You Don't Have to be a Day Trader to be a Success - Part 2
Continuing on from last week, I am hoping to give even more compelling reasons to consider other trading approches to that of only day trading.
Profit per hour of trading is hugely inefficient for day traders
When day trading currencies it is not unusual to be at your pc for up to 10 hours a day. If you are fortunate enough to be able to make a net profit of $200 per day (which most people are not able to achieve) then that is the equivalent of earning $20 per hour which is not unreasonable earnings. Most people who day trade don’t make anywhere near this amount and many spend 10 hours a day in front of their pc and end up with a net loss on the day. It is also very difficult to be able to do anything else when in a trade and requires a great deal of your attention. By comparison, placing trades that are swing positions or longer term do not require more than around 30 minutes of your time a day and the profits are usually much greater. So in the event that I am able to make a $600 profit over 3 days and that it has taken 1.5 hours of my time to achieve this then my profit per hour of activity is 600 / 1.5 = $400 per hour. This is 20 times more effective than if I am able to make a $600 profit over a 3 day period by day trading.
In addition to this if you are not sat in front of your pc all day then you can go and make money engaging in other activities such as selling trading courses (pun intended, I am only joking). Seriously though you do have the time to do many other activities that can generate revenue or spend time doing something else that may interest you.
Tax Benefits (UK Traders)
If you live in the UK then spread betting offers major tax benefits but only for longer term trading and not for day traders. When I was day trading I always used a direct market access platform as this gave almost instant executions and often the spread was zero on currencies. At the end of the financial year though I still had to declare my profits to the inland revenue, or IRS if you are in the US, and pay tax. In my view it is not possible to successfully day trade using bucket shops or spread betting companies. There are many reasons for this from the cost of the spread, (assuming you get filled at the quoted price) to the “alleged” claims by some that prices are manipulated in favour of the company you choose to trade with. As I said earlier, it is easier to manipulate prices in a short timeframe but certainly not on a swing or position trade because if so then arbitrage traders will slaughter those who do it. I remember many years ago one of my trading associates taking over £70K in risk free trading off a spread betting company by doing exactly this. This was because they were manipulating prices but he was banking on them doing this and would place two trades with different companies and pocket the difference when prices came back into line. Of course the ability to do this has long since gone but what it means is that if you are a swing or position trader you can use a spread bet company and avoid paying tax that you would have to otherwise pay using direct market access. This is because the spread is of almost zero consequence when taking longer term positions and as there are fewer trades it works out a lot less of the overall profit or loss.
In addition to all other day traders that are competing with each other for daily profits, there is the additional problem of trades placed by computers. In some sectors of trading, computers now account for up to 40% of all daily trading volume and this is set to increase. Trading against a computer has many disadvantages ranging from the speed at which they can execute orders to their ability to very quickly move a market against your position more quickly than you can react to it. They do however have no positions open overnight and that is great help to swing and position traders.