The dangers of short-term trading

Do you have the mindset of a trader? That's the advertising catchphrase for an online broker that is marketing aggressively around Raffles Place.

The advertisement makes short-term trading sound like a lucrative and exciting proposition. But in reality, short-term trading is an extremely risky sport. Many factors are working against traders that they more often end up losing money instead. 

With the aggressive marketing campaign in the heart of CBD, I thought it would be important to highlight some of the dangers of short-term trading before more people get burnt.

TRADING COSTS 

Day traders who trade frequently end up paying much more in commissions than long-term buy and hold investors. These commissions add up over time, especially when short-term traders tend to take profit after only a small percentage gain.

While online trading fees are generally falling, fees can still add up over time. Right from the get-go, traders are already trying to claw back what they lost in fees, making their task of earning money all the more difficult. The difference in the bid and ask further complicates the issue.

Buy and hold investors, on the other hand, pay less in fees and each investment they make can end up becoming multi-baggers, making brokerage fees negligible in the long run.

THE USE OF MARGIN

Typically, day traders use margin to increase the size of their trade. Margin allows traders to earn a higher return on their capital outlay but it also increases the size of a loss.

On top of that, margin calls make trades even riskier. Should the trade position go against the trader and fall below their available funds, the margin call will immediately close their position, realising the loss.

IT'S A ZERO-SUM GAME

Short-term trading is effectively a zero-sum game. For there to be winners in short-term trading, there must also be losers. 

In addition, short-term traders are playing the game against professionals, who may have an informational advantage.

This is very different from long-term investing, where a rising stock market creates the opportunity for all investors to make a profit together.

IT'S TIME-CONSUMING 

A successful day trader also needs to factor in the time taken to make frequent trades.

Short-term trading requires the constant monitoring of charts, news, and technical indicators. The time and effort to make successful trades may not be dissimilar to that of a full-time job.

THE GOOD INVESTORS' CONCLUSION 

Don't get taken in by the aggressive marketing campaign to be a short-term trader. While it may seem enticing, short-term traders bear the huge risk of loss. There are so many factors working against short-term trading, that only a small percentage of them are able to make consistent profits.

This article was first published in The Good Investors. All content is displayed for general information purposes only and does not constitute professional financial advice.