How to (Not) DayTrade: The Real Risks and Rewards of Day Trading

So, you’re interested in making a living from day trading? Many of us have heard stories about both the massive gains and losses from day trading—sometimes with dramatic consequences. During the dot-com boom before 2001, stocks could jump between 30% to 200% in just one day, multiple times per week. If you knew what you were doing and had access to a fast electronic brokerage system, you could ride those rapid price movements, buying and selling on the same day.

However, only about 1% of those attempting this consistently made money. I witnessed one individual make a million in one day by shorting Corel, while another lost a lot by holding onto the WWWF IPO for too long. The reality is that, since 2001, when factoring in inflation, you’d have been better off putting your money in an old sock.

So What Should You Do?
Should you abandon the stock market altogether or give up on day trading? Not necessarily. Instead, you should consider a more reliable system—one based on simple formulas that could potentially yield an annual return of 30% or more. Using such a system, an initial $11,000 investment left in the market for 17 years could grow to over a million dollars. But this approach is not day trading, and you would need the mental resilience to ride out the bad years.

The Truth About Day Trading
If you’re still determined to day trade, the only reliable way to do so today is by acting on mind-blowing news—news like “XYZ Corporation finds a cure for cancer” or “ABC Inc invents an Eternal Life Pill.” The catch is, you need to access this information before others do.

You can subscribe to a real-time market news service for about $10 a month. Get up early—around 6 AM EST—and look for breaking news, such as a company inventing a car that runs on water. Make sure the news was just released and wasn’t available yesterday. Buy the stock immediately, using only money you can afford to lose, and always set a stop loss. Sell it just before the official market opening at 9:28 AM EST, ideally doubling your money by taking advantage of early enthusiasm.

Would I recommend trading that same stock again after the market officially opens? Absolutely not. Too many mind games come into play during the first day after major news, and the stock will likely experience heavy fluctuations. Also, do not hold these stocks overnight—most people will sell off on the second day.

A Few More Tips
Avoid buying IPOs on their first day. The most highly promoted IPOs have often led to significant losses on the following day. The real winners here are the brokerage houses that market these IPOs. So, if you have extra money to risk, a strong stomach, and are willing to wake up at 6 AM to track market news, day trading could be for you—but it comes with substantial risks.