Day trade your way to riches

I was hoping I might be allowed to do business a few days before they told me to take my trade somewhere else. I walked in.

It was a whopping big place and there must have been at least a couple of hundred people there staring at the quotations. I was glad because in such a crowd I stood a better chance of being unnoticed. I picked out the stock for my initial play.

Reminiscences of a Stock Operator, Jesse Livermore

If you want a bit of stock market action from the 1900s Jesse Livermore never fails to deliver. Reading the story of how a successful trader started winning against “bucket shops” 100 years ago, reminds me how little has changed in investor’s psychology.

People wanting to make a quick buck. To double their money and win against the house. But winning against the house is not easy. It can be done, but it’s really really hard.

It also reminded me how in every zero-sum game for every winner there’s a loser (or a couple of hundreds of them). The bucket shops back then used to wipe out people day trading stocks on margin. Our book hero found a way to exploit the market and kept winning. So shops started banning him from entering.

He had to travel to different states, change names and pull tricks to allow him to keep “gambling”. This also reminds me of the thousands of pounds I’ve made matched betting, effectively betting against the house. Well, there are only so many years you can win against the house before it eventually says: No, sir, we don’t want your business anymore.

I’ll take my ~£20,000 and leave, thank you very much.

But to my previous point, I see a dramatic rise of day trading in free-trading apps such as Robinhood and our own FreeTrade here in the UK.

The influx of young, inexperienced traders is benefiting Robinhood. In March the start-up said it saw three times its average customer trading volume compared to 2019. That uptick continued through April and into May, Bhatt said.

I guess furloughed people have more time to gamble when the sports are on pause?

Commission-free trading is amazing for the retail investor. I’m so glad I can buy my ETFs on FreeTrade for FREE instead of paying £12.50 each time. Trading on zero fees has the amazing effect of driving down costs across the whole industry too. So what’s there not to like.

But it’s also a double-edged sword for the inexperienced newcomer. It’s too lucrative and the short serotonin releases your body enjoys can make it addictive. Hell, a person even took his own life after thinking he had a negative $700,000 balance. I don’t need to explain myself further I guess.

I’m not worried about the risk of people taking their own lives because of day trading. That’s close to zero. But a burnt child dreads the fire.

The stock market as a whole is an amazing “platform”. it almost works like magic. It takes your savings and buys tiny ownership of future innovation and earnings.

It’s a shame not to take advantage of it because “you’ve tried it out and it doesn’t work”. Imagine having lost 50% of your starting capital. You’ll think twice before entering the stock market again.

Obviously, having a go at the stock market can also be a good thing. There are elements that you can learn even if you’re day trading, such as slippage, trend following strategies, how you behave under pressure, how taxes work etc. They can go a long way in order to build wealth later on.

You also learn what’s out there! In terms of asset classes, geographies, sectors etc. If you’re curious you dive deeper and learn how companies are valued, why some go bust, economics and interest rates. You learn how the system works.

You stop blaming the prices that always go up because there’s pay growth too, assuming you have a job, of course. It’s likely that you also own assets yourself so the rising prices can benefit you too to some extent. Especially, if you have good debt, like a mortgage.

So it’s not all time-waste. Eventually, you realise that day trading is way too much fun to yield a good risk/reward ratio. As a hobby, it must be great. As a consistent way to build wealth, I highly doubt it.

But I’m not here to judge. You wanna have a go, I’m all up for it. After all, high turnover is only making FreeTrade shareholders richer and I happen to own a very thin slice of that.