Day trading continues to be a popular pursuit for a lot of people around the world because of the freedom it can provide to those who approach it with a professional attitude.
What many fail to recognize is that there are costs to day trading and that they can often spiral out of control.
When trading costs are talked about, it’s usually about the financial investment that you must make but it’s bigger than that.
Types Of Day Trading Costs
There are several costs that come when you enter the day trading business and all of them have the ability to affect you in a negative way.
- Financial costs
- Psychological costs
- Life costs
Financial costs are the one that most people focus on and it is really the easiest one to measure. You know quickly if you are making money or losing money.
The other two are not as simple to define because these are affected over time. Like a storm brewing in the dark of night, they sneak up on you and catch you by surprise. Being aware of their presence will allow you measure how much they affect you.
Looking at these from the perspective of a new trader, there is a low end and a high end and in between the two extremes is a wide gap. Just starting out you are going to have to find a way to learn about the markets and the different ways to approach them.
A lot of the information you need to know about markets like Futures, Forex and Options can be found absolutely free in the blog section of websites such as Trading Tips by Netpicks. You can learn the basics of day trading these markets without incurring fees of any kind.
Where the costs start to add up is when you start paying for information which is something many beginners do. This opens up an whole different can of worms because in the trading education business expensive does not always equal quality.
I’ve seen courses running upwards of $15000 that teach all types of entry strategies and the “secret methods the pros use”. There are “special trading indicators and software” that can set you back the same amount of money.
But here is the truth and for most it is a tough pill to swallow.
Spending that amount of money guarantees one thing. It guarantees that you will be spending that amount of money.
It does not guarantee your success at day trading.
Some of these “education companies” are really course selling companies. That is their business model.
That’s not to say you won’t find some value in them. But you won’t find success directly from them. It takes more than that.
What about trading systems?
You can certainly design your own trading method that uses much of the information that is found for free. It’s a lot of work, it’s time consuming and sometimes you don’t know where to start.
There are legitimate companies that sell trading systems that have been back tested, forward tested and shown good results in the real world by following the trade plans.
Like many things though, cost is not a direct reflection on quality.
Much like the courses though, there is a huge range of price points for these systems.
I can tell you that I found Netpicks in 2008 and watched how the owner, Mark Soberman, day trading crude oil using the trading system they were selling. The price was reasonable considering the support that was offered and I had seen what the method could do first hand.
I bought the system and just trading the it taught me more about the factors outside of the actual trading event than anything I had ever read.
Of course I am biased with the Netpicks products (because I see firsthand the success that has been had) but if I can give one piece of objective advice: If you are being marketed to with over-hyping the trading lifestyle as opposed to the actual act of trading, move along.
Trading Computers and Trading Platforms
You obviously need a computer and I’ve never found the need for anything more than the average desktop/laptop computer. Other traders who run multiple screens, squawk boxes and resource heavy day trader software may need something faster but when starting, stick to simple.
The trading platform you will need range in price as well from free to hundreds per month. Again, starting out just stick to simple and the cheapest one you need and over time you can adjust to suit your needs.
Do You Need The Best Broker?
That depends on what you require from the broker. If you are using a full service broker you can expect to pay more in fees. The important thing is you obviously want the trading commissions for your online trading to be reasonable but don’t sacrifice the services you need to save a few cents.
When seeing out the broker, don’t be afraid to call and ask questions.
- How much are the “all in fees” for a round turn on your chosen instrument?
- There may be fees for getting your money out of your account and for trading statements.
- Are there fees for the platform they offer?
Negotiate the best price you can get on all the fees as over time, these fees can eat large into your overall profits. We comparison shop in other areas of our lives and you should do the exact same thing when looking for your trading broker.
Fund The Trading Account
After all the training and testing of your trading system, you are eventually going to need start-up capital for your trading business. How much can you invest for risk capital to get your business started?
Brokers will have minimums but it’s been said that most traders start out with too little capital. This causes them to risk a larger percentage of their account and when the losses come in a streak, the equity curve is too far sloped in the downwards direction.
Getting back to even once you’ve taken heavy trading hits is extremely tough.
There is no magic number for trading risk. Some say 2%. Some say less and others say more. If you are starting out with a small account, it will be very hard to build it up to a sizable amount if the risk is too conservative.
One way to decide on what to risk is to take the string of losses that came in your back test and do the math to figure out the hits your account would have taken at different percentages.
It’s not perfect but it is a start.
How Much To Earmark For Trading?
That answer depends on your expectations. Unreal expectations of overnight success will require more capital because you are no doubt going to lose a big chunk of it.
Let’s do a rough calculation:
Trading system (complete with training and maybe a trading coach) – $2500 – $3000
Charts – Free to $250/month
Account funding – $5000
Total: Rounding to $10,000
I’ve read comparisons to the costs of a university degree to that of learning to trade. It is mostly from those who:
1. Have spent a ton of money on systems and education that didn’t bring them the success they desire.
2. Trading educators that charge insane prices to learn the basics.
The costs for learning to day trade do not have to be excessive especially for the “secret method of hedge fund traders”. Simple works in trading including profiting from traders trapped in losing trades and setups that come from ranges/channels.
Many people though will benefit from systems that have shown an edge in the markets but comes with reasonable price tag. Why reasonable?
The trading method is only a part of the success equation. It takes more than a system to to put you on the path to the freedom you seek. You have to follow it.
Psychological Costs Of Day Trading
I’ve seen how people can change as they go further into their trading career in terms of negative and positive.
On the plus side, you start to look at life differently. You get a handle on biases that can affect us in our day to day activities. People become goal oriented and do a constant appraisal of themselves in terms of being balanced. Success can do wonders for confidence and self-esteem and those that have these changes have approached trading in a very healthy way.
There is a dark side and this is where many (if you believe the failure rates in trading) will fall.
Day trading will allow you ample opportunity every day to make and lose money. The wins can make you overconfident and the losers can shatter all the positive thoughts you have of yourself.
Either of those two outcomes can lead you down a path that is hard to recover from. The cost of failure…..the cost of never realizing a dream….can burn a whole straight through your soul.
There is no easy way to avoid the traps that come with trading in terms of the psychological effect they can have. You have to realize that you will lose money.
- Not every trade will make you “right”.
- A losing trade does not make you “wrong”.
- Not finding success does not make you a failure
The best we can do is to have set goals of what we want to get out of trading. Write them down and consistently review them.
1. We can constantly assess our mental state to ensure we are keeping a healthy outlook on trading and on ourselves.
2. We can approach it as a business including approaching the learning stage with the same intensity and focus that a wannabe doctor would have.
3. We can have a trading system that has even just a slight edge in the market and we follow the trading place exactly as written.
4. We can expect that we will have dark days and those are the days that the best position is no position in the market.
There will be no guarantee of success but putting yourself on a path that has the best chance of finding it, makes sense.
Trading is not something you will learn overnight. You will probably not be consistently profitable for months-years-if ever. It is a time consuming venture just like any business.
Your business can fail just like any other business.
Your business can succeed just like others do.
But it will cost you time that could be spent on something else with no guarantee that you will be able to master a system, fight the psychological demons and come out a winner.
Days will fly by as you sit in front of your screen learning the system, testing the system, trade plans, psychological work, review………it goes on.
And that does not even count the time spent actually day trading your instrument of choice!
You are going to have to make a commitment just like you would in any other business. Don’t be swayed into a casual attitude simply because you can do this all from home. Respect your time and use it in a productive manner so you are not wasting time.
It happens where years will go by and people are still blowing out accounts and jumping from system to system. I think we can agree that time was certainly not time well spent.
If trading and all that it can provide is your goal, your approach from day one will have an impact on your ultimate success or failure.
Make your decision to succeed and then take the steps needed to attain that success.
Perhaps you will be able to mitigate most of these day trading costs (in truth, trading of any type) and come out the other side with the success you craved.