Stock Trading 101 – Why Day Trading is Dangerous

Traders with short timeframe horizon need to be aware of some of the pitfalls of day trading that influence the markets now and will have a lasting impact on trading in the long-term.

You are not a machine.

In recent years high volatility has become the norm and when this happens the market goes wild leading to large moves within seconds. If you are a day trader and you need to react immediately cut losses, take profits, or simply enter new positions it will be very challenging to do so if you are a manual trader. The speed limitations of actually entering the prices you want is not the only constraint here. The inability to fully quantify what is taking place when markets move quickly can distort judgement and emotions may overpower trading discipline.

The last decade has seen the rise of algorithmic trading in all markets. This is an extract from Wikipedia providing more details on the subject:

In 2006 at the London Stock Exchange, over 40% of all orders were entered by algo traders, with 60% predicted for 2007. American markets and European markets generally have a higher proportion of algo trades than other markets, and estimates for 2008 range as high as an 80% proportion in some markets. Foreign exchange markets also have active algo trading (about 25% of orders in 2006).^[6] Futures and options markets are considered fairly easy to integrated into algorithmic trading,^[7] with about 20% of options volume expected to be computer-generated by 2010.^{[dated info][8]} Bond markets are moving toward more access to algorithmic traders.^[9]

Friends who are building algorithmic engines for major investment banks have shared how their trading platforms suffer from the miniscule delay that takes place because their servers are not deployed at the exchange from where prices are communicated to the rest of the world. Many hedge funds do exactly this to gain a competitive edge. So think twice whether you are at a disadvantage when day trading manually. You simply cannot compete with the billions of dollars that the big players pour into hardware, software, and human capital. Of course, there will be some traders who will continue to be successful day traders, but the question is for how long and whether they can grow their operation dramatically.