Can Day Trading Help You To Achieve FIRE?

Ever since Amon and I started sharing our FIRE journey with the world, we’ve been flooded with questions on a financial topic that we don’t talk about very often: Day trading.

So today I thought I’d dive into the topic, including why historically we haven’t talked about this subject much. Different day trading strategies, the overall success of day traders, tips on how to get started if you are interested in it, and most important of all - can you achieve financial independence and retire early with day trading? Let’s get into it!

What Is Day Trading?

Day trading involves speculating on stocks and securities and buying and selling those stocks and securities on the very same day. These securities include:

● Stocks

● Options

● Forex

● Cryptocurrency

● Stock market index futures

● Index rate futures

● Currency futures

● Commodity futures

But by far most people tend to get involved in trading stocks, which is what I’m going to focus on in this blog post.

Day traders look for volatile stock so they can make incremental wins over 24 hours or less. They are basically jumping in and out of stocks and only holding them for a few hours, or sometimes only seconds! The strategy for any day trader is to make these small gains over a short period.

One thing that many newbies to this concept don’t understand is the difference between day traders and investing. Investors look at the fundamentals and the financials of whatever they are investing in and hold on to those investments over a long period. On the other hand, day traders tend to ignore those fundamentals and focus on the volatility and price movement of what they invest in.

They also focus on what they call “technical analysis,” which is how they justify making certain purchases. I personally dislike this term since it gives many new traders a false sense of security. That’s not to say it’s not a real term - long-term investors do this all the time when they consider investing in a stock or index fund to see what the future returns will be, and we do too. But day traders do this analysis from a daily perspective, which is a different playbook altogether.

Day Trading Strategies

Let’s take a look at some of the main strategies day traders use.

● Scalping: This occurs when a trader tries to make several small profits based on small price changes throughout the day.

● Range trading: traders focus on the highs and lows of a stock and buy/sell within those ranges.

● News-based trading: here traders will focus on stocks that feature heavily in the news cycle, and are subsequently very volatile. They exploit that volatility to make small gains here and there.

● High-frequency trading: Traders make thousands of trades a day exploiting efficiencies in the market. It’s a complicated form of trading usually done by companies or hedge funds, and occasionally individual traders.

But how do these strategies play out in real life? Here’s an example.

Let’s say Ford is all over the news for whatever reason, resulting in significant price fluctuations. Then a day trader with $10,000 decides to pour it into Ford, buying shares for $12.50 apiece. She can then set it up to sell at a particular win or loss, around 1%. If the stock hits that 1% mark, she’ll walk away with a profit. But she can also protect herself by selling at only a 1% loss if the stock drops.

Day traders work on optimizing wins and minimizing losses until the wins (hopefully) outweigh the losses. Over time, you’ll eventually become a successful trader. But how realistic is this?

The Case For Day Trading

A lot of aspiring traders think they can take $10,000 and turn it into $100,000 through countless small 1% trades. Unfortunately, the data just doesn’t support it. In fact, studies show that only around 10% of day traders actually make money through the enterprise.

In my opinion, those aforementioned aspiring traders are lulled into a false sense of security by the idea of technical analysis that I mentioned earlier. It gives them confidence in believing they are part of that 10% because they’re “doing it right.” One study also posited that only 1%of all day traders make above minimum wage through day trading.

This leads me to some of the downsides of this practice.

Downsides of Day Trading

1. The first downside is that the amount of time and effort you put in, and the stress you deal with, are usually not worth the returns. Why burn yourself out for the chance of (maybe) making minimum wage?

2. Another significant con is that success can be very cyclical. New traders will see a small win, get overly confident, and then risk more and more with the assumption that they’ll see success. And if you start to see losses, you’ll begin throwing more money into it to make back those losses. It’s very similar to a gambling mindset.

3. Next, and there’s no nice way to say this, is that lots of new day traders follow bad advice. Many of the aforementioned 90% of people who fail at trading still share advice on charting and analysis to beginners, who then go on and fail themselves.

4. A lot of day traders see it as a game. They want to test their intellectual abilities and “beat the system.” But taking on a win-or-lose mentality inevitably leads to higher-risk taking.

5. And lastly, it’s not uncommon for day traders to borrow money for stock market trading. By using larger amounts of money the idea is that you can leverage it to make more money. But most people who do this end up losing all of it to the stock market and are plunged into debt.

How To Get Started

In my opinion, day trading is a truly terrible way to pursue financial independence. It’s not sustainable in the long term, and your chances of success are very low. But if you’re insistent on trying it yourself, here’s my advice for you:

First, get your finances together before you start trading or investing. Sort out any high-interest credit cards and emergency funds, and any other financial outliers.

Second, learn the fundamentals of investing before you jump into day trading.

Third, solidify your investment plan.

And lastly, use play money before putting your real money on the line. You can do this by using websites that simulate day trading, letting you hone your skills and discipline, prepare strategies, and see how you would fare when using real money.

One more tip - The statistics show that most day traders are losing money, so only trade with money you are willing to use!

Personally, day trading is not for me, and I’m very skeptical about it being a viable way to pursue financial independence and early retirement. But of course, this is your journey and it’s up to you to do your due diligence. Hopefully, this information has given you some insight into the practice and has helped you understand if it’s the right choice for you.