Is Day Trading Worth It? 10 Reasons to Reconsider

Day trading is a stock trading strategy in which you buy shares and then sell them the same day. No question, day trading is risky. This can also include shorting shares, which is selling shares you do not own, then buying them back (hopefully) at a lower price to capture a profit.

In simple terms, you buy shares of stock XYZ in the morning, then sell those same shares at some point during the same day. Selling the shares to close out the trade can take place one minute or one hour later, as long as it is within the same trading session. This is also known as a "round trip."

One important point new day traders often overlook is the Pattern Day Trader (PDT) rule. Wikipedia defines PDT best: a "pattern day trader is a FINRA designation for a stock market trader who executes four or more day trades in five business days in a margin account, provided the number of day trades are more than six percent of the customer's total trading activity for that same five-day period." That’s bad news for low dollar traders, because once you’re marked as a pattern day trader, you have to maintain $25,000 equity in your account to keep day trading.

You can avoid PDT status by only trading in a cash account, but then you won’t be able to leverage or go short, which limits your upside and actionable ideas.

Bottom line: To day trade stocks without any account restrictions from your online stock broker, you need to have a margin account and at least $25,000 in your account at the start of each trading day.

Looking back, here are 10 hard-learned lessons I wish I knew about professional day trading before I got started.

10. The "lifestyle" of a successful day trader is a big fat lie

Yachts, private jets, presidential suites, fancy cars, sleeping on piles of $10K stacks (because why not), mansions, and hobnobbing with celebrities: they're all a part of what is presented as the "dream day trader lifestyle."

The dream advertised by stock picking subscription services, Instagram and X accounts, etc., are all built on a foundation of sand. Sadly, it's all clever marketing and not a reality.

Stock-picking service providers must — or at least expect to — make more money from their subscriptions and product sales than they do from their own trading.

That’s a bold thing to say, so let me back it up with my reasoning. Above average returns are very hard to earn because, as soon as investors figure out a strategy that works, others will pile on until the only excess returns available are due to chance.

The traders who run courses can live that "lifestyle" because of you and your desire to day trade part-time or make some money on the side or get rich investing. Without you, those stock-picking services wouldn't exist.

Worse yet, in some cases, they will prey off you, scam you, and the SEC will have to get involved.

The next time you see a trading service trying to sell you on a monthly chat room subscription, day trading education course, or live trading lessons, look around the site and see if they have audited tax records of their returns listed anywhere. They won't, or at least I haven’t seen any.

The only difference between you and them is that they figured out #9 and #8 below before you and decided to pursue a career in education and "give back" to help you out. This includes sharing their daily stock picks and lessons for a monthly fee.

Lesson: Professional trading rarely leads to the"lifestyle" portrayed on the web and social media.

To trade for a living, you need a huge bankroll. Why? Because you won’t have profitable years forever. Even if you do have very good years, the timing of the bad years can hamstring you. Experts call this “sequence of returns risk.” You also have to consider trading expenses, drawing a salary to pay bills, and paying taxes on all those short term capital gains, if you’re actually profitable. The IRS loves taxing short term capital gains, because they are taxed as ordinary income. Long-term capital gains (a year or longer) are taxed at lower rates.

According to the United States Bureau of Labor Statistics, the average full-time American worker aged 20-24 earned $37,024 per year in 2022.

Financial planners often recommend an annual 4% withdrawal rate from a growth portfolio to protect the principal against inflation and, most of all, market downturns. Four percent of a million dollars is $40,000. Voilà.

Even if you had an unbelievable year and returned 50% on a $100,000 portfolio, you are only building your bankroll +$14,769 for next year ($50,000 - $4,859 taxes - $30,372 average cost of living). Again, not including trading costs.

Mind you, this also doesn't include research, trading subscriptions, and so on, which can easily total thousands of dollars a year. If you’re like most traders, you’ll also continually be upgrading your computer rig with the latest and greatest hardware, because the last thing you want is for your data to lag the market.

To live, you must take draws every month (another piece of wisdom I realized after the fact), which means you need to win... constantly. Drawing your capital down by even 10% is a serious hurdle to overcome.

Now, you may be thinking, "Blain, there is a thing called leverage." Yes, there are ways to leverage your portfolio. With a $25,000 margin account and pattern day trader status, you can trade up to $100,000 (4x) in securities during the day and hold up to $50,000 (2x) overnight. Leverage is a two-sided sword that magnifies both your wins and your losses, and you’re paying interest on what you borrow overnight. It's a gift and a curse. Leverage amplifies both your wins and your losses, minus the interest you pay to leverage.

Lesson: You can start with as little as a few thousand dollars, but don't get suckered into attempting to trade for a living unless you have at least a $1,000,000 portfolio that you are prepared to lose. Once you factor in the swings of trading, taxes, cost of living, and time, it's seriously David vs. Goliath math.

There are many very smart people out there. With a global stock market cap of $109 trillion, there is a lot of money at stake and endless resources put into research.

Here’s how to understand the difference between individual investor shnooks like you and me versus the institutional investors who really dominate the markets:

YOU: Go to the mall on the weekend, walk into a Lululemon store, see a lot of people paying full price for yoga pants. The "aha" moment: This place is packed. You use your mobile trading app to scan a tag, discover "LULU" as the ticker symbol, talk to the sales clerk about how sales have been, then quickly buy some shares on your phone.

INSTITUTIONAL FUND MANAGER: Has the founders’ mobile phone numbers in her contacts and has regular calls with the chief financial officer. Her research staff calls Lululemon stores across the country, as well as suppliers, and pulls data nationwide to determine how the numbers are really lining up. They then analyze to determine that margins are being contracted despite strong sales growth and she sells the stock heading into its next earnings call.

To take this full circle, guess what happened to Lululemon after one such earnings report some years back, despite positive chatter from traders and analysts? -16.41% the next day.

Here's what one research group, FBR Capital, had to say post-Lululemon earnings:

"Firm notes the key 2Q issue was the GM miss relative to guidance/expectations, which reflected incremental port-delay-related/material liability costs and potentially a greater-than-expected mix shift to lower-margin categories (men's, women's fashion). Of foremost go-forward concern is a +55% increase in inventories, which, in addition to sales of higher-cost units, is likely a factor in its lower 3Q guide relative to the Street. While there is some in-transit/early delivery noise, LULU has to move through a significant amount of product in 2H15 to normalize sales/inventories."

Could you do research that deep? Doubt it. Here’s another group of investors who are trading against you:

HEDGE FUNDS: Uses rooms full of computer servers to enter and cancel thousands of orders a day just to measure supply and demand for stocks. Simultaneously buys on one exchange and sells on another to capture nano-sized price differences. Leases office space right next to exchanges’ data centers just to get speedier executions. Hires Nobel Prize-winning physicists to construct algorithms that no one but other physicists can understand (and sometimes they get it wrong too).

Lesson: Don't ever think for a second that you can outsmart the market. There is always someone out there that knows more than you.

The 5% rule is to allocate no more than 5% of your portfolio to personal trading and invest the rest in low-cost index funds. An oldie but a goody, the Wall Street Journal had a weekend feature back in 2013 titled Investing for the Fun of It (subscription required). Here's an excerpt:

"Win or lose, the key to using play money safely is to make sure it involves a sum the investor can live without.

“Enjoy the fun of gambling and the thrill of the chase, but not with your rent money and certainly not with college education funds for your children, nor with your retirement nest egg," John Bogle, Vanguard's founder, wrote in "The Little Book of Common Sense Investing," published in 2007.

Bogle wrote that what he called “funny money” should amount to no more than 5% of a person's investments. Some experts put the limit lower. Mr. Malkiel says it depends upon the investor's individual circumstances.

“Getting the proportion wrong is one risk. Another is that an investor will lose, for example, 5% of his or her money and think, "I was so, so close. Let me take another 5%," Mr. Statman says. The temptation to keep on trying to win is common, he says, and some people find it hard to resist."

Lesson: Your long-term future is more important than your short term desire to get rich overnight. Trade with no more than 5% of your portfolio and invest the rest in low-cost index funds. You may or may not make money trading, but trading will help you learn how markets work and you might learn something about yourself, too.

6. The power of steady, compounding returns

Compounded returns really make a difference. You may think that 5%-10% returns are boring, but over the course of a decade or more it stacks up. The difference between successful investors and those living in their parents’ basements usually comes down to consistency and patience rather than scoring the rare home run.

When you trade, you’re only trading a few stocks at a time. That’s riskier than, say, when you buy an index fund. When you’re right, you get outsized returns. When the chief executive officer of a stock you planned on owning for only a few hours gets hit by a bus, your capital might get clobbered so much that you won’t be able to recover.

Buying a diversified index fund reduces that CEO-meets-bus risk, and others like it, to practically zero, leaving you only with the broad market risk, which is much easier to live with. Markets go up and down but, with patience and enough savings, you can live through the market downturns to get to the good part later.

Fun fact: The S&P 500 has never returned a loss over any 20-year period.

Lesson: The earlier you can start investing (ideally in low-cost index funds), the better. The power of compounded returns over the course of several decades cannot be underestimated.

Hot stock tips are everywhere, and unfortunately no matter how experienced you are, it can be really hard to pass up a great buy tip, especially if the person has apparent access to some "behind the scenes" information no one else knows about.

Unfortunately, ads like the one above for penny stocks are designed to sucker you into buying a product or service. These tips are utter junk and will leave your wallet and portfolio bleeding red in the end.

Reality: If someone had a strategy that could consistently return even 20% per year, they'd be rich beyond their wildest dreams and would not need to sell picks. They’d start a hedge fund instead.

The S&P 500’s long-term annual return has averaged in the range of 9.5% to 11%, depending on the periods measured. Endowments, pension funds, and the like would pour money hand over fist into any fund manager that could consistently generate 1.4% of outperformance decade after decade.

Lastly, this rule includes Wall Street analysts. Ignore analyst buy/sell recommendations. You can read through their reasoning to come to your own conclusions, but don’t feel compelled to follow their recommendations.

No one knows what the market is going to do tomorrow, next week, or next year. At best, it's just an educated guess from someone really "smart."

Warren Buffett sums it up best:

"With enough insider information and a million dollars, you can go broke in a year."

Lesson: No matter how smart they are, the odds are always stacked against you. Pursue stock tips with extreme skepticism.

Until you live this firsthand, unfortunately, it won't fully hit home. You can spend your whole year seeing small wins and losses. Have an off day, break your rules, and hold a large position into earnings, and wham!, you might wake up poor the next morning.

The opposite is also true. Make a great call, follow your rules, and sell a monster winner that represents over 90% of your gains for the year. Despite dozens or hundreds of uneventful trades over months prior, you'll be very happy you showed up ready to trade that day.

Lesson: Never underestimate the impact a single trade decision can have on your portfolio.

3. Taxes and the costs of trading are a serious hurdle

This comes back to #9, but it's worth breaking down the basics. Here are the key terms to understand:

• Short term capital gains tax - Short term capital gains don't benefit from any special tax rate; they're taxed at the same rate as your ordinary income. For 2023, ordinary tax rates range from 10% to 37%, depending on your total taxable income.
• Long term capital gains tax - If you can manage to hold your assets for longer than a year, you can benefit from a reduced tax rate on your profits. For 2023, the long term capital gains tax rates range from zero to 20%. If your ordinary tax rate is already less than 15%, you could qualify for the zero-percent long term capital gains rate. High-income tax filers save a fortune by favoring long term capital gains over short term capital gains.
• Order execution quality - Many brokers sell high frequency trading firms (market centers) the right to exercise your trade. This is called payment for order flow. Despite being fractions of a penny per share, poor fill costs can add up real quick when you trade frequently. For the best order execution quality, I recommend Fidelity.

Outperforming the S&P 500 in any given year is a feat in itself, but when you then take into consideration taxes and research (those hot stock pick services, chat rooms, and market newsletters don't come for free), the game becomes that much more difficult.

Lesson: Once taxes and other costs of trading such as research are considered, the challenge of outperforming the market year after year is virtually unachievable for us average investors.

Trading is a mental game. The mind is a beautiful thing, and given a runway of endless data, it can wreak some serious havoc.

Confirmation bias definition via Wikipedia: "Confirmation bias is the tendency to search for, interpret, favor, and recall information in a way that confirms or supports one's prior beliefs or values."

In the trading world, this means that once you take a position, you look for evidence that you’re right instead of watching for reasons you might be wrong and should exit the trade. Many psychologists believe we are hard-wired to do this. Traders train themselves to minimize their biases or, better yet, use a rule-based trading system that takes emotion and impulsiveness out of the equation.

Here’s something else to think about: We humans are pattern recognition machines and, mostly, that’s a good thing. It’s kept us on top of the food chain for eons. We developed agriculture once we recognized the difference between planting seasons and harvest seasons. But we also see faces in clouds because we categorize anything if we have a chance. That can lead to costly mistakes.

Technical analysis (charting) is the worst in provoking this natural human behavior. If a trader made money on one setup, he’ll instinctively think, "Oh, I've seen this pattern before, it's a buy," even if there are a billion things wrong with the stock. There is a reason why online brokers offer dozens and in some cases hundreds of technical indicators. Indicators encourage you to see more "patterns" and trade more frequently.

In poker, a player can go on "tilt" and make poor decisions, ultimately losing their stack in a hurry. The same mental dilemma applies to trading. We take bad risks hoping to break even, we play with “house money” when we’re winning (pro tip: house money spends just as well as the money not in your trading account)... in short, we let our feelings guide our trading decisions, and our feelings won’t lead to great trades as much as we think they might.

Several quotes from market masters on trading psychology:

"The truth is that trading, both successful and unsuccessful, is more about psychology than tactics." - Jack Schwager

"I’m always thinking about losing money as opposed to making money. Don’t focus on making money, focus on protecting what you have." - Paul Tudor Jones

"Everyone has the brainpower to make money in stocks. Not everyone has the stomach." - Peter Lynch

Lesson: Trading is 90% mental and 10% skill. Those who succeed learn to manage risk and trade unemotionally.

Widely regarded as the greatest investor of all time, Warren Buffett understands the market and his advice for the average American is priceless:

"It is not necessary to do extraordinary things to get extraordinary results.... By periodically investing in an index fund, the know-nothing investor can actually outperform most investment professionals."

Choosing to buy and hold low-cost broad index funds, like those that follow the S&P 500, keeps the growth potential of stocks and removes the craziness, most of the cost, and the headaches that come with trading. You can be much more confident about your future if you invest in index funds for the long term instead of rolling the dice several times a day.

As far as allocation goes, Warren also keeps it simple:

"My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. I suggest Vanguard’s." (VFINX)

The numbers don't lie. Despite staffs of analysts, access to CEOs, CFOs, unlimited capital for research, etc. on average, the majority of mutual funds underperform the market over the short and the long haul.

» For an introduction to passive indexing like Warren Buffett, read my guide, How to Invest. 

Lesson: Warren Buffett is the greatest investor of all-time. He recommends low-cost indexing, instead of market timing, as the best path to long-term success. I agree with him.

I like trading. I don’t want to discourage you from doing it. I do want you to have realistic expectations and not go bankrupt. For new investors, trading should be a hands-on way to learn about how markets work, not a way to pursue getting rich.

“But, Blain,” you might say, “there are people who are getting rich trading. What about them?” First, I want to see their account statements before I listen to their stories. I want to know how much they started with, how much more they deposited over time.

I want to know how long they’ve been trading and how much they know about the markets. It’s very likely their good fortunes came from being lucky instead of skilled. If you have a million traders randomly making trades, someone eventually has to be the “best,” but it will be through chance.

While I have no regrets about investing thousands of hours into the markets over the past 20+ years, I've had to accept the reality that my retirement portfolio would be further ahead had I understood these truths from the beginning:

• The “lifestyle” of a successful day trader is a big fat lie.
• You really need at least a $1,000,000 portfolio to trade full-time.
• The odds are dramatically stacked against you.
• Allocate 5% or less of your portfolio to trading (speculating) and invest the rest in low cost index funds.
• The effect of compounded returns over the course of several decades is amazing.
• Taking tips from people “smarter” than you is a terrible idea.
• One trade can easily make or break your year (or career).
• Taxes and trading costs are a serious hurdle.
• Your psyche can be your worst enemy.
• Passive indexing is the best path forward for 99.9% of Americans.

If your mentality is to use the market as a vehicle to supplement income or get rich, stop yourself — you're already primed for failure. Day trading is a losing game.