas or any casino for that matter and simply blow off your money. Who knows, you might get lucky once in a while, but you atleast know that the chances are negligible.
Remember, if it’s a bull market, everyone’s a hero. Else, this approach has its own huge drawbacks and a 100% (well almost 100%) chance of eroding your wealth. Real money is made by holding stocks and not trading them. This is where there’s a huge chance of you getting fooled by the self-named ‘TV Experts’. The same experts, who suggest you to buy a stock when it has peaked out, will advise you to sell it after it has made the lows. All they can do is follow the tail. If they were actually good at it, they wouldn’t have done it for free. So beware. There’s a reason why well known names in the world like Warren Buffet, Peter Lynch, Bill Gross, etc were not traders but long term investors. Also, you will find that most of the books on investment advice have been written on them and not traders.
Spend time in researching the fundamentals of a company and understand how good the business model is, instead of looking out for short term gains. You might get lucky once in a while, but overall, intraday trading makes you a big time nothing!
When markets are tried to be understood, the idea that everyone can make money is not only inaccurate, but impossible and laughable. Everyone making money means there is no market, because who would be taking the other side of the trade? Our job is making sure that you are on the right side of it! Keep in mind that most traders lose money because the market requires them to do so. You will most likely hear more stories of people making it big by intraday trading rather than hearing about people losing everything. Those rarest of the rare success stories will make you believe you have that one special something that will make it work for you, but it won’t.
There are no shortcuts to anything in the world, especially making money in the stock market. So take a step back if you are into it and make the right choice! Happy Investing!