🎙 Day trading is often seen as a way to get rich quick. But it’s almost impossible to day trade your way to a million-dollar retirement, especially with the effects of emotional investing and stock market sentiment. So, why does it seem like it’s the winning lottery ticket you’ve been waiting for? Why does it go wrong? And why is long term investing the better strategy? 🤔
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Hello, friends! And welcome back to Girl on FIRE, the financial independence podcast for independent women.
My name is Priya, I’m a Chartered Accountant, an analyst and the creator of Paper Money Co.
I’m also a fierce financial feminist and the host of this podcast. I believe that a woman who is in control of her money, is in control of her life.
This week we’re talking about day trading! But we’re not talking about how to day trade.
Because day trading is rarely done successfully, and when it is, it’s either by super nerds with incredible software.
Or, it’s because of luck. And we’re not building your wealth and planning your retirement based on luck.
What we’re going to talk about today is what day trading is, how it compares to long term investing and why it can be so dangerous.
But before we get started, I want to remind you that I’m going to be hosting a masterclass in July where I share my 3 Insider Secrets to Financial Success.
I’m going to share how you can budget your way to 6-figures like a pro, just like I did, without giving up your latte and all the things you love.
It’s totally free, you just need to register so I can send you the link to join. And also so that I know you’re coming.
I’d love to see you there, so head to papermoneyco.com/masterclass to get registered.
And to be honest, I could also use some moral support from my Girls on FIRE. This is the first masterclass I’ve hosted and I’m a little terrified.
But in this masterclass I’m going to walk you through the 3 biggest secrets that have shaped the way I budget and allow me to have money available for investing.
You know that I’m all about getting the basics right first, so that’s what I’m going to cover in this masterclass.
As I’ve said in many episodes at this point, the sooner you can get your foundation set and get those good money management practices in place, the sooner you can start investing and building your wealth.
And this masterclass will help you build a super strong foundation, so you don’t want to miss out.
So, I would love it if you would come along, even if it’s just for moral support because Priya has no idea what she’s doing. The link to register once again is papermoneyco.com/masterclass.
As always, Girl on FIRE is about learning, so whip out your favourite notebook or journal and get ready to take some notes.
If you’re not into writing things out by hand, you can always find the transcript on my website — papermoneyco.com/gof26.
Okay, let’s dive in and talk about day trading!
What is day trading?
So, what is day trading? Day trading is the practice of purchasing and selling a security within a single day.
Now, that means there could be hours between when a day trader purchases a security and when they sell it. Or, it could be milliseconds.
And it’s most common on the stock market and on foreign exchange markets. The goal with day trading is to profit from very short term price movements.
What day traders are looking for is a temporary inefficiency between supply and demand.
Now, you can imagine with buy and sell trades that happen milliseconds apart, day traders need quick and accurate market information and analytical software.
It also takes a lot of time and carries a lot of risk. A lot of day traders use a high amounts of debt to try to capitalise on those short term price movements.
This is why day trading is often compared to gambling. Because day traders are trying to profit from the short term volatility in the market.
And those price fluctuations could be based on momentary inefficiencies between supply and demand.
Supply and demand inefficiencies in day trading
So, what do I mean when I say supply and demand inefficiencies? It’s an economic concept and it’s part of the law of supply and demand.
In a perfect world, supply and demand are perfectly matched. The level of supply meets the level of demand.
So, when there is a supply and demand inefficiency, it means that there is either more supply or more demand.
There’s an imbalance that impacts the value of the security, in other words, it impacts the price.
Supply exceeds demand
Now, what happens when supply exceeds demand? Imagine you’re running a popsicle stand in the middle of winter.
No one wants a popsicle because it’s way too cold! So, there’s no demand for what you’re selling.
And when there’s no demand, you end up with more popsicles in your freezer than you know what to do with.
You have an excess of supply. There’s an imbalance between supply and demand for your little popsicle stand.
But you need to sell those popsicles to recover the cost of your little stand and to pay your wages, if not make a profit.
So what do you do? You drop the prices of your popsicles. Selling 0 popsicles at $3 each sucks. But selling 3 popsicles at $1 each is better.
Demand exceeds supply
Now, what about when demand exceeds supply? All of a sudden in the middle of winter, there’s a super hot day.
It’s 40 degrees, the pavement is hot enough to cook an egg on and it feels hot and sweaty and gross.
And now everyone in the neighbourhood really wants a popsicle to cool down. So, a group of 10 people approach your stand.
They all want popsicles. But you only have 4 left in the freezer. Suddenly people in the crowd start bargaining with you because they really want it.
Someone says they’ll give you $4 instead of $2 for a popsicle. And you say, yes! Then others start doing the same. They start bidding for the remaining popsicles.
Think of how bidding on eBay works. Buyers are offering a higher and higher price for something that’s in short supply that everyone wants.
Timing the market
So, now let’s pretend your popsicle stand is the stock market. When demand of a stock exceeds the supply for that stock, the price goes up.
It becomes more valuable because there are a lot of investors chasing a small amount of that stock.
And then when there’s an excess of supply, the price goes down. Because it’s not hard to get your hands on that stock. It’s readily available in the market.
So, what day trading tries to do, is capitalise on those moments when supply exceeds demand in order to purchase the stock at lower prices.
And then in that moment when the demand exceeds supply and the price goes up, day traders are trying to sell.
They’re trying to time their trades to buy low and sell high. They’re hoping to make a capital gain.
This is what it means when we talk about trying to time the market. They’re trying to seize those momentary opportunities.
And, yes, some day traders make money this way but the vast majority of people don’t. Because the market is unpredictable and it’s driven by investor sentiment.
Not only is the market unpredictable, but your own emotions get in the way. You freak out and make trades based on fear or greed, not sound investing principles.
That’s how you end up losing a ton of money
And it’s because of experiences like this that investing as a whole is sometimes seen as something much more scary and risky than it needs to be.
But the Girl on FIRE philosophy isn’t about day trading. We’re about sustainable, long term investments.
We’re about getting rich slowly, instead of getting rich quick. Because here’s the thing about get-rich-quick schemes.
You might get rich super fast, but that also means you can get broke super fast.
If you can make $1M by buying and selling securities milliseconds apart, you better believe that you can lose $1M that quickly, too.
FIRE & investment calculator spreadsheet
But before we move on, I want to ask my Girls on FIRE for a favour. If you’ve listened this far into the episode then you’re probably enjoying it, right?
So, here’s what I’d like you to do next. Pause this episode for a few seconds and head on over to papermoneyco.com/podcastreview.
I want you to leave a rating and review for Girl on FIRE because it helps me provide better content based on what you’re enjoying the most.
It helps other women out in the internet wilderness come and find us as well.
And it’s also a great way to support this show for free, and for that I’d love to send you a little something to say thank you.
If you do that, I’ll send you a copy of my FIRE and investment calculator. Which, if I do say so myself, is pretty damn amazing.
It’s how I plan for my early retirement and my wealth. It shows me how my wealth is going to grow, when I can retire and how long my money will last.
And it also has a separate tab that takes Australia’s superannuation into account as well.
And you can use it to analyse companies and different investment options when you’re picking stocks too.
I’ve never actually seen anything like it before, so it’s pretty special. And I’m currently not offering that spreadsheet anywhere else except on my Patreon.
Not in my shop, not to my email list — it’s a ghost. So, this is kind of a money-can’t-buy type deal.
The only way to get your hot little hands on that spreadsheet is by submitting a rating and a review, taking a screenshot and tagging me in it.
That URL again is papermoneyco.com/podcastreview. I’ve made it nice and easy for you.
So, go hit pause and do that right now. It’s okay, I’ll wait.
Okay, that concludes my little ad-break, so let’s get back to it.
Day trading vs long term investing
So, let’s take a second now to compare day trading with long term investing. With day trading, you’re making buy and sell trades within the day.
You’re rarely, if ever, holding an open position overnight. You want there to be extreme volatility in the market in the short term.
Because you want to buy low and sell high a few seconds or a few hours later. Most of us would agree that seeing prices plummet and soar like that within the day is enough to make you sick.
But that’s what day trading relies on. It feeds off short term volatility in the market.
Now, what about long term investing. If you’ve been listening to Girl on FIRE for a while, you’ll know that the investing philosophy I teach is all about long term investing.
So, day trading goes against everything we talk about on this podcast. But it’s my job as a financial expert to make sure you know what day trading is and what it can do to your wealth.
You know I’m never just going to sit here and tell you what to do. That’s not me.
I’d rather explain something to you and help you understand it so that you can make the best and most informed decision for yourself.
Now, when it comes to long term investing, let’s look at what we talk about here every week.
We talk about how the stock market always moves up in the long term, despite all the day to day fluctuations and despite all the market corrections and market crashes.
We’ve already experienced at least 2 global market crashes in the last 15 years. First the GFC and then the Coronavirus crash just last year.
But if you look at the graphs, the market is still moving up. It’s a tenacious beast. It dusts itself off and keeps going.
So, with long term investing, it doesn’t matter what happens in the market today or tomorrow, because over the next 10, 15, 20 years, the market will still move up and you’ll still make money.
Another thing we talk about a lot on this podcast is diversification. Not just in your investments but in where your income comes from.
We talked about that a little bit last week when we talked about investing for dividends.
We know that there is risk involved when you’re investing in the stock market. But we try to manage and mitigate that risk as much as possible by making sure our portfolios are well diversified.
And when you’re well diversified, it doesn’t matter if a single stock or a single market takes a nosedive, because all your eggs aren’t in that one basket.
This helps you smooth out those daily fluctuations and that short term volatility. Which is the exact opposite of what day trading thrives on.
We also talk about doing your homework, starting with setting your investing strategy.
And then, looking for the right things to invest in that make sense for your investing strategy.
Why do people day trade
So, if long term investing is safe, then why are people trying to day trade their way to millionaire status?
Well, the answer is actually pretty simple. We’re impatient. I heard this quote in the show Once Upon A Time that I really love.
Everyone wants a magical solution to their problems, but no one wants to believe in magic.
And that’s so relevant here, because instead of waiting for the magic of compounding to do it’s thing over time, people are choosing to day trade because they want to literally get rich quick.
They don’t want $1M in 30 years, they want it in 30 days, or 30 minutes. And the impatience causes some people to turn to practices like day trading, usually without knowing what they’re doing and they lose a lot of money.
But that’s not going to happen to Girls on FIRE. You work too damn hard for your money to lose it gambling on the stock market.
Because here’s the thing: it may take you 30 or 40 years to retire a millionaire. But that time will pass either way, whether you like it or not.
Next weeks’ episode
And that’s all I have for you Girls on FIRE today!
My challenge for you this week is to head to papermoneyco.com/masterclass and register for my free masterclass where I teach you my insider secrets to financial success.
I get asked how I managed to pay off debt and grow my net worth to over 6-figures on a modest salary, and this is how. I’m sharing the secrets!
I really hope to see you there, it’s totally free.
And the sooner you can get your foundation set and get those good money management practices in place, the sooner you can start investing and building your wealth.
On next weeks’ episode we’re taking this topic a little further. I talk about investor sentiment a lot on this show, so next week we’re going to dive into what that means.
We’re going to talk about emotional investing and what that means for your wealth and your investing strategy.
I’m a firm believer that we fear what we don’t understand, and arming yourself with knowledge is the antidote to that fear.
Gosh, check me out, I sound so poetic going on about knowledge and antidotes, but that’s what we’re doing here, right?!
Girls on FIRE don’t blindly follow stock tips from rando’s on the internet. We make solid investment choices because we took the time to learn how the stock market works. And how to make those decisions for ourselves.
It’s going to be a super interesting episode so you’re definitely not going to want to miss it.