Do you want to make a million dollars this year? Are you tired of working for minimum wage? Do you want to escape the 9 to 5? What if I told you all of this is possible, and I’m going to teach you how to make this a reality for yourself . . .
Enticing ads like this created by investors who have been able to make money in an unpredictable market plague the internet. I don’t know any young adult that does not or has not seen one of these in their lifetime. Their approach to making money fast easily catches young impressionable minds and quickly draws them in. We begin to question if there is any truth behind the claims and start to investigate. Why wouldn’t you want to make these things your reality? If it’s as easy as they say, not following their path would be saying you want to settle for less than what you’re capable of. This popular portrayal of the stock market is found wherever you look. The amount of information you can find telling you the reality of success in the market is nowhere near the amount of misinformation telling you how easy and predictable the market is.
Oftentimes people will try to convince you that anyone can get into the market with just a five-minute tutorial and $250. The problem with this is that it’s true, to an extent. In the stock market, it is possible to turn $250 into a million in less than a year, although it is not likely. It might be the only legal way to do this other than getting lucky gambling. The other problem with this is that it’s just that, a gamble. According to Brad Barber, a behavioral finance researcher at the University of California, Davis, “the aggregate performance of day traders is negative, that the vast majority of day traders are unprofitable, and many persist despite an extensive experience of loss.” This shows that the amount of risky investments you would have to make to turn $250 into a million in less than a year is extremely high and would require a lot of luck, especially for a new trader. One recommended practice is to “look at your timeline, financial plans for the next seven years typically include low- and medium-level risk portfolios. However, once you move into the seven- to 10-year range, you’ll want to consider riskier assets” (Marquit). You would need to completely break almost all the common and recommended best practices set by market professionals, and run the risk of losing everything. Both what you put in and what you have made at that point could be gone in a matter of seconds. This idea of day trading to get rich quickly has plagued the market and claimed an unimaginable amount of money from new investors. Since success in the market doesn’t necessarily mean you have any clue what you’re doing, these lucky few make videos and put them on platforms for the world to see.
In this essay, I will be looking at the results of surveying 25 college students who are my peers at the University of Tampa, who are accounting or other business-related majors, and who practice day trading. I will analyze their mindsets about both short and long-term trades to draw some conclusions on what you could do to not make some of the same mistakes. I will also be assessing their responses to look at different patterns such as time spent trading, return on trades, and other factors that might affect the bigger picture.
The Allure of Risky Trading
I first learned about day trading while binge-watching random YouTube videos. An ad came on talking about how you could make a lot of easy money no matter what your age is. Of course, the curious fifteen-year-old I was I couldn’t let that opportunity pass. They had just told me it was possible to make more than the 20 dollars an hour I made for mowing lawns. This piqued my interest and I began looking to see if this had even a sliver of truth in it. What I found was that it was true. By day trading for a couple of hours a day, I could become a millionaire. Me being the money-hungry kid I was, I wanted to start instantly but everything I found was telling me I needed five-hundred to a thousand dollars to get started, which I did not have. This entry price stifled my interest. After a couple of months of trying to figure out how I would make this work, I gave it up. After I graduated high school and started college, I knew a few things everyone should do to financially set themselves up for the future and some smart steps to take to be successful later in life, including opening a Roth IRA account early and putting a small amount of money into it every month as well as investing in some long-term stocks that you think will be successful in 10-15 years was another one. Finally, I get to college, and again all over the internet, I see how easy it is to make money fast in the stock market. Some of my peers that entered the market before me have had major success in the market. They would tell me about huge returns they made on a small trade that had a quick turnaround time. What they don’t tell you is “Successful day traders treat it like a full-time job, not merely hasty trading done between business meetings or at lunch” (Davis and Royal). Chris Davis and James Royal believe success day trading is linked to the time you put into it. All of these events peaked my interest to the point where I decided to conduct my own research. Finally, with everything I had learned about the market I wanted to see if these things are true. I wanted to know if this success is surrounded by several failures, or if they just ended up being one of the lucky ones. I was curious about several of the aspects I knew went into day trading and stocks in general and wanted to see how my peers went about all of this.
A Survey of and Interviews with College Day Traders
In this section, I will be discussing how I went about the collection of my data, what my data was, the purpose behind it, and how I interpreted it. Some of the questions asked in the survey were general questions to get an idea of the participants and see what their experience levels were. Other questions were more specific to look at why they make some of the decisions they make. Twenty-five people, all students at the University of Tampa, responded to my survey.
The first general question I asked was their age, which helped me get a tight range of individuals and take out some of the variability. Since my research is looking at a very specific group of people I wanted to ensure they all fit the typical college age range. Next, I asked how long they’ve been trading. Not only did this help me see the link between their age and how long they had been trading, but it also showed me whether time and experience really build skill when it comes to day trading. I then looked at the amount of money they were trading and time they put in making those trades. This showed me who was doing their due diligence and who was spinning the wheel and crossing their fingers. I did this because I can directly link this information to their successful trading. To see if the participants were day trading or investing I looked at the time they leave their money in a particular investment. A majority of my participants only day trade and they tend to have the least experience, while the ones who see returns and have more experience investing tend to use a combination of both.
Then I asked a series of questions to gauge what influenced them to make these trades, whether it was wanting to make money fast, enjoying the thrill of trading, learning about investing, building long-term wealth, or other people around them trading. Next, I looked at their success, to see if it was linked to following recommended best practices. Finally, I concluded the survey with two open-ended questions. The first was “if you invest, why do you invest the way you do and where did you get that approach from?” This helped to show me if they were trained or self-taught. The second question was “what else can you tell me about your experience investing?” This information would help me draw any extra information they feel may be important.
Results from the Survey
In this section, I will give the results of the survey without my interpretation of the data. I had nineteen men and six women participate in the survey. Nineteen of the participants have been trading for less than a year, two were between a year and two years, and four had been trading for more than two years. The majority of the participants were nineteen years old, four were eighteen, and two were twenty. Eighteen participants had been trading with less than $1,000, three were between $1,000 and $5,000, two between $5,000 and $10,0000, and two more were trading at over $10,000. Ten participants spent less than an hour researching potential trades while the other fifteen spent between two and twenty hours. The speed at which the participants made money was a factor for all of the participants, with ten people saying it affected them a great deal. Half of the participants said that the thrill of trading affected their approach to trading and half said it did not. Everyone agreed that building long term wealth was one of the factors that affected their trading strategies.
It’s interesting to note that one of the only women who responded to my survey takes a non-aggressive approach and invests specifically to build wealth for her family, whereas almost all of the men took an aggressive approach and did it for the thrill of trading. In one of her open-ended responses, she wrote, “I decided to invest using a long term investment approach because I am still young and fortunate enough to have my parents’ support. I am willing to engage in long term investments so that as I age, I will have enough money to provide for my family.” Also, she reports having greater returns and spending less time working on trading than most of the men. She says she spends an average of one to two hours researching potential trades and plans to leave her money in a single investment for more than a year. This is interesting because women in US culture are often socialized or expected to be less aggressive people and there could potentially be a correlation between gender and trading style. Obviously, with such a small sample size, we cannot make generalizations based on gender. But this result from the survey raises certain questions that would be worth pursuing later, such as “are women more or less likely to have an aggressive trading style?” and even “are women more or less likely to be successful investors?”
Another point of the data from the survey I would like to examine is the two traders with the most money in the market. Both of these participants have more than two years of experience and put over ten hours a week into finding potential investments they want to make. One of them day trades and invests long term, while the other swing trades which involves holding your stock longer than a day trader but shorter than an investor. Swing trading is safer than day trading but doesn’t have the average returns that long term investments have. They both noted that the thrill of trading doesn’t affect any decisions they make in the market so they don’t act on random impulses. In their open-ended response answers, they both mention that their dads have experience in the market and got them into investing. “The way I invest I learned from my Dad, I worked at his firm for a little while and got to learn a lot. A big tip to any new investor or trader is to be patient.” From this real-world experience, he has understood the importance of waiting and being patient. One other thing that sets these two traders apart from the others is that they learned the hard way that day trading is not a safe move and patience is the key to success in the stock market. A lot of people don’t know that the average percent increase with a long term investment is “12.6 percent per year,” according to a study by Laura Xiaolei Liu et al. published in The Journal of Political Economy. In contrast, Day traders average much less: “Raw returns and passive benchmark returns are 0.17 percent and 0.16 percent per day, respectively,” as Boris S. Abbey writes in The International Journal of Money and Finance. This comes out to less than 1 percent annually which means the two most successful participants in my survey, by emphasizing long term investments over day trading, have the research on their side.
The final finding I want to draw from my research is that everyone who has day traded for over a year mentioned patience being a factor that comes with experience. In their open responses, they talk about how they learned to be patient as they looked for new investments, and when they pulled their money out. One participant says, “When I started I was impatient and wanted to see growth within weeks or months. Though I was seeing growth in my portfolio I wanted more. Then I started to do my research and talk to people about their investments and it led me to invest in companies that weren’t on the main stage yet.” Several more make statements like “you can lose money just as quickly as you make it. it’s not always full of ups and it tests you a lot, you just have to stay the course” and “Sometimes, the quickest way isn’t the best way. Find something safe and focus on that. And then chance higher risk investments.” This advice could be very beneficial because it uses a process to build experience in the stock market.
Touching a Hot Stove
With the technology we have today, it is very easy to find yourself dipping your hand in day trading. If you do want to try this for yourself and test your luck, there are a lot of things that could help lead to your success. For starters, patience is a skill and even if you are making aggressive trades, taking that extra second could help you limit your losses and increase your profits. From all the research I did over the last couple of months, everything points to day trading being too risky and insecure to be a smart financial decision. The link between day trading and gambling may be stronger than you think. A lot of day traders react on impulse and trade for the thrill of it, which is exactly what people do when gambling. After new investors dip their head in day trading, they seem to learn the hard way and move to longer forms of trading, so it could help to get some experience in a slower and safer trading style before you take the risks of day trading. Although day trading is not the optimal form of trading if you want to maximize your profits, people seem to want to touch the hot stove and see if they can come out without getting burnt.
Abbey, Boris S. “Do Individual Currency Traders Make Money?” Journal of International Money and Finance, Volume 56, Pages 158-177. https://www-sciencedirect-com.esearch.ut.edu/science/article/pii/S0261560614001624?via%3Dihub
Barber, Brad M. and Terrance Odean. “Do Day Traders Rationally Learn About Their Ability?” University of California, Davis. October 17. https://faculty.haas.berkeley.edu/odean/papers/Day%20Traders/Day%20Trading%20and%20Learning%20110217.pdf. 6 October 2020
Davis, Chris and James Royal. “Day Trading: How to Get Started.” Nerdwallet. 6 October 2020. https://www.nerdwallet.com/article/investing/day-trading-risks
Liu, Laura Xiaolei, et al. “Investment‐Based Expected Stock Returns.” Journal of Political Economy, vol. 117, no. 6, 2009, pp. 1105–1139. JSTOR, http://www.jstor.org/stable/10.1086/649760. Accessed 14 Oct. 2020.
Marquit, M. (n.d.). “Are Long-Term or Short-Term Investments Better?” https://www.thebalance.com/are-long-term-or-short-term-investments-better-2385918 October 09, 2020
Image: Screen capture from Warrior Trading YouTube channel.