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Day-Trading is a Total Scam. Don’t Fall For the Pitch

by Darwin on April 20, 2011

scam

I'll Take That For Ya!

I constantly hear radio spots for getting rich day-trading.  The claims on the commercials are so outrageous, I can’t even believe the FTC allows it.  If you listen to satellite radio at all, you’ll know exactly which ads I’m referring to; they play a repeating cycle virtually every commercial break.  They often start off with something like the following:

The Claim: “I Quit My Day Job. I start work at 9AM and I’m liquid by lunchtime each day.”

The Reality: About the only thing I’d believe throughout the whole commercial is that most of the trading is done in the first and last hour of trading.  This has been shown statistically.  As far as quitting a day job to do this?  Unless your day job was the unemployment line, I highly doubt there are more than a handful of examples where successful US workers are doing better now day-trading than they were when they were gainfully employed.  If fact, I’d love to see the numbers for people who went through their program and what their annualized gains are (after taxes).  You’ll never see such a report.

The Claim: “I made $3 Million trading in the worst bear market in history.  Bull, Bear, I don’t care!”

The Reality: First of all, if this is even true, then, he made $3Million on what base?  Was he trading on margin with a $100 Million base and made $3 Million?  That’s a 3% return over a period of years.  Was it on margin?  Did he get lucky with a ton of out of the money options?  Did he just own gold or bonds and no stocks during the crash?  So, he got lucky and timed the market once and that’s the claim to fame?  What’s to say this will work in the future?  And…if he’s this good, why the heck would he be selling himself out and sharing his secret??? He wouldn’t be wasting his time!

The Claim: “How would you like to know what the market is going to do 80% of the time?  We know and so can you with our trading system”

The Reality: What does this really mean, 80% of the time?  How is that measured?  What are the numerator and denominator in this equation and most importantly, what are the ACTUAL ANNUALIZED RETURNS using this system during various time periods?  That’s what I’d want to know, and they’ve been conveniently omitted from the commercial.

The Ultimate Reality – Always Question This…

Here’s something I always ask myself and you should too when it comes to purported investing strategies for sale.  If the strategy were so successful, why would anyone “sell it”.  They would be focusing all their efforts on executing this strategy, borrowing more money, managing money professionally, or making a living off it in some way other than selling other people a system.  Think about it.  Some of the top hedge fund managers make tens of millions of dollars per year for beating their benchmark.  Are they wasting time peddling books, CDs, and newsletters?  No. The people that are selling you the dream aren’t making money themselves.  If they were, they’d be focused on making MORE money from their investments, not sharing their “secrets” with a gullible public.

Look, there are some successful day-traders out there.  Most of them work for the likes of Goldman Sachs and make an order of magnitude more than the rest of us by using their proprietary information (front-running anyone?) and platforms (see how Goldman turned a profit EVERY DAY from trading for a full quarter).  Read that again.  That’s like batting 1000.  Even in down markets, sideways markets, Goldman profited EVERY SINGLE DAY.  You think you can compete with that?  Aside from Wall street firms, they’re few and far between.

I Know a Day-Trader

One of my old college buddies was a day-trader for about 10 years out of college.  It’s what he did for a living – some technical analysis, some momentum trading, some fundamental.  He didn’t work for a large firm, he worked for himself.  He was able to eek out a living, but he didn’t get rich.  He eventually started shifting away from it and earning income other ways like through insurance and other means.  He said the stress was killing him and that he was basically “gambling for a living”.  It didn’t seem to the the most fulfilling, or even profitable venture.  I’m sure a daytrader will come across this article and dispel some of these opinions, but seriously, if you’re one of them – do you think a typical American hearing this commercial should quit their job and try daytrading for a living?  You can’t be serious.

If you think you have what it takes, you’ve got to ask yourself a few questions:

  • What makes you think you’re smarter than the thousands of other very smart people out there?
  • What makes you think you can deliver better results than the best and the brightest out of MIT math and engineering programs now working on Wall Street?
  • Do you really think you’re going to have a better career doing this than a more conventional career?
  • What is the endgame?  Are you going to do this for the rest of your life?
  • What are you going to do when you blow through you life savings chasing this sham?

There’s a difference between a retail investor like me, who wants to own a piece of Apple or Baidu and a day trader.  I’m an investor and I hold for months or years.  A daytrader is trying to profit purely from little momentum shifts, capturing a few pennies here a few there, often with leverage to make it worthwhile.  The transaction costs and taxes will often chew up what little edge you think you can eek out.  And then, there’s the downside risk of loss (even when investing in gold).  It’s a net losing game and if you think you can “win” with all these headwinds, you may want to realistically assess why you’re so overconfident.

Are You a DayTrader?
Would You Try DayTrading?

{ 17 comments… read them below or add one }

Dave @ Money In The 20s April 21, 2011 at 6:41 am

Completely agree with you! I don’t understand how the FTC allows these commercials to be on the air. It’s ridiculous! The average person is never going to be a day trader and should never try to be. I can’t imagine the stress that would be involved. One wrong bet on margin and you could go broke!

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Ken Faulkenberry April 21, 2011 at 10:37 am

I have met many people who bought these products, but haven’t met anyone who has successfully used them. You use excellent reasoning to show someone why these products don’t make sense. I would like to add one. Investing involves production and profits which are growing and divided amoung investors. Gambling involves dividing a shrinking asset where some win and some lose. Day trading is dividing a shrinking asset (commissions, bid/ask spread, misc. expenses) with some wining an some losing. Gambling is not investing. Investors should realize the difference.
Thanks for the great article.

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Ken Faulkenberry April 21, 2011 at 10:37 am

I have met many people who bought these products, but haven’t met anyone who has successfully used them. You use excellent reasoning to show someone why these products don’t make sense. I would like to add one. Investing involves production and profits which are growing and divided amoung investors. Gambling involves dividing a shrinking asset where some win and some lose. Day trading is dividing a shrinking asset (commissions, bid/ask spread, misc. expenses) with some wining an some losing. Gambling is not investing. Investors should realize the difference.
Thanks for the great article.

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Ravi Gupta April 21, 2011 at 11:37 am

You make great points, all of these advertisements are laughable at best. As you said there are so many different scenarios and if the strategy isn’t listed my scammometer goes off. The people that are targeted are those who aren’t as well versed in markets as experts or occasional traders. This the reason people fall for this, besides if a person if willing to go into a stock without researching it they are also more likely to enter a scam without the same research.

-Ravi Gupta

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101 Centavos April 22, 2011 at 10:20 am

I wonder what the hourly wage of a day trader nets out to be. My guess is probably not much.

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Financial Samurai April 24, 2011 at 12:39 pm

Day trading is gambling, and I have to admit, it’s so fun so many times until a trade blows up in my face!

Sam

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Frits Altenburg April 26, 2011 at 5:56 am

I agree with you 90% and have to say I had to pick myself up from the floor after seeing the pic of the woman, the little chicks and the goose picking her purse: I’ll take that for ya” hilarious!!

I do believe though you can make money through day trading. The basic is when you enter a random market long at level 1000 and you put your stop loss at 995 and your take profit at 1005 you have a 50% winning chance (probably a bit lower since you might not get a fill at 1005) With a predefined stop loss SL AND a predefined take profit TP you will allways be a loser because of the brokerage. No matter if your settings are SL -8 and TP +2 than you have an 80% winning chance and a 20% losing. So in the end again you’re at break even and brokerage is your loss. I compare this to playing black/red roulette and the zero (green) is your brokerage.

However if you constantly cut your losses at -5 and constantly let your profits run with some sort of trail you are comfortable with then you will be a winnner. E.g.: First 5 trades you don’t reach 1005 and prices drop and you accept the loss.

In 3 of those trades it actually sucks that your stop loss is hit, because price didn’t move down further than 992 and then came back up. The 2 other trades went down to 975 and even 955 before coming up but not to your entry point. Good thing you had that stop loss in!!

In your 6th trade price goes up to 1005 but price comes down and hits you again at 995. Another 5 point loss.

In your 7th trade price goes up to 1008, but the market comes back down. You used a trailing stop with a trail of 10 points so you get stopped out at 998 another 2 point loss.

In your 8th trade price goes up to 1013. You used the same trailing stop of 10 points and price goes down and you get stopped out at 1003. Only a 3 point profit.

In your 9th trade price goes up to 1025 and with the same 10 point trail you get stopped out with a 15 point profit.

In your 10th trade price goes up to 1045 and with the same 10 point trail you get stopped out with a 35 point profit.

What just happened? You took ten trades and 7 of them ended in a loss! That sucks big time! Especially since it was 7 losses in a row! 6 Months ago I wouldn’t have blamed you if you had thrown in the towel at that point. Total loss out of those 7 trades is 32 points.

Here come the winners! Total profit 53

Total profit : 53
Total loss : 32
Gross profit : 21 (ex. Brokerage)

You only have a 30% of winning trades but still you end up with a profit! I say:”amateurs want to be right, professionals want to make money”.

Technical analysis is total crap and I don’t sell anything. With my posts on the internet I’m just trying to keep people out of the hands of those scammers that try to teach people how to day trade. Daytrading in the basics a 50% chance game. But if you accept that at least 50% are losses and let that other 50% potential big winners run than you will be a winner. The difference between making lots of money through day trading and making a shitload of it is just luck. But I’ll settle for a lot ;0)!

Shaka,

Frits Altenburg

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Ron June 3, 2011 at 1:12 pm

I’ve been a day trader for 11 years.
Here’s the truth I’ve seen:
* You can make money no matter what the market is doing. I trade both long and short every single day.
* You should learn 1 stock or commodity VERY WELL. I’ve seen some successful traders trade everything, but to me you need to learn 1 thing well and then add others.
* Most people blow through their account. You need to be very cautious for at least a year. You should study daily for 6 months before you even start trading real money. Learn chart patterns for hours.
* The toughest hurdle is your own emotions, trading rationally and following your rules. The toughest hurdle is your own emotions, trading rationally and following your rules. I said it twice because no one believes it, but that is what will sink you! Trust me, I’ve been sunk several times.
8 months ago my trading account got down to just $6,000 from bad trading. I focused and it’s back to $90k. It’s always a battle to stay focused (I only trade 2 hours per day).
* A huge % of REAL trading is NOT LUCK! I have had streaks of making money for 40 trading days in a row, many days without a SINGLE loser on 30 trades. But, staying that focused and learning that much about the market is not as easy as it sounds.
* Overcoming the cost of commissions is a real problem, although it’s WAY easier than 10 years ago (commissions are less than 1/2 what they were back then). I tend to spend about $200 day in commissions.

You need to study and be able to compete with a Goldman Sachs trader. It is possible, but you have to study like you’re a graduate student.

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Mark July 26, 2012 at 4:14 am

You’ve been day trading for 11 years and your trading account sits at $90K?

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DOMINIC December 21, 2012 at 12:27 am

How can one doubt that Day Trading can be a way to make enough revenue to live a comfortable life style. You need to put in the work , this is defined as 10,000 hours of studying and simulation trading. You must become an expert on the equity or instrument you are trading. Has any one heard of professional gambler how about the pro poker player. These people have the odds stacked against them but their are pro gamblers and pro poker players. It is a fact most over 90 % are not going to be successful but the other 10% will be extremely successful. It is basic business strategy 101 if you want a high percentage of success then buy a franchise and make 80k to 100k per year.

Day trading is not about the money, that comes second being a g great trader with a defined business strategy is first then the money will come to you.

Day trading is the hardest way to make a simple living. If it was not for the high failure rate the successful trader would not be extremely successful.

The richest people in the world made their wealth from the old fashion way inheritance or marriage, real estate then investing. So that says it all.

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Frits Altenburg February 11, 2013 at 4:18 am

Yeah Ron is a real winner with 90K in 11 years lol! If he had taken on a regular job he probably made about 4 times as much or even more. Over the next period your account will go down again from 90K to minus 10K and then it’s game over. More than 10 years of your life wasted on a myth.

Good luck Ron!

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DOMINIC December 21, 2012 at 12:23 am

How can one doubt that Day Trading can be a way to make enough revenue to live a comfortable life style. You need to put in the work , this is defined as 10,000 hours of studying and simulation trading. You must become an expert on the equity or instrument you are trading. Has any one heard of professional gambler how about the pro poker player. These people have the odds stacked against them but their are pro gamblers and pro poker players. It is a fact most over 90 % are not going to be successful but the other 10% will be extremely successful. It is basic business strategy 101 if you want a high percentage of success then buy a franchise and make 80k to 100k per year.

Day trading is not about the money, that comes second being a g great trader with a defined business strategy is first then the money will come to you.

Day trading is the hardest way to make a simple living. If it was not for the high failure rate the successful trader would not be extremely successful.

The richest people in the world made their wealth from the old fashion way inheritance or marriage, real estate then investing. So that says it all.

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Frits Altenburg February 11, 2013 at 4:14 am

Hi Dominic,

You talk about 10% will become a successful trader. But that is just another marketing story. Newbies will say:”10%? Wow those odds are pretty good, I’m getting in”! And another victim is made… It is not even known how many people trade on this planet so how can you possibly come up with this 10% figure. There is absolutely no research to be found about these numbers. If it was 10% than why is it that the last person we know about who made a shitload of money is from the age of the dinosaurs, Larry Williams (might also be just another marketing story). I see your name is linked to a vendor website. Just another vendor that isn’t able to show live winning trades or a trade log held by a third party.

Hilarious, haha!

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Frits Altenburg December 21, 2012 at 8:11 pm

I can only say that Darwin is right. I posted here last year and have to admit that I just had a good run and got out while I still was ahead. In other words:”I was lucky”! Over the months I’ve learned that this business is impregnated with fraud. That goes from vendors and their charlatans on forums to the CME sponsoring the vendors.

In reaction to my website I had thousands of emails including those from people whose lives were ruined by this business (maybe partially their own fault). I will do my utmost to put an end to this. If you want to help me, take a look at the website and sent me an email.

Merry Christmas to you all!

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Mike February 10, 2013 at 5:25 pm

I have been day trading for barely two months so obviously I do not have the breadth of experience as Ron does but so far I have eeked out about 4%. Maybe my system works or I have gotten extremely lucky so far. I suppose only time will tell.

Would have made more money had I put this money into my 401K or IRA that’s for sure. I must say though that I hope it gets better as I keep refining my system, learn from my mistakes and especially learn to trade taking emotions out of the equation. Was chasing profits (i.e. running with the herd) as opposed to following the system and got burned pretty badly in the process. Conventional wisdom has it that fear and greed are the two primary emotions when day-trading. Can’t argue with that. On top of that I am often second-guessing my decision especially when I lose money seems to be a common coinsurance (at least to me).

In my limited experience I find that the more I trade (win or lose), it is becoming less and less emotional and more business like. In a way I have been blessed because I am not day-trading with scared money. I don’t know if I could trade if my very existence depended on day-trading or even worse if my family depended on on it. I surely crack under pressure and make decisions that would be outright foolish.

Anyways, just my random thoughts after stumbling on this website.

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Darwin February 10, 2013 at 11:16 pm

Glad to hear about your early success. I hope it lasts!

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Frits Altenburg February 11, 2013 at 4:04 am

congrats on your wins mate! Though I would like to award you more winners I have to say that I’m 100% sure that you are on a road to nowhere. But, I also think you have to find that out yourself. Just remember that we warned you and at some point the best you can do is quit trying to achieve something that is nothing more than a trading branche fairy tale.

Good luck!

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