Day trading is the action of buying and selling a security or fund the same day. Mutual funds are only priced once each day, at the 4:00pm EST closing price of the NYSE. Therefore, it is technically impossible to day trade mutual funds. Day traders would more often use individual stocks or ETFs for their trading purposes since they can move in or out of these securities very quickly during the day.
What is Day Trading of Mutual Funds?
If an investor states that he day trades mutual funds, he means that he decides close to 4:00pm each day whether to buy a particular fund or sell a fund. He must then wait until 4:00pm the following day to take any corrective action. Some investors actually do this in an attempt to achieve short term gains in particular investment sectors over one day’s time.
Can Day Trading Work?
Attempting to day trade mutual funds is just pure gambling. Such traders are exposing themselves to market action for one day, without the ability to sell during the day if they find their strategy is wrong. Experienced investors can identify trends and market direction over several weeks. Nobody, including professional investors, can identify the correct market action over the course of one day. Professional investors who are day traders normally stick with individual stocks, futures and options.
Using ETFs for Day Trading
If investors want to day trade funds, they should use ETFs. ETFs trade just like stocks and can be traded throughout the trading day. There are over 1000 ETFs on the market now covering all types of asset classes and sectors. There are also leveraged and inverse funds that are available for investors. Leveraged funds allow for returns of 2X or 3X the return of an underlying index. An inverse fund returns an amount similar to an underlying index but in the opposite direction. So if an index rises by 2%, an inverse fund would fall by 2%.
Why Attempt Day Trading
Why would someone want to attempt day trading mutual funds or ETFs? It is common knowledge that nobody can confidently project the direction of a stock or fund over an 8 hour period. Investors who do attempt this approach are essentially gamblers who are looking for the Big Score. They are also the ones who will go in and out of the leveraged and inverse ETFs for the same reason. Result? Most inexperience day traders are forced to stop after a while since they are out of money. Over 90% of amateur day traders lose most of their money.
Given the large loss rate, why do people keep on trying to day trade? The answer is the same as why people buy $100 of lottery tickets each week, or place $1000 on one Roulette number in Las Vegas – the hope of the big win that will change their lives. Unfortunately, we all know the end game for these people.
Invest for the Long Term
Day trading is a no-win game. People should invest their hard earned money for the long term and retirement. This involves setting a strategy, investing with large diversified mutual funds, and not trying to “beat the market”. Disciplined investors will experience growth gradually and consistently over long periods of time. This is the only way to provide for a comfortable and rewarding retirement.