“There is no elevator to success. You have to take the stairs” – Zig Ziglar.
Suhas Sharma, a Pune based sales executive first started intraday trading in the year 2019. Buoyed by success in his initial few trades, he quit his full-time job with a pharmaceutical company to become a fulltime intraday trader. He believed that even if he could make anything above Rs.1000 per day, he would still be earning more than what his job was paying minus the hassles of travelling every day to different locations in Pune in connection with his work.
However, two months down the line, he realized that things were not quite working the way he expected. Rather than making profits on his intraday trades, he was making significant losses which were eroding away his capital amount.
Not determined to give up, he enrolled for a training course in intraday trading to learn how to trade based on charts and candlestick patterns. While this new learning gave him a renewed sense of confidence, the actual profits in his intraday trades were still miles away.
Strangely, he felt that the charts and stock price movements always matched his analysis but only when looking at it after market hours, while things were never as expected when checking for the same in real-time.
Frustrated with things not moving the way he expected in intraday trading and almost 70% of erosion in his capital, Suhas decided to quit intraday trading altogether and instead invest for the long term while taking up a regular job.
Suhas Sharma is not alone. The same story has been repeated countless times with investors.
Intraday trading refers to the activity of buying and selling or selling and buying stocks on the same day to make profits by capitalizing on the difference between the prices at which the stocks are bought and sold. In theory, this looks like a great way to make quick profits and become rich in a short time. But in practice, intraday trading is not a breeze, and most intraday traders make losses with many even losing their capital invested.
Let’s take a detailed look at the drawbacks of intraday trading:
There are multiple types of risks involved in intraday trading
Stock markets are highly volatile and unpredictable in the short term. So even if a trader selects the right stocks or strategies to trade, there is always a danger of some unforeseen even impacting the stock price or stock markets. Some famous examples of such events include the 9/11 terror attacks in America, drone attack killing Iranian general Qassem Soleimani in 2019 by America and the aerial dogfight between India and Pakistan in the year 2019 when markets crashed unexpectedly. No trader can anticipate any such unexpected events beforehand, and in such a scenario, even the well-planned trading strategy may go for a toss.
Besides this, there is always a risk of excessive exposure due to the easy availability of credit. Leveraging allows traders to take exposures in the market that are much higher than they can afford to cover. However, taking high exposures to earn higher returns comes with the risk of more significant loss.
One of the most significant drawbacks of intraday trading is that it is highly addictive and may create a gambler’s mindset. Majority of intraday traders are highly influenced by their emotions which motivate them to take high risks beyond their means. Many traders tend to place their trades driven by their instincts or past experience rather than logical thinking in pursuit of higher profits and also tend to overtrade. Since intraday trading is based on speculating on the price movement of stocks, the addiction to trading could lead to compulsive gambling. Extreme competitiveness and failure in initial few trades of the day, often drive traders to indulge in revenge trading, where they take more significant risks to cover past losses which in turn leads to additional losses.
Intraday trading is highly stressful
Intraday trading is very stressful as traders are always hooked to their computers or mobile phones so that they don't miss out on opportunities. This highly impacts their other activities and day to day work causing high levels of stress.
Intraday trading cannot create sustainable wealth
To create sustainable wealth, a trader requires consistent success in his intraday trades. Given the high risk and limited time duration at hand, the chances of making consistent profits in intraday trades are highly negligible. Only a minor fraction of intraday traders are able to make profits regularly. So, it is almost impossible to create sustainable wealth from intraday trading. Besides, there is always a risk of losing heavily in a trade which may eat away the gains made from previous trades.
Frequent charges and taxes reduce the trader’s profits
Frequent buying and selling as a part of intraday trading means higher brokerage costs, as well as higher taxes. Short-term capital gains are chargeable at a higher rate as compared to long term capital gains which are applicable on selling stocks after holding them for a year or more.
This is a highly overlooked aspect by many traders and in the long run, reduces the overall gains.
Bottom line – Why intraday trading is not worth it?
It is challenging to earn consistent profits from intraday trading due to limited time at hand for an intraday trader in addition to huge market volatility in the short term. On top of it, there is intense competition from big players in the stock market, including those using algorithms which can identify and react to market trends in near real-time thus giving them a competitive advantage over traders, who execute their trades manually. For the average retail investor, the best way to create wealth is by investing in fundamentally sound stocks for the long term. It is a proven fact that when one remains invested in good quality stocks for the long term, wealth creation is automatically bound to happen. On the other hand, intraday trading can be one of the fastest ways to lose even the capital invested.
As aptly said by the Nobel prize-winning American economist, Paul Samuelson “Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.”
Wish to know more about creating wealth by investing in fundamentally sound stocks for long term? Click here.