Day Trading Doesn’t Make Sense
For all it’s highlighted benefits, daytrading as a whole is often detrimental to most trader’s account balances. Over the years, day trading has been exploited as a way to make money quick, but for most, it’s a way to lose even faster. We’ll breakdown daytrading, and the math, to discover why day trading simply doesn’t make sense.
Trading Costs
The cost of a trade is relative to the number of shares, or dollar value for each trade. Commission on 100 shares of Ford is entirely different than 100 shares of Berkshire Hathaway. The commission on Ford is worth about 2 shares of stock while its worth about .0001% of the Berkshire shares.
Spreads are a fixed cost
So the cost of commission is relative, but one cost that plays so dearly into the cost of a trade is the spread between bid and ask price. The spread isn’t relative, its lower on high volume stocks and higher on low volume stocks but the spread stays the same no matter how many shares you purchase.
Profit/Loss And Movement Calculations
Often, traders fail to figure costs into their trading regimen. Whether buying for one hour, one minute, or holding for the century, the costs of trading remain the same. If you buy into a stock with a spread of $.10, the shares must move $.10 before you even break even.
Day trading, chump change, high volume trades
Day trading is all about making many, high volume trades for low amounts of profit. Let’s consider a case in which you’re shooting for a $.50 profit. If the spread is $.20, roughly 28% of the total movement in the stock price is made up by your own expenses. If instead you shoot for $5 of profit, the cost of the spread is only 2.8%. You only have to be better than the market by 2.8% to make money in the long run, but 28% better to make money in the short run.
