Table of contents:
- 1 7 reasons why you should not trade
- 1.1 1. you are living in a fire hazard
- 1.2 2. like a psychological thriller
- 1.3 3. how successful are traders really?
- 1.4 How 14 professional traders failed magnificently and sank a quarter of a million euros
- 1.5 The role of (self-learning) computer algorithms in trading
- 1.6 4. the trading experts’ illusion of success
- 1.7 5. you sacrifice something more valuable than money
- 1.8 6. a critical look behind the banknotes
- 1.9 7.your money stands still – but you can change it this way
Trading is popular. Sitting at home in front of your PC, watching the stock prices and increasing your money daily with several “trades”. As quickly as possible with as little effort as possible.
You’ve probably heard about trading success stories and wondered what’s really behind trading.
The idea of fast and easy money attracts many people who then want to learn how to trade. And many people think that this is the only way to make money on the stock market.
But is trading a sensible way to increase your money, especially if you are a beginner? Can you earn a lot of money with trading? How serious is trading? And: Does trading really work?
In this article (and in the accompanying podcast) I will show you well-founded statistics and facts, trading experiences and alternatives that trading coaches won’t show you.
I have 7 very good reasons for you why you should…
- may prefer to leave day trading to others
- or should inform you further, if you think this is the only way to get a good return.
I will also show you what day trading has to do with your school days – and to which group of “students” you should belong in order to win on the stock market in a more relaxed way.
7 reasons why you should not trade
In the meantime, even television advertising for trading platforms is already running. Trading software buys large blocks of sponsorship from football clubs.
“New trading strategy for breathtaking returns!”
“1000% return in 2 weeks!”
“Increase money with a few clicks!”
Wow! That sounds really exciting.
Strategies for trading securities like day trading, volume trading. Swing trading, position trading, scalp trading and other strategies come to the fore.
On the other hand, investing your money long-term sounds about as exciting as watching the grass grow (or watching Bayern Munich football matches against third division teams).
But now comes the catch:
What speaks against trading, which is so popular on the stock exchange and which makes headlines time and again?
To answer that, we need to clarify an important question briefly in advance: What is trading anyway?
Trading refers to the active trading of securities or foreign exchange (i.e. foreign currencies) and is one of the riskiest forms of investment. More specific forms are, for example, day trading and swing trading.
How can you trade?
You do not need any special software, but access to an online broker. There are “normal” online brokers where you open a securities account and your securities (e.g. shares) are held in safekeeping, but also more specialised brokers who offer other financial products (often with considerably more risks).
Traders usually work with charts, i.e. price movements. Others also use sentiment data, i.e. indicators of a certain mood in the financial markets. Fundamental data is often less relevant.
1. you are living in a fire hazard
Hardly any other form of investment has such a high average risk as day trading.
On the one hand through high fluctuations in value.
However, leveraged products are also often traded, which can multiply the profit – but also the loss – by money borrowed at short notice.
Until recently, your risk of loss was not limited to your invested money: In the worst case you had to add money because you gambled away the money you borrowed from the bank through the leverage.
Imagine you would like to invest with 1.000€. If a share price increases by 1%, your deposit value increases by 10€.
But now you can borrow 9.000€ from the bank. If you invest 10,000€ now, even though only 1,000€ comes from yourself, your deposit will increase by 100€.
You pay back the 9.000€ to the bank and voilá: You’ve made 10 times the profit with the same amount of your own money. 100€ instead of 10€.
But what happens if the product in which you invest the €10,000 becomes worthless? You still have to raise the €9,000 – even if you only deposited €1,000 at the bank.
The more money you borrow, the greater the leverage. The greater the leverage, the more the profit is multiplied – or even the loss.
Private insolvency as a 26-year-old engineer?
An engineer also had to make this experience a few years ago. At the age of 26, despite a good salary, he was on the verge of private insolvency:
He invested in CFDs, a rather risky form of investment, and lost his money when Switzerland unlinked its currency from the euro. His invested 2.800€ became a mountain of debt of 280.000€.
Of course this is an unfortunate extreme case. And fortunately, there are now legal regulations in place to avoid such an obligation to make additional contributions from the outset. However, this leverage effect is still often used in trading strategies.
Many traders only see the big chances of winning with a $ sign in their eyes. After all, it’s funny how “always only the others” lose, something like this could never happen to you.
Even though this risk is enormous primarily with leveraged products, the risk is generally greater with short-term investment strategies: on the one hand, due to the psychological component, the alarmingly low profit chances compared to long-term investing and the high fees for frequent trading, which require ever higher excess returns. More about this in a moment.
2. like a psychological thriller
The path of long-term investment is usually not very nerve-wracking:
You don’t have to sit in front of the computer for hours. You don’t have to pay a lesson. And you do not have to realize short-term losses.
Well-known daytraders preach one thing to their potential imitators: They have to be stress resistant and have nerves of steel.
At the beginning it is common that inexperienced investors, who trade on a minute, hourly or daily basis, have to pay a lot of apprenticeship money.
They are not yet able to keep up with the other market participants, fluctuate too often between fear and hope, are unable to recognize patterns perfectly and lose their money.
This can be – especially at the start of the stock market – a rather high hurdle.
And indeed, it also leads to the fact that many investors only give up trading after having experienced these losses and turn to long-term investment.
So for once we have the side of the long-term investor in the form of a car ride:
He drives quite fast, but always calmly and reliably reaches his destination.
The trader’s journey is different:
He loses a side mirror right at the start. Nevertheless, he boards the car like a maniac. His car somersaults a few times, but somehow keeps on going – even with only three tyres. But: But fast.
Nevertheless he only reaches the finish with a probability of 10%.
Where does the 10% come from? I will tell you in reason #3.
3. how successful are traders really?
So let’s get down to business: How successful is trading really? How much return do traders achieve?
And by “really” I don’t mean what many people tell you about how successful they are. But more about this in point 6.
I will show you 3 studies on the success of private traders and give you 2 insights into the “success” of professional traders, which give us an insight into the success of trading.
What we have to record: The biggest disadvantage of trading is the high cost.
You have to pay fees every time you buy and sell on the exchange. Around these fees and they bid-ask spread, the so-called spread, your yield decreases.
If you trade very little, you only pay a small fee. If you trade a lot, you pay high fees.
So these fees have mainly traders. And before it goes into the profit zone, the fees have to be recouped.
Okay. This is of course a disadvantage, but if the traders earn a return that bears this, everything would be fine.
So let’s not look at individual trading experiences, but at entire studies on the success of the traders.
Study #1 (stock market) – 85% of traders lose money in the short term
In this study, Brad M. Barber examines the success of so-called day traders, who take speculative positions in the stock market at very short notice.
The result: 85% of day traders make losses on an annual basis.
Only with less than 1% of the traders the scientists could really find out that they follow a profitable strategy and that the profits do not depend on luck.
These figures show that at least 4 out of 5 traders lose money on an annual basis. Only one in 100 has a proven track record of making sustainable profits.
Study #2 (Forex market) – 89% lose money in the medium term
And there is another study from France, in which the Forex market (foreign exchange market) was examined.
There, over four years, from 2009 to 2012, the performance of traders with different brokers was documented. The result:
Almost 89% of all traders have lost money – on average 10.900€.
And according to the study, it makes little difference whether newcomers or experienced traders are considered – the learning effect is surprisingly low.
Study #3 (Stock market) – 98% lose money in the long run
In this study, the learning behaviour of day traders on the stock market was examined, using a period of 14 years.
The result: More than 98% of day traders lose money.
And for those who make short-term profits, the winning streak does not last long:
- 40% of day traders give up after one month at the latest.
- 87% of day traders give up after three years at the latest
- 93% of day traders give up after five years at the latest
- The study by Barber and Odean entitled “Trading is detrimental to your wealth” also finds a clear correlation between trading activity and net shareholder returns:
The picture shows: The more traded (group 5), the lower the net return achieved. The group that trades the least (group 1) achieves the highest net return on average.
These studies paint a devastating picture: Only a very small fraction really manages to achieve lasting profits.
It’s like digging for gold: Whenever there is a report of a big gold find somewhere, everyone sets out to find the riches with their own hands.
A few of them, probably by chance, will have large finds that attract more and more people. But the majority of people will go home empty-handed again, as is the case with trading.
Who always makes money from this? The brokers and the trading coaches.
This picture is supported when you look at who is high up in the Forbes list of the richest people in the world.
It’s investors like Warren Buffett, Peter Lynch, Ken Fisher and many more. These are mostly billionaires and they don’t invest on a daily basis, but invest with foresight and long-term – some more, some less.
So even though the trader goes to a lot more trouble and takes a greater risk, there are hardly any known traders who have become really rich as a result – even though the supposedly so high returns should have catapulted the traders to the top positions long ago.
How one of the most famous German-speaking trading professionals achieved a return of -108
(Important: The following descriptions are based on this article)
A successful businessman has given Birger S. (full name in the original article), “Germany’s No. 1 Daytrader” (according to the magazine “Der Aktionär”) 100.000€ “for testing”. So I think you can guess the actual amount if someone wants to “test” something with 100.000€.
The investor himself was professionally very successful, acquired a lot of expensive knowledge in seminars and private coaching and had a large starting capital, and entrusted it to an even better professional. Optimal conditions therefore.
So if someone should make a profit, then this constellation, right?
The money was continuously decreasing and after less than 2 years it was almost completely gone. Afterwards, a loan was taken out to recoup the losses. Also failed.
The result: day and swing trading by a trading professional achieved a return of -108% (yes, really) for the customer. The invested capital was gone and on top of that debts were incurred.
How 14 professional traders failed magnificently and sank a quarter of a million euros
The organizer “Trade-Champion” has invited a total of 16 traders in 2015, who were previously able to demonstrate a positive return.
The challenge: Each of these traders was equipped with real 20.000€ – no play money. The first one who manages to increase his capital tenfold wins the trading competition and may keep the money. The one who suffers a loss of 40% or more flies out of the competition.
Every trader could trade freely, use his own indicators and let his portfolio grow. Also the just mentioned Birger Schäfermeier was among other well-known names.
The first round had to be cancelled and redesigned, because Schäfermeier showed a minus of 40.000€ after a few weeks and thus violated the rules of the competition.
The result of the 2nd round, which started on April 1, 2015: On June 8, 2015 the competition was cancelled due to the disastrous trading results.
The aim was to show the spectators profitable trading systems in practice in order to learn from them. The problem: There were hardly any profitable trading systems.
4 traders dropped out prematurely, because they had lost more than 40%. After a little more than 2 months, 14 of the 16 traders had not achieved significant increases in value.
On the contrary: The 16 traders had lost a quarter of a million euros in total.
And we are not talking about inexperienced, naive investors: These 16 traders were pre-selected, some of them were well known in the trading scene and had to prove previous profits. Otherwise they would not have been endowed with 20.000€ each.
The statement of the organizer: “With a few exceptions – actually only two […] – we could not recognize any valid system, strategy or successive increases in the value of the portfolio.
The organizer’s website is for sale today.
“But there is a lot of money to be made with trading”
Of course there are successful traders. Of course you can earn money by trading.
But these statements of trading advocates are just as meaningless as the statement “You can make a lot of money with football”.
The same is true for any profession: You can earn a lot of money as a footballer, as a programmer, as a tax expert or as anything else.
So should you now become a professional footballer just because a few manage to earn a lot of money with it?
Of course not! It’s about completely different questions that are important for it.
In terms of trading, the more interesting questions are much more:
- What are the chances of earning a lot of money with trading?
- Do you even have the knowledge to trade successfully?
- Do you even enjoy earning your money this way?
- What disadvantages are connected with trading?
- Are there worthwhile alternatives how you can invest your money profitably without trading?
And against this background, it is no use if only an extremely small fraction succeeds in being successful with trading. This small fraction can be found in every profession – just by chance.
And identifying even this small fraction is extremely difficult, as the stories just quoted illustrate.
The role of (self-learning) computer algorithms in trading
These are all fact-based insights into the (mis)success of day traders: both from private investors and seasoned professionals. Away from the rose-red “so you can get rich” glasses.
After all these results it is in my opinion very optimistic and courageous to accept as private investors to increase their own money permanently and successfully by day trading, swing trading or similar trading concepts and strategies.
Especially since it will probably only be harder than easier:
Meanwhile it is not only people who want to make a trading profit by trading, but more and more computer algorithms that beat people in speed and discipline.
In addition, there are more and more self-learning algorithms (keyword “machine learning”), which continuously evaluate data and no longer need rules, but recognize profitable trading strategies themselves and evaluate them long before the human investor discovers them.
Not only has trading been extremely difficult in the past, it will probably only become more difficult in the future.
Not to mention achieving a reasonable return, considering the time involved, the risk and the other reasons mentioned here.
The fact is that the majority of traders lose money in the long run and even sacrifice a lot of time and nerves for it.
4. the trading experts’ illusion of success
Okay, at most 10% of traders make profits in the long run – probably even less.
It’s not much, but it’s a good thing. And if you are making profits and you’re in that 10%, then trading should be worth it.
But this is wrong.
Just because someone makes a profit doesn’t mean that they are doing the right thing with their money.
You can invest much less risky and with much less effort broadly in the market. In the past, this has provided a return of 7% – 9%.
Only a fraction of the traders who make profits manage to earn a higher return on their money than the market.
So you can see: Making profits is not the decisive key figure. There are other alternatives that might…
- less risky
- not so time-consuming
… and are therefore more to be recommended – even IF you are one of the few percent who earn money by trading.
Important: Here not even the tax disadvantages of active trading have been taken into account. With a passive buy-and-hold investment, profits are not taxed until they are sold and can generate further profits until then: The so-called tax deferral effect.
The active investor also has to pay tax on the (rare) profits on sale, but this happens much more quickly. This is why there is no tax deferral effect there. From a tax perspective, the picture here would therefore be even more devastating.
5. you sacrifice something more valuable than money
A major aspect that makes trading much less attractive is the time sacrificed.
The long-term investment is an addition to your existing income. It requires very little time and all profits from this investment do not affect your income from work.
However, if you want to earn money as a trader, you have to sacrifice a lot of time.
You have to follow the prices for hours in order to discover favorable trading opportunities. Is the price rising as desired? Is the share price falling too much? Is it stagnating?
This is active work to make money, which is not a bad thing. But most likely you already have a main job that requires you to work 8 hours a day.
It’s going to be difficult if you want to follow the stock market for hours.
Unless you are one of a hundred traders who can call himself a professional and quit his job to trade.
But a pro has never fallen out of the sky.
So even if you as a trader should make profits that exceed the market, you must not forget the time you have spent. Your salary is an hourly wage just like a trader.
But with a long-term investment you have very little to do.
You can even reduce the effort to a few hours a year and still receive a return that is better than 90% of the traders.
6. a critical look behind the banknotes
In times when social networks are becoming more and more popular, there is a lot of envy and “I want this too” feelings.
On Instagram and YouTube, many traders show off their winnings and talk about their comet-like rise to the league of the rich and beautiful.
And even if evidence is provided, it is hard to see whether this success is actually based on competence or pure coincidence.
Because if millions of traders trade, it is purely by chance that some – without any talent or ability – will increase their money.
Competence cannot be judged by whether someone has multiplied his money. If it were, every lottery winner, poker player and roulette player who bet twice in a row on the right colour would be an investment expert.
The available, reliable studies show a clear picture: the majority of traders are continuously losing money.
But many people show their winnings in pictures or videos (where it is not even clear whether it was skill or pure luck).
The problem? The losses are concealed.
Nobody shares a picture of their last huge loss – something like this sells badly.
With profits of several thousand euros, many people think: “Wow, how does he do it?”
Sure, that’s understandable. If someone seems to earn a lot of money in a very short time, we would all like to do it. But this creates a completely distorted picture of the actual success.
Bill Gates and Mark Zuckerberg dropped out of college and are now billionaires. Would now be the correct conclusion “I’ll quit my studies, then I’ll also become a billionaire”?
Absolutely not. You just don’t hear anything from the people who dropped out of college and are now financially much worse off.
We only hear about the positive examples. But this “Survival Bias” distorts reality enormously.
And it’s exactly the same with traders:
Just because someone shows you a profit or tells you how much they earn, doesn’t mean that they are trading profitably – and even less that you can trade profitably.
Meanwhile, there are not only traders like Koko Petkov or others who wave banknotes on YouTube or Instagram and cloud the senses of the newcomers. Also dubious groups like “Trading with Alex” from coach Alex (and many imitators) are forming on Facebook and WhatsApp and create the impression that they make every trader rich at the push of a button through personal contact.
An illusion that is quite naive and in the long run will never lead to more, but only to less money.
7.your money stands still – but you can change it this way
Trading is like working. What happens when you stop working?
You don’t make any money.
This is exactly what happens when you trade: you only earn money when you actively sit in front of the computer, observe, buy, analyse and sell.
If you don’t do that, you don’t make money. It is as simple as that.
With long-term investments, however, your money increases without any action on your part.
Once you have invested your money, it can remain untouched. So it multiplies even if you don’t have the time or desire to go public.
That is the beauty: Your money multiplies passively.
The trader has to work actively to make the money multiply. And in most cases this is not even rewarded with a better return.
Why you should keep your hands off trading
Here you go: The seven reasons why you shouldn’t trade.
Trading is popular and the Internet offers a whole new reach.
Trading platforms are advertised on television and probably make even more people become traders.
I have shown you, however, that in most cases it makes no sense to trade for financial, time or other reasons.
Yes, there are people who make a profit from it. Estimated 1% systematically – so not by luck. But if you build your investment on luck, like the other 99% of traders, you will not succeed.
Trading is riskier for beginners – in comparison to the long-term investment approach -, takes considerably more time, works only with a minimal percentage of traders and is a rather opaque market.
Important: This is not about condemning an entire profession (“trader”) and unobjectively throwing around the terms “gambler” and “speculator”, as it unfortunately often happens in most articles.
Traders are important for the markets, I know many of them personally and I am happy for every trader who trades really successfully on the stock exchange. (Even if many are under the illusion of success – more about this in reason #4)
The only question here is why, in my opinion, most private investors should not engage in active trading (and day trading in particular) on the stock exchange and why a long-term investment approach is usually the better alternative.
You know this phenomenon from school:
There are students who work, learn and do everything for a good grade.
Then there are the students who only do the most necessary things – and later on always get the better grade.
It’s something similar on the stock market:
The traders do everything, react to every signal and chase after every strategy in order to invest as well as possible.
The clever, long-term investor leans back, does only the bare essentials and only adjusts if it really has to be done. And in the end, he is rewarded with a better return.
A lot of effort for little or no return. Or: Little effort for a lot of return.
On the stock exchange, most people unfortunately opt for the first-mentioned option, trading – after all, everything sounds so nice and the hope of quick wealth remains.
But hope and luck are not things that will help you to increase your money in the best possible way.
So don’t let yourself be guided by false promises and “fast riches guaranteed” illusions, but by your clear head and mind.
PS: An alternative to short-term trading is long-term investing. Here you can find out how you can demonstrably (without hocus-pocus or any miracle strategy) beat up to 96% of fund managers with it.