Day trading has been growing in popularity for several years. Still, two recent events have brought a surge of new interest in this potentially lucrative, albeit risky form of investing in the stock market.
The first was the lockdowns of 2020 precipitated by the COVID-19 pandemic. Suddenly, millions of people were stuck at home. Sometimes out of sheer boredom, other times out of desperation to gain income, day trading took off as 2020 wore on.
The sensational GameStop phenomenon was a second recent event that spurred new interest in day trading. Tens of thousands of Reddit users began using Robinhood’s trading app to frantically buy GameStop stock, running up the price of this troubled company to extraordinary values.
Many made tens of thousands of dollars in fast profits while many others lost their proverbial shirts.
And that spells the first significant danger of day trading. It can be a fast way to lose a lot of money. Here’s why day trading is dangerous in the current climate of the markets:
Volatility
Thanks to phenomena like the GameStock happenings, the markets display far greater volatility than in previous years. Based on a particular scale that measures volatility, the figure had stabilized at about 29 from 2015 until 2020. Since then, however, the volatility rating has gone from 90 to as high as 248. That makes for a hazardous day trading environment.
Commission-Free Trading Backlash
It is easier than ever to trade stocks with apps that let you do so without paying a commission. That’s good, but the problem is that it creates an illusion that there is no cost to trading a lot daily. The bottom line is that the more changes you make in your portfolio, the more risk you build into the process.
Skipping the Research
Day trading encourages unsophisticated traders to buy stocks without researching a company’s underlying fundamentals. When day traders move in aggressively and buy stocks without knowing what they are investing in, that’s more like flat-out gambling than actual investment activity.
The notion of day trading makes researching what one is buying almost a moot point. This form of stock trading is predicated on turning around a transaction in a matter of hours. It’s an extremely risky way to buy stocks because one is basically flying blind.