The leading criticism of Day Trading for Dummies is that I discourage people from day trading. That’s intentional. Day trading is not for everyone. There are people who day trade successfully, who enjoy it and make money at it. They are few and far between, however. Most people who take up day trading lose many. Some make money but find that the profits are too small to make it worth their while.
The book has been a steady seller and has been updated frequently to reflect new technology, new regulation, and new things to trade. The basics are the same, whether you’re trading corn or cryptocurrency. Set limits. Manage your cash. Plan your trades. Log every trade, successful or not, and look for patterns to help you improve.
There’s always been a blurred line between day trading and gambling. The odds are different. On a net basis, day trading is a zero-sum game, meaning that for every winner, there’s a loser. One dirty secret of day trading firms is that many have proprietary trading desks that do nothing but take the opposite position of their customers. Besides being basic risk management, it allows them to make money, because most day traders lose money.
One problem is that many day traders approach it as gambling, and in gambling, the odds favor the house. Right now, we have volatile financial markets and enormous uncertainty while casinos are closed, and most sports events are shut down. For many, day trading is taking up the space.
I mean, Draft Kings is running commercials to get people excited about betting on golf. Golf! Obviously, players were betting each other back in 15th century Scotland, but not like this.
Trading apps are designed to be efficient and compliant, which is not the same as friendly to a novice investor. While sports gambling companies offer special apps to teach you all about golf so that sports bettors can get some action. The financial markets, meanwhile, operate under the assumption that people knowingly take risk. The key is disclosure; companies must show investors accurate financial reports. Brokerage firms distribute agreements laying out the risks. They are meant to be read. They are boilerplate, yes, but they are not end-user license agreements.
On June 12, a 20-year-old customer of Robinhood committed suicide, and the note he left for his family cited the losses that appeared in his account as the reason. He hadn’t lost as much as he thought; the losses were temporary due to mismatches in the timing of trade settlements.
Suicide is not unheard of among traders, nor is divorce, alcoholism, or drug use. Back in the first great wave of electronic day trading, during the 1990s dot com bubble, one money-losing trader killed his wife, his children, and nine people at his brokerage’s co-working space before killing himself. (Back then, few people could get sufficient bandwidth at home to trade, so they rented office space at what were known as trading arcades.) In 2002, my former next-door-neighbor here in Chicago had a seat at the Board of Trade. He was also deeply in debt, and he set fire to his house, killing his 90-year-old mother in the process, for the insurance money. He died in prison.
Doubt, fear, and greed drive people to do terrible things.
I don’t trade. I don’t have the mindset for it. Most of my money is in index funds. I sell short occasionally because I appreciate the research that goes into it. It makes markets efficient, but it’s hard to make money these days when you can get so little return on cash balances. I don’t gamble, either. I know the odds are against me, and I hate that.
I’ve always liked traders. They are straightforward. They don’t mess around or play games. And I know plenty of traders who do fine. People who have the right mindset and who approach trading like a business, can make good money while adding to market liquidity and efficiency. Day trading is not a bad thing, but it is not right for everyone.
If you’re going to trade, do it right. You don’t have to buy my book, as many public libraries carry it. The Options Institute of the Chicago Board Options Exchange has free articles, videos, and other tutorials that explain the basics of trading just about every asset and contract out there. Understand what your limits are, and stick to them.
Day Trading for Dummies has plenty of cautionary tales already. I don’t need any more for the next edition.
