Working to become a disciplined investor and not falling for false promises of too good to be true returns is extremely important and will affect your finances for the rest of your life.

Many investors chalk short-term investing to be nothing more than gamblers chasing fools gold. 

But is there any legitimacy to concepts like day trading to quickly make a short-term profit? In this article, we’ll explore the merits of day trading and figure out if day trading is a good investing strategy.

What is day trading? 

“Day Trading is defined as the buying and selling of a security within a single trading day. This can occur in any marketplace, but is most common in the foreign-exchange (forex) market and stock market.” – Investopedia. 

Simply put, as a day trader, your goal is to buy securities and quickly sell them to make a short-term profit, taking advantage of volatility. In contrast to the long-term investor, day traders thrive during volatile times.

There are many different techniques and tools that day traders use to make money that I’ll be discussing in this article. 

How do you day trade?

There are different things you can day trade like stocks, crypto, foreign currencies, etc. that each requires a brokerage to facilitate transactions. Each form of day trading will require a different platform, but many people choose to start with stocks because they’re one of the easiest securities to day trade. 

If you’re a teenager and want to start day trading – or long-term investing – you’ll have to open a custodial investment account.

“The term custodial account generally refers to a savings account at a financial institution, mutual fund company, or brokerage firm that an adult controls for a minor (a person under the age of 18 or 21 years, depending on the laws of the state of residence). Approval from the custodian is mandatory for the account to conduct transactions, such as buying or selling securities” – Investopedia. 

This will allow you to invest with the approval of your parents. 

But once you have a brokerage, what next? 

There are many different strategies day traders deploy to predict future price movements. One of the most popular is technical analysis. 

Technical analysis 

“Technical analysis is a trading discipline employed to evaluate investments and identify trading opportunities by analyzing statistical trends gathered from trading activity, such as price movement and volume” – Investopedia.

By analyzing volume, price trends, “support” levels, and “resistance” levels, investors use technical analysis to predict price movements that inform their trading decisions.

Paper trading

But before you start risking real money, how can you practice day trading?

“A paper trade is a simulated trade that allows an investor to practice buying and selling without risking real money. … While learning, a paper trader records all trades by hand to keep track of hypothetical trading positions, portfolios, and profits or losses” – Investopedia. 

Oftentimes people paper trade to get used to day trading before risking actual money. This is a great way to learn day trading terms, build discipline, and just generally cultivate relevant skills. 

But these fictional trades aren’t a great indicator of how successful you’ll be with real money. When you aren’t using real money to make trades, physiology is completely different. Knowing that your decisions aren’t really costing or making you real money, you’ll likely take greater risks that may or may not pay off.

So just because you’re making a lot of money in paper trading, that doesn’t necessarily mean you’ll be as successful in the real stock market. However, this doesn’t discount the fact that paper trading is a great tool. 

Invest don’t gamble 

Instead of using technical analysis or other strategies to predict future price movements, sometimes people use day trading as an excuse to gamble. 

Buying a stock because you “think it will go up” with absolutely no evidence to back your thesis is gambling thinly veiled as investing. It’s true; sometimes, you will make money. But it’s difficult to time the market, so most of the time, you’ll probably end up losing money. 

A prime example of the is GameStop stock. In late January, GameStop stock quickly began increasing. In just two weeks, it rose over 1000% after a community of people on Reddit decided to simultaneously buy the stock. 

But that sounds great, right? Making 1000% returns in just a few weeks? Well, most people didn’t buy in at the start of its meteoric rise. Unfortunately, if you weren’t lucky enough to buy and sell at the right times, you likely lost a lot of money. 

Of course, GameStop came crashing down again just a few days later, and those who bought at the peak, or waited too long to sell, lost money. 

So if you’re okay with gambling, go ahead and buy whatever everyone else is. But if you actually want to build wealth in the long term, this isn’t a good strategy. Rather, stick to long-term investing or disciplined day trading. 

Day trading vs. long-term investing 

For teenagers, long-term investing is better unless you are extremely confident in your abilities and have extensive practice paper trading.

But the big question remains; how profitable is day trading? Well, the answer to this question is complex. 

A 2016 analysis of data from eToro, a social trading platform, found that almost 80% of day traders lost money, with the median loss being -36.3%. These numbers aren’t great. But if you were in the top 20% of day traders, how much could you expect to make? 

Of the 20% who did make money, the vast majority underperformed a low-cost index fund.

“It turned out that less than 1% of day traders were able to beat the market returns available from a low-cost ETF” – Burt Malkiel, Princeton professor. 

So day trading doesn’t make sense unless you’re literally in the top 1%. This is not to mention that day trading is very time-consuming and harder to learn, as opposed to long-term investing witch is mostly passive. So considering the high failure rate, significant time cost, and steep learning curve, in most cases, it doesn’t make sense to day trade.